Plain Background Power Point Slides Chapter 12 The Statement of Cash Flows2948

The Statement of Cash
Flows
Chapter 12
1
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Objective 1
Identify the purposes of the

statement of cash flows.
2
Basic Concepts
Reports the entity’s cash flows
(cash receipts and cash
payments) during the period
3
Purposes of the Statement
of Cash Flows
1. Predict future cash flows
2. Evaluate management decisions
3. Determine the ability to pay
dividends to stockholders’ and
payments to creditors
4. Show the relationship of net
income to the business’s cash
flows
4
What is Cash?
 Cash on hand
 Cash in the bank
 Cash equivalents - highly liquid,
short-term investments that can be
converted into cash with little delay
 Money-market investments
 U.S. Government Treasury bills
5
Objective 2
Distinguish among operating,

investing, and financing cash
flows.
6
Operating, Investing, and
Financing Activities
Operating activities create
revenues, expenses, gains, and
losses.
Investing activities increase and
decrease long-term assets.
Financing activities obtain cash
from investors and creditors.
7
Two Formats for
Operating Activities
 Indirect method reconciles from net
income to net cash provided by
operating activities
 Direct method reports all cash
receipts and cash payments from
operating activities
 The two methods have no effect on
investing or financing activities.
8
Two Formats for
Indirect Method
Net income $XXX
Adjustments:
Depreciation, etc. XXX
Net income provided by operating activities $XXX
Direct Method
Collection from customers $XXX
Deductions:
Payment to suppliers, etc. XXX
Net income provided by operating activities $XXX
Objective 3
Prepare a statement of cash

flows by the indirect method.
10
The Indirect Method:
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other than cash
Increases in current liabilities
Negative Items
Net loss
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current liabilities
11
Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assets
Purchase of investments that are not cash
equivalents
Making loans to others
12
Positive Items
Issuing stock
Selling treasury stock
Borrowing money
Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of debts
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Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands) 20x2 20x1 Inc/dec)
Assets
Current:
Cash $ 22 $ 42 $ (20)
Accounts receivable 93 80 13
Interest receivable 3 1 2
Inventory 135 138 (3)
Prepaid expenses 8 7 1
Long-term receivable 11 – 11
Plant assets, net 453 219 234
Total $725 $487 $238
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Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands) 20x2 20x1 Inc/dec)
Liabilities
Current:
Accounts payable $ 91 $ 57 $ 34
Salary payable 34 6 (2)
Accrued liabilities 1 3 (2)
Long-term debt 160 77 83
Stockholders’ equity
Common stock 359 258 101
Retained earnings 110 86 24
Total $725 $487 $238
15
Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Revenues and gains:
Sales revenue $284
Interest revenue 12
Dividend revenue 9
Gain on sale of plant assets 8
Total revenues and gains $313
16
Income Statement
Anchor Corporation
(In thousands)
Expenses:
Cost of goods sold $150
Salary and wage expense 56
Depreciation expense 18
Other operating expense 17
Interest expense 16
Income tax expense 15
Total expenses $272
17
Income Statement
Anchor Corporation
(In thousands)
Total revenues and gains $313
Total expenses 272
Net income $ 41
18
Statement of Cash Flows:
Depreciation does not affect Sales of long-term assets are
Statement of Cash Flows (Indirect Method)
cash, but it decreases net investing
Year Ended
income – add December
it back in. 31, 20x2 (In
Activities thousands)
– remove gains from
Cash flows from operatingnet income.
activities:
Net Income $41
Adjustments to reconcile net income to
net cash provided by operating activities:
A Depreciation 18
B Gain on sale of plant (8)
19
Year Ended December 31, 20x2 (In thousands)
C Increase in accounts receivable (13)
C Increase in interest receivable (2)
C Decrease in inventory 3
C Increase in prepaid expenses (1)
C Increase in accounts payable 34
C Decrease is salary payable (2)
C Decrease in accrued liabilities (2) 27
Net cash provided by operating activities $68
20
Changes in Current Asset and
Current Liability Accounts – C
1. An increase in a current asset other
than cash indicates a decrease in cash.
2. A decrease in a current asset other
than cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.
4. An increase in a current liability
indicates an increase in cash.
21
Cash flows from investing activities:
Acquisition of plant assets $(306)
Loan to another company (11)
Proceeds from sale of plant assets 62
Net cash used for investing activities $(255)
22
Cash flows from financing activities:
Proceeds from issuance of common stock $101
Proceeds from issuance of long-term debt 94
Payment of long-term debt (11)
Payment of dividends (17)
Net cash provided by financing activities $167
23
Statement of Cash Flows
Net cash provided by operating activities $ 68
Net cash used for investing activities (255)
Net cash provided by financing activities 167
Net decrease in cash $ (20)
Cash balance, December 31, 20x1 42
Cash balance, December 31, 20x2 $ 22
24
Computing Acquisition and
Sales of Plant Assets
Anchor had plant assets, net of
depreciation, of $219,000 at the
beginning of the year and
$453,000 at year end. The
acquisition of plant assets
amounted to $306,000 during
the year.
25
The income statement shows
depreciation expense of
$18,000 and an $8,000 gain on
sale of plant assets. What is the
book value of the assets sold?
Beginning balance + Acquisitions – Depreciation
– Book value of assets sold = Ending balance
26
$219,000 + 306,000 – 18,000 – X = $453,000
X = $219,000 + 306,000 – 18,000 – 453,000

X = $54,000 (book value)
How much are the proceeds
from the sale of plant assets?
27
Book value + Gain – Loss = Sale proceeds
$54,000 + $8,000 – 0 = $62,000
28
Plant Assets (Net)
Beginning bal. 219,000 Depreciation 18,000
Acquisitions 306,000 Book val. 54,000
Ending bal. 453,000

Sales of Investments
Beginning balance + Purchases
– Book value of investment sold
= Ending balance
30
Computing Loans and
Their Collections
Beginning balance + New loans made
– Collections
= Ending balance
31
Computing Issuances and
Payments of Long-Term Debt
Beginning balance was $77,000.

