Download cashflow statement accounting edition and more Exercises Economics in PDF only on Docsity!
The Statement of
Cash Flows
Purpose of a statement of cash flows:
To provide information about the cash inflows and outflows of an entity
during a period.
To summarize the operating, investing, and financing activities of the
business.
The cash flow statement helps users to assess a company’s liquidity, financial flexibility, operating capabilities, and risk.
The statement of cash flows is useful because it provides answers to the following important questions:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?
Specifically, the information in a statement of cash flows, if used with information in the other financial statements, helps external users to assess:
1. A company’s ability to generate positive future net
cash flows,
2. A company’s ability to meet its obligations and pay
dividends,
3. A company’s need for external financing,
4. The reasons for differences between a company’s net
income and associated cash receipts and payments,
and
5. Both the cash and noncash aspects of a company’s
financing and investing transactions.
What can we learn from SCF that is not already available in
the other financial statements?
It provides answers to important questions like:
Where did cash come from? What was cash used for? What was the change in the cash balance?
Couldn’t we just look the balance sheet?
The change in cash could be determined, but the statement
of cash flows provides detailed information about a
company’s cash receipts and cash payments during the
period.
Many things you want to know about a company is summarized in this one
statement
Operating, financing and investing cash flows
Net income does not always tell the whole story about operating performance.
A statement of cash flows is an excellent forecasting tool.
Review of terms
Cash and cash equivalents
It is a short-term, highly liquid investment.
It must be readily convertible to cash and it must be so near to maturity that
there is insignificant risks of changes in value due to changes in interest rate.
Company, Inc.
Statement of Cash Flows
For the year ended December 31, 199X
Cash Flows from Operating Activities
Cash received from customers
F 0 E 9Cash received as interest income *
F 0 E BCash received as dividend income
F 0 E 9Cash paid for cost of goods sold *
F 0 E ACash paid for selling expenses
F 0 E BCash paid for general & administrative expenses
Cash paid for interest (including interest on capital leases)
Cash paid for income taxes
Cash that would have been paid for taxes except for “excess tax deduction” related to stock based
compensation
Net cash provided by (or used by) operating activities
Cash Flows from Investing Activities
Cash received from sale of property, plant, & equipment
Cash received from sale of investments
Cash received from repayment of note receivables
Cash paid to acquire property, plant, and equipment
Cash paid to acquire investments
Cash paid out as a loan
Net cash provided by (or used by) investing activities
Cash Flows from Financing Activities
Cash received as proceeds from issuance of debt
Cash received as proceeds from issuance of stock
Cash received as proceeds from reissuance of treasury stock
Cash paid to repay debt (principal payment)
Cash paid on principal related to capital leases
Cash paid to reacquire stock (purchase treasury stock)
Cash paid as dividends
Cash retained due to “excess tax deduction” related to stock options
Net cash provided by (or used by) financing activities
Net increase (decrease) in cash
Beginning cash and cash equivalents balance
=Ending cash and cash equivalents balance
Schedule of Noncash Investing and Financing Activities
Assets for Liabilities &/or Equity
Liabilities &/or Equity for Assets
Liabilities for Equity and Equity for Liabilities
Capital lease (acquisition of asset and obligation for lessee)
A reconciliation of net income to cash provided by operations
*Brackets indicate items that are normally combined
Operating Activities
(Usually associated with working capital accounts like Accounts receivable, inventory, salaries payable, etc.)
Inflows:
From sale of goods and services
From receiving dividends investments
From receiving interest from investments or loans
From sale of trading securities
From reduced income taxes due to “excess tax deduction”
related to stock options
Outflows:
To suppliers for inventory and other materials
To employees for services
To other entities for services (insurance, etc.)
To government for taxes
To lenders for interest
To purchase trading securities
Interest expense is an operating item! Investment earnings (dividends & interest) is an operating item!
Buying and selling trading securities are operating activities! These things may not make sense to you – so
“memorize.”
Financing Activities
(Usually associated with long-term liability and equity items)
Inflows:
From issuance of debt (bonds and notes)
From issuance of equity securities
Common stock
Preferred stock
Re-issuance of treasury stock
Outflows:
To stockholders as dividends
To repay or retire long-term debt, including capital leases for lessee (interest on leases is classified as operating)
To reacquire capital stock (treasury stock)
An “anomaly” on SCF
Dividends are paid to stockholders and interest is paid to bondholders.
Dividends paid are shown as outflows under financing activities
However, FASB defined interest expense to be an operating activity
Interest & dividend revenue are defined to be operating activities, too.
