PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA

Jon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

REPORTING THE STATEMENT OF

CASH FLOWS

Chapter 16

16 - 2

How does a

company obtain its

cash?

Where does a

company spend its

cash?

What explains the

change in the cash

balance?

PURPOSE OF THE STATEMENT

OF CASH FLOWS

16 - 3

How did the

business fund its

operations?

Did the business

borrow any funds or

repay any loans?

Does the business

have sufficient cash

to pay its debts as

they mature?

Did the business

make any dividend

payments?

IMPORTANCE OF CASH FLOWS

16 - 4

Cash Currency

Cash

Equivalents

Short-term, highly liquid investments.

Readily convertible into cash.

Sufficiently close to maturity so that market value is

unaffected by interest rate changes.

MEASUREMENT OF CASH FLOWS

SHORT TERM TREASURY BILLS, bank accounts , money market and marketable

securities

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CLASSIFICATION OF CASH FLOWS

The Statement of Cash Flows

includes the following three

sections:

Operating Activities

Investing Activities

Financing Activities NON CASH ACTIVITIES REQUIRE DISCLOSURE in the notes

C1

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Outflows Salaries and wages

Payments to suppliers

Taxes and fines

Interest paid to lenders

Other

Inflows Receipts from customers

Cash dividends received

Interest from borrowers

Other

OPERATING ACTIVITIES

C1

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Outflows Purchasing long-term

productive assets

Purchasing equity investments

Purchasing debt investments

Other

Inflows Selling long-term productive

assets

Selling equity investments

Collecting principal on loans

Other

INVESTING ACTIVITIES

C1

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Outflows Pay dividends

Purchasing treasury stock

Repaying cash loans

Paying owners’ withdrawals

Inflows Issuing its own equity

securities

Issuing bonds and notes

Issuing short- and long-term liabilities

Contributions by owners

FINANCING ACTIVITIES

C1

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NONCASH INVESTING AND FINANCING

Items requiring separate disclosure

include:

Retirement of debt by issuing equity

securities.

Conversion of preferred stock to

common stock.

Leasing of assets in a capital lease

transaction.

Purchase of equipment by issuing stock

C1

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FORMAT OF THE STATEMENT

OF CASH FLOWS

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PREPARING THE STATEMENT

OF CASH FLOWS

P1

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ANALYZING THE CASH ACCOUNT

P1

The Cash account is a natural place to look for

information about cash flows from operating,

investing, and financing activities.

Cash summarized data

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ANALYZING THE CASH ACCOUNT

P1

Cash from

Operating

Cash from

Investing

Cash from

Financing

Cash

Provided

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ANALYZING NONCASH ACCOUNT

P1

A second approach to preparing the statement

of cash flows is analyzing noncash accounts.

we can explain changes in cash by analyzing changes in the noncash accounts

consisting of liability accounts, equity accounts, and noncash asset account

And any related income statement accounts

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INFORMATION TO PREPARE THE STATEMENT

P1

Comparative

Balance Sheets

Current

Income Statement

Additional

Information

Information to prepare the statement of cash

flows usually comes from three sources:

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CASH FLOWS FROM OPERATING INDIRECT AND DIRECT METHODS OF REPORTING

The net cash amount provided by operating activities is

identical under both the direct and indirect methods.

Direct

Method

Indirect

Method

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APPLICATION OF THE

INDIRECT METHOD OF REPORTING P2

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APPLICATION OF THE

INDIRECT METHOD OF REPORTING

P2

Additional information on Genesis Inc.’s 2011 transactions:

a) The accounts payable balances result from merchandise

inventory purchases.

b) Purchased $70,000 in plant assets by paying $10,000 cash

and issuing $60,000 of notes payable.

c) Sold plant assets with an original cost of $30,000 and

accumulated depreciation of $12,000 for $12,000 cash,

yielding a $6,000 loss.

d) Received $15,000 cash from issuing 3,000 shares of

common stock.

e) Paid $18,000 cash to retire notes with a $34,000 book value,

yielding a $16,000 gain.

f) Declared and paid cash dividends of $14,000.

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Net

Income

Cash Flows

from Operating

Activities

Changes in noncash

current assets and current

liabilities

+ Losses and

- Gains

+ Noncash

expenses such as

depreciation and

amortization

APPLICATION OF THE INDIRECT METHOD OF REPORTING

P2

1

2 3

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Use this table when adjusting Net Income

to Operating Cash Flows.

