hhofma3e_ch14_inst

Report
Chapter 14
1
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Identify the purposes of the statement of
cash flows
Distinguish among operating, investing,
and financing cash flows
Prepare the operating cash flows by the
indirect method
Identify noncash investing and financing
activities
2
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Analyze cash flows
Prepare the statement of cash flows by the
direct method (Appendix 14A)
Prepare the indirect statement of cash
flows using a spreadsheet (Appendix 14B)
3
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1
Identify the purposes of the statement of cash
flows
4
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The comparative balance sheet reports financial
position
Shows whether cash increased or decreased
Does not show why cash changed
Should we be worried about Exxon’s drop in cash?
5
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The statement of cash
flows details cash
activities
Shows where cash
came from (receipts)
and how cash was
spent (payments)
Reports why cash
increased or
decreased during the
period
Operating
Investing
Financing
X 1,000
6
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Cash inflows:
Operating
Investing
Financing
Cash outflows:
Operating
Investing
Financing
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2
Distinguish among operating, investing, and
financing cash flows
11
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Operating
•Day-to-day
operations
Investing
•Long-term assets
Financing
•Equity & Long-term
liabilities
12
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Inflows:
Collections from customers
Interest and dividends earned
Outflows:
Merchandise purchases, payments to workers,
interest payments, tax payments
Reflects day-to-day operation success
Cash inflow: core business is making money
Cash outflow: core business is losing money
13
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The business investing in long term assets, or
selling them
Computers, software, land, buildings, equipment
Or loaning to outsiders (or reversal)
Or investing in outside companies (or reversal)
Cash outflows:
The business is investing in their future
This is normally good, if they can afford it
Cash inflows:
The business may be selling off productive assets,
hurting their ability to grow in the future
14
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Sourcing capital, return on capital, and return of
capital
Good or bad depends on many factors
Business life cycle
Utilization of capital
Performance or potential in operating and investing
Inflows: borrowing, selling stock
Outflows: repaying loans, repurchasing stock,
paying dividends
15
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Operating Cash
Flows
Investing Cash
Flows
Financing Cash
Flows
Owners
Buy
Collect
Sell
Borrow
Pay
Pay
Pay
a the
building
dividends
interest
Buy
invest
cash
employee
truck
money
inventory
from
in
and
to
onthe
to
from
raise
customers
the
wages
equipment
owners
business
loan
bank
cash
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Operating Cash
Flows
Investing Cash
Flows
Our
We business
are
We aare
mature
generating
grew
business,
too large
We are a start up and our
using
We
earning
tremendous
are
too
bankrupt,
tons
muchof
amounts
debt,
cash
the and
doors
from
ofwe
business operations are still
cash
can’t
operations,
from
cover
are
ourshut.
the
core
with
interest
business
no
burning through cash
appealingpayments.
activities
growth prospects.
Financing Cash
Flows
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www.yahoo.com/finance
www.google.com/finance
www.sec.gov
CAT
SNA
CVX you tube video
…………..
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3
Prepare operating cash flows by the indirect
method
19
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Current assets
Long-term
assets
20
Current
liabilities
Long-term
liabilities
Owners’
equity
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Indirect method
Starts with net income; adjusts it to net cash
provided by operating activities
Used by most companies
Direct method
Restates income statement in terms of cash
Shows cash receipts and payments from operating
activities
Different computations, but same operating cash
flows end result
Investing and financial cash flows are always
direct
21
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22
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23
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Changes in current assets and current
liabilities.
Cash Flows from
Operating Activities
Net Income
+ Noncash
expenses such as
depreciation and
amortization.
+ Losses and
– Gains (nonoperating
activities)
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Changes in current assets and current
liabilities.
Cash Flows from
Operating Activities
Net Income
+ Noncash
expenses such as
depreciation and
amortization.
+ Losses and
– Gains (nonoperating
activities)
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Changes in current assets and current
liabilities as shown on the table.
Cash Flows from
Operating Activities
Net Income
+ Noncash
expenses such as
depreciation and
amortization.
+ Losses and
– Gains (nonoperating
activities)
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Comparative Income Statements
2008
Sales
$
450,000
$
Cost of goods sold
180,000
Gross profit
270,000
Wages expense
100,000
SG&A
20,000
Depreciation expense
4,000
Interest expense
10,000
Income before taxes
136,000
Income taxes
20,400
Net income
$
115,600
$





