Chapter 1

Report
Chapter 12
Statement of Cash Flows
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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 12-1
Identify cash flows arising from
operating, investing, and financing
activities.
12- 3
Business Activities and Cash Flows
The Statement of Cash
Flows focuses attention
on:
Operations
Cash received and paid
for day-to-day activities
with customers, suppliers,
and employees.
Investing
Cash paid and received
from buying and selling
long-term assets.
Financing
Cash received and paid
for exchanges with
lenders and stockholders.
12- 4
Business Activities and Cash Flows
Checking and
Savings
Accounts
Cash
Currency
Cash Equivalents
Highly liquid short-term investments
within three months of maturity.
12- 5
Classifying Cash Flows
UNDER ARMOUR, INC.
Statement of Cash Flows
For the Year Ended December 31, 2010
(in millions)
Net cash provided (used) by operating activities
$
37
Net cash provided (used) by investing activities
(41)
Net cash provided (used) by financing activities
7
Net Change in Cash and Cash Equivalents
3
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
187
$ 190
12- 6
Operating Activities
Cash inflows and outflows that directly relate
to revenues and expenses reported on the
Income Statement.
12- 7
Investing Activities
Under Armour’s 2010 Investing Activities
12- 8
Financing Activities
Under Armour’s 2010 Financing Activities
12- 9
Relationships Between Classified Balance
Sheet and Statement of Cash Flow (SCF)
Categories
12- 10
Relationship to Other Financial
Statements
Information needed to prepare a Statement
of Cash Flows:
 Comparative Balance Sheets.
 Income Statement.
 Additional details concerning
selected accounts.
12- 11
Relationship to Other Financial
Statements
Recall that the basic Balance Sheet equation is:
We can recast the equation as follows:
The following equation is true:
From this basic Balance Sheet equation, we
develop our model to solve for the change in cash:
12- 12
Direct and Indirect Reporting
of Operating Cash Flows
Same result
We will concentrate on the indirect method for now, and we
will look at the direct method again later in the chapter.
12- 13
Learning Objective 12-2
Report cash flows from operating
activities, using the indirect method.
12- 14
Cash Flows from Operating Activities Indirect Method
The indirect method adjusts Net Income
by analyzing noncash items.
Changes in Current Assets
and Current Liabilities.
Cash Flows from
Operating
Activities Indirect Method
Net
Income
+ Noncash
expenses such as
Depreciation and
Amortization.
+ Losses and Gains
12- 15
Relationships to the Balance Sheet and
the Income Statement
Change in account
balances during the year
Increase
Decrease
Current Assets
Subtract from
net income.
Add to
net income.
Current Liabilities
Add to
net income.
Subtract from
net income.
Use this table when adjusting Net Income to operating
cash flows using the indirect method.
12- 16
Statement of Cash Flows
Indirect Method Example
Use the following financial
statements for Under
Armour, Inc. and prepare
the Statement of Cash
Flows for the year ended
December 31, 2010.
12- 17
Statement of Cash Flows
Indirect Method Example
12- 18
Statement of Cash Flows
Indirect Method Example
12- 19
Statement of Cash Flows
Indirect Method Example
The Statement
of Cash Flows
using the
indirect
method will
begin with
Under Armor,
Inc.’s Net
Income from
the Income
Statement.
12- 20
Direct and Indirect Reporting
of Operating Cash Flows
When using the indirect method, start with accrual basis
Net Income and adjust it for:
1.items that are included in Net Income but do not involve
cash, and
2.items that are not included in Net Income but do involve
cash.
12- 21
Next, adjust for the non-cash items included
in Net Income.
For Under Armour, the only non-cash adjustment
is for Depreciation Expense.
12-22
Accumulated Depreciation increased by $17, from $70 in the 2009
Balance Sheet to $87 in the 2010 Balance sheet. The same $17 is
shown as Depreciation Expense in the 2010 Income Statement.
To complete the Cash Flows from Operating Activities section, we
must examine comparative Balance Sheets to determine the
changes in current assets and current liabilities from the beginning
of the period to the end of the period.
12-23
These five items were shown earlier in the current portions of Under
Armour’s comparative Balance Sheets for 2009 and 2010
Increase
Decrease
Current Assets
Subtract from
net income.
Add to
net income.
Current Liabilities
Add to
net income.
Subtract from
net income.
12-24
Learning Objective 12-3
Report cash flows from investing
activities.
12- 25
Reporting Cash Flows from Investing
Activities
We will need this additional data to prepare
the investing portion of the statement.
1. No disposals or impairments of Equipment or
Intangibles occurred
2. Equipment costing $30 million and Intangibles
costing $11 million were purchased with Cash.
12- 26
Reporting Cash Flows from Investing
Activities
Under Armour, Inc., has two investing
activities on the Statement of Cash Flows that
required the use of Cash:
1. Purchase of Equipment, and
2. Purchase of Intangibles and Other Assets.
12- 27
Learning Objective 12-4
Report cash flows from financing
activities.