Change in Account Balance During Year

Increase Decrease

Current Subtract from net Add to net income.

Assets income.

Current Add to net income. Subtract from net

Liabilities income.

ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES

P2

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P2

ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES

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P2

ADJUSTMENTS FOR OPERATING ITEMS NOT PROVIDING OR USING CASH

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P2

ADJUSTMENTS FOR NONOPERATING ITEMS

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P2 SUMMARY OF ADJUSTMENTS FOR INDIRECT METHOD

Common adjustments to net income when computing net

cash provided or used by operating activities under the

indirect method:

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P3

CASH FLOWS FROM INVESTING

Identify changes in

investing-related

accounts

Explain these

changes using

reconstruction

analysis

Report their cash

flow effects

A three-stage process to determine cash

provided or used by investing activities:

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P3 CASH FLOWS FROM INVESTING

This analysis reveals a $40,000

increase in plant assets from

$210,000 to $250,000 and a

$12,000 increase in

accumulated depreciation from

$48,000 to $60,000.

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P3

CASH FLOWS FROM INVESTING Item b: Genesis purchased plant assets of $70,000 by issuing

$60,000 in notes payable to the seller and paying $10,000 in cash.

Item c: Genesis sold plant assets costing $30,000 (with $12,000 of

accumulated depreciation) for $12,000 cash, resulting in a $6,000

loss.

We also reconstruct the entry for Depreciation Expense using

information from the income statement.

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P3 CASH FLOWS FROM INVESTING

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P3

CASH FLOWS FROM FINANCING

Identify changes in

financing-related

accounts

Explain these

changes using

reconstruction

analysis

Report their cash

flow effects

A three-stage process to determine cash

provided or used by financing activities:

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P3 CASH FLOWS FROM FINANCING

This analysis reveals:

1. an increase in notes payable

from $64,000 to $90,000,

2. an increase in common

stock from $80,000 to

$95,000, and

3. an increase in retained

earnings from $88,000 to

$112,000.

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P3

CASH FLOWS FROM FINANCING

Item e: Notes with a carrying value of $34,000 are retired for $18,000

cash, resulting in a $16,000 gain.

Item b: Genesis purchased plant assets of $70,000 by issuing

$60,000 in notes payable to the seller and paying $10,000 in cash.

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P3

CASH FLOWS FROM FINANCING

Item d: Issued 3,000 shares of common stock at par for $5 per share.

Item f: Cash dividends of $14,000 are paid.

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P3

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P3

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GLOBAL VIEW

Reporting Cash Flows from Operating Both U.S. GAAP and IFRS permit the reporting of cash flows from operating

activities using either the direct or indirect method. However, two notable

differences include:

1. U.S. GAAP requires cash inflows from interest revenue and dividend revenue be

classified as operating, whereas IFRS permits classification under operating or

investing provided that this classification is consistently applied across

periods.

2. U.S. GAAP requires cash outflows for interest expense be classified as

operating, whereas IFRS again permits classification under operating or

financing provided that it is consistently applied across periods.

Reporting Cash Flows from Investing and Financing U.S. GAAP and IFRS are broadly similar in computing and classifying cash flows

from investing and financing activities. One notable exception is that U.S. GAAP

requires cash outflows for income tax be classified as operating, whereas IFRS

permits the splitting of those cash flows among operating, investing, and

financing depending on the sources of that tax.

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ANALYZING CASH

SOURCES AND USES

A1

Most managers stress the importance of

understanding and predicting cash flows for business

decisions.

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Used, along with income-based ratios, to

assess company performance.

Cash flow on

total assets = Operating cash flows

Average total assets

CASH FLOW ON TOTAL ASSETS

A1

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P4

A spreadsheet,

also called work

sheet or working

paper, can help us

organize the

information

needed to prepare

a statement of

cash flows.

Appendix 16A:

Spreadsheet

Preparation of

the Statement of

Cash Flows

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APPENDIX 16B: DIRECT METHOD OF

REPORTING OPERATING CASH FLOWS

P5

Adjust income statement accounts related to operating activities

for changes in their related balance sheet accounts:

Framework for

reporting cash

receipts and

cash payments

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APPENDIX 16B: DIRECT METHOD OF

REPORTING OPERATING CASH FLOWS

P5

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END OF CHAPTER 16