Cash Flow Statement
2007
250,000
100,000
150,000
40,000
8,000
2,000
4,000
96,000
14,400
81,600
Income Statement 1st
Record Net Income
Remove/counter gains, losses, and non-cash expenses (eg. depreciation & other ‘tions)
Balance Sheet 2nd
Add or subtract current accounts to convert Net income to Cash Flow
•
If Balance change takes a debit
–
Subtract from Net Income
•
If Balance change takes a credit
–
Add to Net Income
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparitive Balance Sheets
2008
Assets
Current Assets
Cash
Accounts receivable
Inventory
Current Assets
Plant assets, net
Total Assets
$
$
Liabilities
Current
Accounts Payable
$
Wages payable
Interest payable
Income taxes payable
Total Current liabilities
Long term
Notes payable
Total liabilities
Owners' equity
Common stock
Retained earnings
Total owners' equity
Liabilities + Owners' Equity$
35,000
15,000
10,000
60,000
40,000
100,000
2007
$
$
40,000
10,000
5,000
55,000
20,000
75,000




20,000
5,000
2,500
5,000
32,500
$
12,000
2,000
3,000
3,000
20,000
20,000
52,500
30,000
50,000
20,000
27,500
47,500
100,000
20,000
5,000
25,000
75,000
$

Income Statement 1st
Record Net Income
Remove/counter gains, losses, and
non-cash expenses (eg. depreciation &
other ‘tions)
Balance Sheet 2nd
Add or subtract current accounts to
convert Net income to Cash Flow
•
If Balance change takes a debit
–
Subtract from Net Income
•
If Balance change takes a credit
–
Add to Net Income
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cash Flow Statement
Cash from operating activities
Net income
$
115,600
Add depreciation expense
4,000
Less increase to A/R
(5,000)
Less increase to inventory
(5,000)
Add increase to A/P
8,000
Add increase to wages payable
3,000
Less decrease to interest payable
(500)
Add increase to income taxes payable 2,000
Cash from operating activities
$
122,100
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
The following slide is a mess
It represents what we are really doing when we
create an operating activities cash flow
statement using the indirect method.
Don’t try this at work.
30
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Cost of goods sold
180,000
We boug h t $5,000 more inve nt ory
t h an w e s old driving inve nt ory up.
Subt ract $5,000 more t h an e xpe ns e d
t o re fle ct t h e e xt ra cas h paid.
Account s payable incre as e d, s o w e
didn' t act ually pay for s ome of t h e s e
g oods t h at w e s old: add $8,000
Gross profit
Depreciation expense
+3000
20,000
4,000
De pre ciat ion doe s n' t cos t us any
cas h , s o w e re move it : Add $4,000
31
+8000
270,000
Wages expense
100,000
Wag e s payable incre as e d, s o w e
didn' t pay for s ome of t h e s e e xpe ns e d
w ag e s : Add $3,000
SG&A
(5,000)
Interest expense
10,000
Since w e paid more int e re s t t h an w e
+4000
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




