CHAPTER 16
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As the cartoon implies, business investments with good long-term cash flow prospects frequently provide poor cash flow in their early years. Measuring net income by means of the accrual basis of accounting mitigates the short-sightedness of cash flow measures.
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The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period.
(i.e., it tells where the cash came from and where it went while explaining the change in the cash balance.)
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The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period.
We need to sell our inventory and collect our receivables, if we plan to have a good year.
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The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period.
In addition, we have to make an investment in new equipment to improve our productivity.
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The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period.
I guess we will have to borrow some money to afford all this new equipment.
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P. 582
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Operating Activities
Transactions that enter into the determination of net income
Investing Activities
Transactions involving acquisition or disposal of noncurrent assets
Financing Activities
Transactions involving creditors and stockholders
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Operating Activities
Cash inflows from: Sale of goods or services Interest revenue Dividend revenue Sale of trading securities Other
583
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Operating Activities
Cash outflows for: Purchase of inventory Payment of salaries and wages Interest expense Other expenses Purchase of trading securities
583
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Operating Activities
Direct Method
Deducts from cash sales only those operating expenses that consumed cash.
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Operating Activities
Indirect Method
Starts with accrual basis net income and adjusts net income for items that affected net income but did not involve cash.
This is the most popular method and is used by about 95% of companies.
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Investing Activities
Cash inflows from:
Sale of property, plant, and equipment. Sale of securities. Collections of longterm loans.
583
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Financing Activities
Cash inflows from:
Issuing debt.
583
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Indirect Method
Operating Activities
Accrual basis net income
Add: Non-cash expenses (e.g., Depreciation, Depletion and Amortization) Add: Losses not affecting cash Deduct: Gains not affecting cash Adjust: For changes in current assets and current liabilities
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Indirect Method
Operating Activities Section
For Changes in: Add Change to Net Income Deduct Change from Net Income
Decreases Increases
Increases Decreases
589
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a. b. c. d.
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a. a. b. b. c. c. d. d.
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a. b. c. d.
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a. a. b. b. c. c. d. d.
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a. b. c. d.
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a. a. b. b. c. c. d. d.
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a. b. c. d.
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a. a. b. b. c. c. d. d.
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a. b. c. d.
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a. a. b. b. c. c. d. d.
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Non-Cash Activities
The reason that non-cash investing and financing activities must be disclosed in notes to the statement of cash flows:
The reader wants to know why all amounts on the comparative balance sheet changed from the beginning to end of year, whether cash was involved or not. Therefore, this is a good place to disclose it.
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Sample Company Comparative Balance Sheet At December 31, 1999 and 1998 1999 1998 Change Cash $ 82,000 $ 30,000 $ 52,000 Acct. Receivable 120,000 100,000 20,000 Inventory 87,000 82,000 5,000 Land 101,000 90,000 11,000 Equipment 113,000 100,000 13,000 Accum. Depr. (20,000) (15,000) (5,000) Total $ 483,000 $ 387,000 $ 96,000 Acct. Payable $ 76,000 Wages Payable 33,000 Notes Payable 50,000 Capital Stock 170,000 Retained Earnings 154,000 Total $ 483,000 $ 60,000 17,000 50,000 160,000 100,000 $ 387,000 $ 16,000 16,000 10,000 54,000 $ 96,000
Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Cash flows from operating activities: Net income $ 64,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 5,000 Increase in with accrual basis net(20,000) and Start Acct. Receivable income Increase in inventory (5,000) make all necessary adjustments. Increase in Acct. Payable 16,000 Increase in Wages Payable 16,000 Net cash provided by operating activities $ 76,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Cash flows from operating activities: Net income $ 64,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 5,000 Increase in Acct. Receivable (20,000) Add depreciation, depletion Increase in inventory (5,000) and amortization. Increase in Acct. Payable 16,000 Increase in Wages Payable 16,000 Net cash provided by operating activities $ 76,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Cash flows from operating activities: Net income $ 64,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 5,000 Increase in Acct. Receivable (20,000) Increase in Inventory (5,000) Increase in Acct. Payable increase 16,000 Deduct the in Increase in Wages Payable - accounts 16,000 the current assets Net cash provided by operating receivable and Inventory. activities $ 76,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Cash flows from operating activities: Net income $ 64,000 Add the increases in the Adjustments to reconcile net current to net cash provided income liabilities - accounts payable and wages payable. by operating activities Depreciation expense 5,000 Increase in Acct. Receivable (20,000) Increase in Inventory (5,000) Increase in Acct. Payable 16,000 Increase in Wages Payable 16,000 Net cash provided by operating activities $ 76,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Cash flows from operating activities: Net income $ 64,000 Adjustments to reconcile net income to net cash provided Now that we have completed the by operating activitiesoperating activities cash flows from section of the statement lets look at the Depreciation expense 5,000 cash flows for investing (20,000) Increase in Acct. Receivable activities. Increase in Inventory (5,000) Increase in Acct. Payable 16,000 Increase in Wages Payable 16,000 Net cash provided by operating activities $ 76,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Net cash flows from operating activities: $ 76,000 Cash flows from investing activities: Purchase of Land $(11,000) Purchase of Equipment (13,000) (24,000)
Sample purchased land for cash during 1999. Cash flows from financing activities:
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Sale of Capital Stock Payment of Cash Dividends Net Increase in Cash Cash, January 1, 1999 Cash, December 31, 1999
$ 10,000 (10,000)
Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Net cash flows from operating activities: $ 76,000 Cash flows from investing activities: Purchase of Land $(11,000) Purchase of Equipment (13,000) (24,000)
During activities: Cash flows from financingthe year Sample purchased new equipment Sale of Capital Stock $ 10,000 paying $13,000 cash. Payment of Cash Dividends (10,000) Net Increase in Cash $ 52,000 Cash, January 1, 1999 30,000 Cash, December 31, 1999 $ 82,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Net cash flows from operating activities: $ 76,000 Cash flows from investing activities: Purchase of Land $(11,000) Purchase of Equipment (13,000) (24,000) Cash flows from financing activities: Sale of Capital Stock $ 10,000 Payment of Cash Dividends capital Sample (10,000) To raise addition Net Increase in shares of stock for $10,000 cash. $ 52,000 sold Cash Cash, January 1, 1999 30,000 Cash, December 31, 1999 $ 82,000
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Sample Company Statement of Cash Flows For the Year Ended December 31, 1999 Net cash flows from operating activities: $ 76,000 Cash flows from investing activities: Purchase of Land $(11,000) Purchase of Equipment (13,000) (24,000) Cash flows from financing activities: Sale of Capital Stock $ 10,000 Payment of Cash Dividends (10,000) Net Increase inThe company paid $10,000 in Cash $ 52,000 Cash, January 1, dividends to its shareholders. 30,000 cash 1999 Cash, December 31, 1999 $ 82,000
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Sample Company We have now explained what Statement of Cash Flows caused the cash account to For the Year Ended December 31, 1999 increase by $52,000 during Net cash flowsthe year. from operating activities: $ 76,000 Cash flows from investing activities: Purchase of Land $(11,000) Purchase of Equipment (13,000) (24,000) Cash flows from financing activities: Sale of Capital Stock $ 10,000 Payment of Cash Dividends (10,000) Net Increase in Cash $ 52,000 Cash, January 1, 1999 30,000 Cash, December 31, 1999 $ 82,000
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Retained Earnings Dividends 4,000 30,000 Beg. Bal. 10,000 Net Income X 30,000 + X - 4,000 = 36,000 X = 10,000 36,000 End. Bal.
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Hey, dude, how about going over that stuff one more time?
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