Direct versus Indirect Presentations
FASB Statement No. 95 allows two ways to calculate and report a company’s net cash flow from operating activities on its statement of cash flows.
The Direct Method
Under the direct method, operating cash outflows are deducted from operating cash inflows to determine the net cash flow from operating activities.
If you choose the direct method, a reconciliation of cash provided by
operations to net income is a required disclosure.
This is the same schedule that appears in a statement prepared using the
indirect method
The required information items on a direct method statement of cash flow (per
FASB)
Operating Inflows
Cash collected from customers (including lessees, tenants, licensees,
and the like)
Interest and dividends received
Other operating cash receipts, if any
Operating outflows
Cash paid to employees and other suppliers of goods or services
(including insurance, advertising and the like)
Interest paid
Income taxes paid
Other operating cash payments, if any
The Indirect Method
Under the indirect method, net income is adjusted for noncash items related to operations to compute the net cash flow from operating activities.
If you choose to use the indirect method, you must also disclose interest paid
and income taxes paid during the year.
Other disclosures
Example 1 - Statement of Cash Flow – DIRECT METHOD Year ending
Year ending Palouse Pottery 12/31/06 Ref Debit Ref Credit 12/31/07 Target Cash 15,000 X 27,000 42,000 27,
Accounts Receivable 40,000 37,500 (2,500)
Allowance for doubtful accounts (3,000) (4,500) (1,500)
Merchandise Inventory 25,000 43,000 18,
Prepaid Expenses 3,000 6,000 3,
Plant, property & equipment 215,000 236,000 21,
Accumulated Depreciation (80,000) (82,000) (2,000)
215,000 278,
Accounts Payable (23,000) (31,000) (8,000)
Salaries Payable (2,000) (9,000) (7,000)
Interest payable (2,000) (1,500) 500
Income Taxes Payable (1,500) (5,500) (4,000)
Dividends Payable 0 (8,000) (8,000)
Long term liabilities (25,000) (15,000) 10,
Common stock, $1 par (100,000) (145,000) (45,000)
Retained Earnings (61,500) (63,000) (1,500)
(215,000) (278,000) 0 1997 1997
Closing entry for Rev/(Exp) Rec/(Disb)
Sales 93,
Gain/(loss) on sale of PP&E (4,000)
Realized gain/(loss) - land 20,
Cost of goods sold (35,000)
Salaries & other operating expenses
(37,000)
Bad debt expense (2,000)
Depreciation & amortization (11,000)
Interest expense (2,500)
Income taxes expense (7,000)
Net income (accrual basis) 14,
Statement of Cash Flows (INFLOWS)^ (OUTFLOWS)
Operating Activities
Investing Activities
Financing Activities
Noncash Financing/Investing
CHANGE IN CASH X 27, Totals
Additional information: a. Wrote off $500 accounts receivable as uncollectible d. Sold land for $30,000 that had been acquired for $10, b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,
e. Paid a $10,000 long-term note installment f. Purchase plant, property & equipment for $48,000 cash. c. Declared a cash dividend of $13,000 g. Issued common stock for $45,000 cash.
Financing Activities
Noncash Financing/Investing
CHANGE IN CASH X 27, Totals
Additional information: a. Wrote off $500 accounts receivable as uncollectible d. Sold land for $30,000 that had been acquired for $10, b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,
e. Paid a $10,000 long-term note installment f. Purchase plant, property & equipment for $48,000 cash. c. Declared a cash dividend of $13,000 g. Issued common stock for $45,000 cash. Example 2 - Statement of Cash Flow Year ending
Year ending Moscow Moving & Storage 12/31/06 Ref Debit Ref Credit 12/31/07 Target Cash 15,000 5,000 (10,000)
Accounts Receivable 30,000 28,500 (1,500) Allowance for doubtful accounts (1,500) (2,000) (500) Merchandise Inventory 10,000 17,000 7, Prepaid Expenses 4,500 500 (4,000)
Plant, property & equipment 220,100 289,100 69, Accumulated Depreciation (20,000) (16,000) 4, 258,100 322, Accounts Payable (10,000) (13,000) (3,000) Salaries Payable (3,000) (1,000) 2, Interest payable 0 (1,000) (1,000) Long term liabilities (30,000) (10,000) 20,
Common stock, $1 par (100,000) (181,000) (81,000) Retained Earnings (115,100) (116,100) (1,000) (258,100) (322,100) 0 1997 1997 Closing entry for Rev/(Exp) Receipt/(Disb) Sales 80, Gain/(loss) on sale of PP&E (2,000) Cost of goods sold (35,000) Salaries & other operating expenses
(26,000)
Bad debt expense (1,000)
Depreciation & amortization (5,000) Interest expense (2,000) Income taxes expense (3,000) Net income (accrual basis) 6, Statement of Cash Flows (INFLOWS)^ (OUTFLOWS) Operating Activities
Investing Activities
Financing Activities
Noncash Financing/Investing
CHANGE IN CASH Totals
Additional Information a. Wrote off $500 accounts receivable as uncollectible d. Issued common stock for $36,000 cash b. Sold operational assets for $4,000 cash e. Paid a $20,000 long-term note installment (cost $15,000, acc'd depreciation $9,000) f. Purchased operational assets, $39,000 cash c. Declared and paid a cash dividend, $5,000 g. Acquired land in exchange for 1,000 shares of common stock worth $45 each
Example 3
Avery Slings & Arrows, Inc.