Income Statement 1st
Record Net Income
Remove/counter gains, losses, and non-cash expenses (eg. depreciation & other ‘tions)
Balance Sheet 2nd
Add or subtract current accounts to convert Net income to Cash Flow
•
If Balance change takes a debit
–
Subtract from Net Income
•
If Balance change takes a credit
–
Add to Net Income
32
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Sales and acquisitions of long-term assets
Plant assets and investments
Analyze accounts to determine activity
Use T-account or journal entries to solve for cash
Factor gains/losses and depreciation expenses
into the cash flow
41
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Combine all the plant assets into a single Plant
assets account
Find the cost of the sold assets
The missing value in our net T-account
42
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Solve cash received using the T-account and
journal entry
Adding the cost of the sold asset to the gain
yields cash received
43
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparative Income Statements
2008
Sales
$
450,000
$
Cost of goods sold
180,000
Gross profit
270,000
Wages expense
100,000
SG&A
20,000
Depreciation expense
4,000
Interest expense
10,000
Income before taxes
136,000
Income taxes
20,400
Net income
$
115,600
$
Cash Flow Statem
2007
250,000
100,000
150,000
40,000
8,000
2,000
4,000
96,000
14,400
81,600
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparitive Balance Sheets
2008
Assets
Current Assets
Cash
Accounts receivable
Inventory
Current Assets
Plant assets, net
Total Assets
$
$
Liabilities
Current
Accounts Payable
$
Wages payable
Interest payable
Income taxes payable
Total Current liabilities
Long term
Notes payable
Total liabilities
Owners' equity
Common stock
Retained earnings
Total owners' equity
Liabilities + Owners' Equity$
35,000
15,000
10,000
60,000
40,000
100,000
2007
$
$
40,000
10,000
5,000
55,000
20,000
75,000




20,000
5,000
2,500
5,000
32,500
$
12,000
2,000
3,000
3,000
20,000
20,000
52,500
30,000
50,000
20,000
27,500
47,500
100,000
20,000
5,000
25,000
75,000
$