New debt amounting to $94,000
was incurred during the year.
The ending balance for the Long-Term
Debt account was $160,000.
How much was the payment?
32
Computing Issuances and
Payments of Long-Term Debt
Long-Term Debt
Beginning bal. 77,000
Payments 11,000 New debt 94,000
Ending bal. 160,000

Computing Issuances of Stock:
Purchases of Treasury Stock
Beginning balance of common stock +

Issuance of new stock = Ending balance
Beginning balance of treasury stock +

Purchase of treasury stock = Ending balance
34
Computing Dividend Payments
Retained earnings beginning balance +

Net income – Dividends declared
= Ending balance
$86,000 + $41,000 – X = $110,000
X = $110,000 – $86,000 – $41,000
X = $17,000
35
Noncash Investing and
Suppose Anchor Corporation issued

Common stock valued at $300,000
to acquire a warehouse.
Warehouse Building 300,000

Common Stock 300,000
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Noncash Investing and
Noncash Investing and Financing Activities: (000)
Acquisition of building by issuing common
stock $300
Acquisition of land by issuing note payable 70
Payment of long-term debt by issuing
common stock 100
Total noncash investing and financing
activities $470

Learning Objective 4
Prepare a statement of cash

flows by the direct method.
38
The Direct Method
The FASB has expressed a
preference for the direct method
Provides clearer information
about the sources and uses of a
company’s operating cash
39
The Direct Method
(In thousands)
Cash flows from operating activities:
Receipts:
Collections from customers $271
Interest received on notes receivable 10
Dividends received on investments in stock 9
Total cash receipts $290
40
The Direct Method
(In thousands)
Payments:
To suppliers $133
To employees 58
For interest 16
For income tax 15
Total payments 222
Net cash provided by operating
activities $ 68
41
The Direct Method
Net cash provided by operating activities $ 68
Net cash used for investing activities (255)
Net cash provided by financing activities 167
Net decrease in cash $(20)
Cash balance, December 31, 20x1 42
Cash balance, December 31, 20x2 $ 22

Cash Flows from
 Cash collections from customers
 Cash receipts of interest
 Cash receipts of dividends
 Payments to suppliers
 Payments to employees
 Payments for interest and income
tax expense
43
Cash Flows from
Purchases of plant assets;
investments in, and loans to,
other companies
Proceeds from the sale of plant
assets and investments; and
the collections of loans
44
Cash Flows from
Proceeds from the issuance of
stock and debt
Payment of debt and purchases
of the company’s own stock
Payment of cash dividends
45
Computing Cash Collections
from Customers
Beginning accounts receivable balance

+ Sales on account – Collections
= Ending accounts receivable balance
46
Computing Payments
to Suppliers
Step 1: How much were the
purchases?
Beginning inventory + Purchases – Cost
of goods sold = Ending Inventory
$138,000 + X – $150,000 = $135,000

X = $150,000 – $138,000 + $135,000
X = $147,000
47
Computing Payments
to Suppliers
Accounts Payable
Beg. balance 57,000
Payments for inventory Purchases 147,000
End. balance 91,000
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Computing Payments
to Suppliers
Step 2: How much did the business
pay for this inventory?
Beginning Accounts Payable + Purchases
– Payments = Ending Accounts Payable
$57,000 + $147,000 – X = $91,000
X = $57,000 + $147,000 – $91,000
X = $113,000
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Computing Payments for
Operating Expenses
Beginning prepaid expense + Payments
– Expiration of prepaid expense
= Ending balance
Beginning accrued liabilities + Accrual of
expense at year end – Payments
= Ending balance
Accrual of other operating expenses at year end
+ Expiration of prepaid expense + Payments
= Ending balance 50
Computing Payments to
Employees
Salary Payable was $6,000 at the
beginning of the year and $4,000 at
year end. During the year, Salary
Expense was $56,000. How much
did the business pay?
$58,000
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Measuring Cash Adequacy:
Free Cash Flow
 The amount of cash available from
operations after paying for planned
investments in plant, equipment,
and other long-term assets.
Net cash flow from operating activities
–
Cash outflow earmarked for investments in
plant, equipment, and other long-term assets
52
End of Chapter 12
53

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Plain Background Power Point Slides Chapter 12 The Statement of Cash Flows2948

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The Statement of Cash

Identify the purposes of the

Distinguish among operating,

Prepare a statement of cash

X = $219,000 + 306,000 – 18,000 – 453,000

Book value + Gain – Loss = Sale proceeds

$54,000 + $8,000 – 0 = $62,000

Ending bal. 453,000

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Beginning balance was $77,000.

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Beginning balance of common stock +

Beginning balance of treasury stock +

Retained earnings beginning balance +

Suppose Anchor Corporation issued

Warehouse Building 300,000

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Prepare a statement of cash

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Beginning accounts receivable balance

$138,000 + X – $150,000 = $135,000

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