Avery Slings & Arrows Income Statement For year ending 12/31/
Sales 6,600, Earnings of affiliates (equity method) 150, Realized loss on sale of equipment (65,000) Realized gain on sale of investments 53, Interest and dividend revenue 15, Total revenues 6,753,
Cost of goods sold 3,490, Salaries and wages 632, Other operating expenses 421, Bad debt expense 45, Depreciation expense 757, Amortization of intangibles 5, Accretion expense 25, Interest expense 935, Income tax expense 177,000 6,487, Net income 266,
Prepare a statement of cash flows (direct method) including the required reconciling schedule and any other required disclosures for Avery Slings & Arrows, Inc. Information from the balance sheet and income statement have been entered into a worksheet for your convenience. In addition to completing the worksheet, you MUST prepare a formal statement with headings, subtotals, etc. for full credit.
ADDITIONAL INFORMATION a. During the year, ASA paid $2,767,000 in cash for land, building, and equipment. b. On August 5, 2004, ASA issued 25,000 shares of common stock for $42 per share. c. ASA purchased $273,000 in marketable securities during the year. d. Equipment costing $500,000 was sold during the year for $59,000. The book value was $124,000. e. During the year, AAS declared cash dividends in the amount of $203,000. f. On April 1, 2004, the holders of $1,500,000 in convertible bonds elected to convert their bonds to common stock. The conversion ratio was 25 shares of common stock for each share $1,000 face value bond. g. The noncurrent investment represents 30% of the outstanding securities of the investee. This investment is accounted for on the equity method. During 2004, ASA received $29,000 in dividends from the investment. h. On May 1, 2004, ASA acquired equipment under a capital lease. At the inception of the lease, the present value of the minimum lease payments was $648,000. i. ASA acquired a patent on a new process for $500,000 on October 15, 2004. j. During 2004, ASA sold marketable securities which it had acquired for $222,000 for $275,000. k. In February, ASA issued 150,000 shares of common stock in a 50% stock dividend. l. ASA issued $3,000,000 in bonds at face value on August 1, 2004. m. ASA sold 500 shares of treasury stock which it had acquired for $20 per share for $46 per share on January 18,
n. In October, ASA acquired 1,000 shares of treasury stock at $38 per share. o. Bad debts in the amount of $33,000 were written off during the year.
Avery Slings & Arrows Year ending Year ending 12/31/03 Re f
Debit Re f
Credit 12/30/04 Target
Cash 2,850,000 x 589,000 2,261,000 (589,000) Securities Available for Sale 180,000 231,000 51, Allowance to adjust to market (80,000) 27,000 107, Accounts receivable (net) 1,900,000 1,947,000 47, Merchandise Inventory 900,000 602,000 (298,000) Prepaid Expenses 50,000 4,000 (46,000) Investments in affiliated companies (equity method)
Land, building & equipment 17,800,000 20,715,000 2,915,
Accumulated Depreciation (1,800,000) (2,181,000) (381,000) Intangible Assets 73,000 568,000 495, Total assets 23,873,000 26,295,
Accounts Payable (650,000) (347,000) 303, Salaries Payable (21,000) (18,000) 3, Interest payable (55,000) (156,000) (101,000) Income Taxes Payable (32,000) (45,000) (13,000) Dividends Payable (60,000) (128,000) (68,000) Bonds Payable (4,000,000) (7,000,000) (3,000,000) (Premium)/Discount on Bonds Payable
Convertible Bonds Payable (3,000,000) (1,500,000) 1,500, Lease obligation (1,825,000) (2,108,000) (283,000) Asset retirement obligation (250,000) (275,000) (25,000) Deferred Income Taxes (75,000) (122,000) (47,000) Other long term liabilities (2,590,000) (590,000) 2,000,