Income Statement 1st
Record Net Income
Remove/counter gains, losses, and
non-cash expenses (eg. depreciation &
other ‘tions)
Balance Sheet 2nd
Add or subtract current accounts to
convert Net income to Cash Flow
•
If Balance change takes a debit
–
Subtract from Net Income
•
If Balance change takes a credit
–
Add to Net Income
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cash Flow Statement
Cash from operating activities
Net income
$
Add depreciation expense
Less increase to A/R
Less increase to inventory
Add increase to A/P
Add increase to wages payable
Less decrease to interest payable
Add increase to income taxes payable
Cash from operating activities
$
2008
115,600
4000
-5000
-5000
8000
3000
-500
2000
122,100
Cash from investing activities
Cash paid to purchase plant assets
(24,000)
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Issuances of and payments on long-term notes payable
Issuances of stock and purchases of treasury stock
Payments of dividends
Use T-accounts and journal entries to solve for cash, just like
investing activities
48
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparative Income Statements
2008
Sales
$
450,000
$
Cost of goods sold
180,000
Gross profit
270,000
Wages expense
100,000
SG&A
20,000
Depreciation expense
4,000
Interest expense
10,000
Income before taxes
136,000
Income taxes
20,400
Net income
$
115,600
$
Cash Flow Statem
2007
250,000
100,000
150,000
40,000
8,000
2,000
4,000
96,000
14,400
81,600
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Comparitive Balance Sheets
2008
Assets
Current Assets
Cash
Accounts receivable
Inventory
Current Assets
Plant assets, net
Total Assets
$
$
Liabilities
Current
Accounts Payable
$
Wages payable
Interest payable
Income taxes payable
Total Current liabilities
Long term
Notes payable
Total liabilities
Owners' equity
Common stock
Retained earnings
Total owners' equity
Liabilities + Owners' Equity$
35,000
15,000
10,000
60,000
40,000
100,000
20,000
5,000
2,500
5,000
32,500
2007
$
$
$
40,000
10,000
5,000
55,000
20,000
75,000
12,000
2,000
3,000
3,000
20,000
20,000
52,500
30,000
50,000
20,000
27,500
47,500
100,000
20,000
5,000
25,000
75,000
$
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
2,008
Statement of Retained Earnings
Beg. Retained Earnings $
5,000
$
Add Net income
115,600
Less dividends
93,100
End. Retained Earnings $
27,500
$
2,007
81,600
76,600
5,000
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cash Flow Statement
Cash from operating activities
2008
Net income
$
115,600
Add depreciation expense
4000
Less increase to A/R
-5000
Less increase to inventory
-5000
Add increase to A/P
8000
Add increase to wages payable
3000
Less decrease to interest payable
-500
Add increase to income taxes payable
2000
Cash from operating activities
$
122,100
Cash from investing activities
Cash paid to purchase plant assets
(24,000)
Cash from financing activities
Cash paid to repay loans
-10000
Cash dividends paid
-93100
Total cash paid for financing activities (103,100)
Total change in cash for 2008
(5,000)
Beginning cash 2008
40000
Ending cash 2008
$
35,000
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Page 685
Compute cash paid for equipment purchases
Compute cash paid to reduce long term notes
payable
Use T accounts to solve for cash flow
53
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5
Analyze cash flows
65
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Cash available from operations after:
Paying for planned investments in long-term assets
Paying dividends to shareholders
Used to manage operations
If investment opportunity is available, cash is
free to invest
66
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68
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Journal Entries, core accounting principles utilization: Any
and all transactions exemplifying those principles
Adjusting Entries: P4-24A
Balance sheet or Income statement: P5-32A
Allowance for uncollectible accounts: E8-15
Inventory Flow, FIFO, LIFO, Avg. cost: E6-16
Fully Amortizing Notes Payable: E11-14 + in class lesson
Bonds, Premium/Discount: E11-16
Stockholders’ Equity transactions w/Treasury Stock &
balance sheet presentation: E12-15, E12-21, E13-12, E13-15,
13-16, p/e ratio
Operating Activities Cash Flows, indirect method: P14-27A
Financial Statement analysis: All analysis HW + p/e ratio
Expect interpretation and analysis on any and all topics.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
The statement of cash flows explains why the
cash balance does not equal net income (loss)
from the income statement.
Cash on the statement of cash flows includes
cash equivalents.
Cash equivalents are assets so close to being
cash that they are treated like cash. The
statement helps users predict future cash flows,
evaluate management decisions, and predict the
company’s ability to pay debts and dividends.
89
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Operating activities reflect the day-to-day
business operations. Operating activities affect
current assets and current liabilities.
Investing activities report purchase and sales of
long-term assets, such as buildings and longterm (nontrade) loans receivable.
Financing activities reflect the capitalization of
the business and include increases and decreases
in long-term liability and equity accounts,
paying dividends, and treasury stock
transactions.
90
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Only the operating activities section is presented
differently between the indirect and direct
methods.
The indirect cash flow statement begins with
operating activities. Net income (or net loss)
from the income statement is the first item listed.
Then, adjustments are made based on changes in
current asset and current liability accounts to
derive cash provided by (used for) operating
activities.
91
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Then, investing activities are reported, showing
cash used to purchase or cash received from
selling long-term assets.
Finally, financing activities are reported,
showing cash used to pay long-term liabilities,
to pay cash dividends, or to purchase treasury
shares AND cash received from issuing new
long-term liabilities or issuing stock.
The total of the cash flows from the three
activities (operating, investing, and financing)
equals the change in the cash balance.
92
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Companies make investments that do not require
cash. They also obtain financing other than cash.
Such transactions are called noncash investing
and financing activities and appear in a separate
part of the cash flow statement.
Free cash flow measures the amount of cash
available from normal operations after paying
for planned investments in long-term assets and
after paying cash dividends to shareholders.
93
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Appendix 14A - The Financial Accounting
Standards Board (FASB) prefers the direct
method of reporting cash flows from operating
activities. The direct method provides clearer
information about the sources and uses of cash
than does the indirect method.
Appendix 14B - The T-account approach works
well as a learning device. In practice, however,
most companies face complex situations. In
these cases, a spreadsheet can help in preparing
the statement of cash flows.
94
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Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
96
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Journal Entries, some perpetual inventory, core accounting
principles application:
Adjusting Entries:
Balance sheet or Income statement:
Allowance for doubtful accounts:
Inventory Flow, FIFO, LIFO, Avg. cost:
Fully Amortizing Notes Payable:
Bonds, Premium/Discount:
Stockholders’ Equity transactions w/Treasury Stock & balance
sheet presentation:
Operating Activities Cash Flows, indirect method:
Financial Statement analysis
Expect interpretation and analysis on any and all topics.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

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