12- 28
Reporting Cash Flows from Financing
Activities
We will need this additional data to prepare
the financing portion of the statement.
1.
2.
3.
4.
No Dividends were declared or paid.
Long-term Debt of $5 million was paid.
$9 million in new long-term loans were issued.
Shares of Stock were issued for $3 million.
12- 29
Reporting Cash Flows from Financing
Activities
Long-term Debt increased because of $9 in
new loans during the year. The long-term Debt
increase is a Cash inflow.
12- 30
Reporting Cash Flows from Financing
Activities
Payments on Long-term Debt resulted in a Cash outflow
of $5. The net effect of these two Long-term Debt
transactions increased Long-term Debt by $4, from $25 on
the 2009 Balance Sheet to $29 on the 2010 Balance Sheet.
12- 31
Reporting Cash Flows from Financing
Activities
The third financing activity is the issuance of Common Stock
resulting in a Cash inflow of $3. Contributed Capital increased from
$224 in the 2009 Balance Sheet to $227 in the 2010 Balance Sheet.
12- 32
Reporting Cash Flows from Financing
Activities
Now we can reconcile the change in Cash to the ending
$190 Cash balance that appears on the Balance Sheet.
12- 33
Noncash Financing and Investing
Activities
Required Supplemental Information:
1. Cash paid for taxes and interest.
2. Significant non-cash investing and financing
activities.
12- 34
Learning Objective 12-5
Interpret cash flows from operating,
investing, and financing activities.
12- 35
Evaluating Operating Cash Flows
• Operating cash flows must
be positive over the longrun for a company to be
successful.
• An upward trend in
operating cash flows over
time indicates growth and
efficient operations.
• Look at the relationship
between operating cash
flows and Net Income.
12- 36
Evaluating Investing Cash Flows
• Healthy companies tend to
show negative cash flows
in the investing activities
section.
• Be cautious over a positive
total cash flow in the
investing activities section
12- 37
Evaluating Financing Cash Flows
• It’s not possible to evaluate
the company’s financing
cash flows by simply
determining whether they
are positive or negative on
an overall basis.
• Instead, consider detailed
line items with this section
to assess the company’s
overall financing strategy.
12- 38
Overall Patterns of Cash Flows
12- 39
Learning Objective 12-6
Report and interpret cash flows from
operating activities using the direct
method.
12- 40
Reporting Operating Cash Flows with
the Direct Method
Provides more
detailed information
Identifies cash
inflows and outflows
relationships
Prepared by
adjusting accrual
basis to cash basis
Investing and
financing sections
for the two methods
are identical
12- 41
Direct Method Operating Activities
When we prepared the operating section using the indirect
method, we also arrived at net cash inflow of $37.
Let’s see how we arrive at these cash flows.
12- 42
Direct Method Operating Activities
With the direct method, we convert each revenue and
expense on the Income Statement to a cash flow.
12- 43
Supplement 12A
Reporting Disposals of Property, Plant, and Equipment
(Indirect Method)
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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Reporting Sales of Property, Plant, and
Equipment (PPE) (Indirect)
Depreciation
Expense
Loss on Sale
of PPE
Gain on Sale
of PPE
A loss on the sale of PPE is added back
to Net Income just as Depreciation
Expense is added back. Adding these
noncash items restores Net Income to
what it would have been had
Depreciation and the loss not been
subtracted at all.
Just the opposite is true for a gain on
the sale of PPE. Subtracting the gain
reverses the effect of the gain having
been added to Net Income.
12- 45
Supplement 12B
T-Account (Indirect Method)
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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
T-account Approach (Indirect Method)
Instead of creating schedules for
each section of the Statement of
Cash Flows, some prefer to
prepare a single large T-account
to represent the changes that
have taken place in Cash
subdivided into the three
sections of the Statement of
Cash Flows.
12- 47
T-account Approach(Indirect Method)
12- 48
Supplement 12C
Spreadsheet Approach (Indirect Method)
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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Spreadsheet Approach
(Indirect Method)
Reconstructing the events and transactions that
occurred during the period helps identify the operating,
investing and financing activities to be reported.
A spreadsheet can be used to ensure that no
reportable activities are inadvertently
overlooked.
12- 50
We begin by entering the
beginning and ending
balances for each account
on the comparative Balance
Sheets.
The cash inflows and
outflows columns will be
used later to explain the
changes in each account
balance.
12-51
Changes in
Balance Sheet
accounts are
analyzed in
terms of debits
and credits in
the top half of
the spreadsheet
and recorded as
cash inflows
and outflows in
the bottom half
of the
spreadsheet.
12-52
Changes in
Balance Sheet
accounts are
analyzed in
terms of debits
and credits in
the top half of
the spreadsheet
and recorded as
cash inflows and
outflows in the
bottom half of
the spreadsheet.
12-53
The top of the completed
spreadsheet
is shown here.
12-54
The bottom of
the completed
spreadsheet
is shown
here.
12-55
End of Chapter 12
12- 56

similar documents