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Transcript of Ppt Chap12
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© The McGraw-Hill Companies, Inc., 2010 McGraw-Hill/Irwin
Chapter 12
Reporting and Analyzing Cash Flows
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How does acompany obtain its
cash?
Where does acompany spend its
cash?
What explains thechange in the cashbalance?
Purpose of the Statement of CashFlows
C1
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How did thebusiness fund its
operations?
Did the businessborrow any funds or
repay any loans?
Does the businesshave sufficient cash
to pay its debts asthey mature?
Did the businessmake any dividend
payments?
Importance of Cash FlowsC1
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CashCurrency
CashEquivalents
Short-term, highly liquid investments. Readily convertible into cash.
Sufficiently close to maturity so that market value isunaffected by interest rate changes.
Measurement of Cash FlowsC1
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The Statement of Cash Flows
includes the following threesections:
Operating Activities
Investing Activities Financing Activities
Classifying Cash FlowsC 2
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Examples of Outflows Salaries and wages
Payments to suppliers
Taxes and fines
Interest paid to lenders
Examples of Inflows Receipts from customers
Cash dividends received
Interest from borrowers
Operating Activities
C 2
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Examples of Outflows Pu
rchasing long-termproductive assets
Purchasing equityinvestments
Purchasing debt investments
Examples of Inflows Selling long-term productive
assets
Selling equity investments
Collecting principal on loans
Investing ActivitiesC 2
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Examples of O
utflows Pay cash dividends
Purchasing treasury stock
Repaying cash loans
Paying owners¶ withdrawals
Examples of Inflows Issuing its own equity
securities
Issuing bonds and notes Issuing short- and long-term
liabilities
Financing ActivitiesC 2
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Classification of
Cash Flow Items
Operating Investing Financing
Interest received Yes Yes
Dividends received Yes Yes
Interest paid Yes Yes
Dividends paid Yes Yes
C 2
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Items requiring separatedisclosure include:
Retirement of debt by issuingequity securities.
Conversion of preferred stock to
common stock. Leasing of assets in a capital
lease transaction.
Noncash Investing and
Financing
C 3
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Cash flows from operating activities:
[List of individual inflows and outflows] Net cash provided (used) by operating activites $ #####
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash provided (used) by investing activites #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activites #####
Net increase (decrease) in cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
Company Name
Statement of Cash Flows
For Period Ended Date
Format of the Statement of CashFlows
C 4
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There are two acceptable methods to determineCash Flows from Operating Activities:
Direct Method
Indirect Method
There are two acceptable methods to determineCash Flows from Operating Activities:
Direct Method
Indirect Method
Format of the Statement of CashFlows
C 4
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Let¶s look at the IndirectMethod for preparing theCash Flows from OperatingActivities section.
Preparing the Statement of CashFlows
P1
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Relationship to theAccounting Equation
Assets = Liabilities Equity
Cash Liabilities Equity+ = +Noncash Assets
= +_
Changesin Cash
Account
Changesin
Noncash Accounts
Cash Noncash AssetsLiabilities Equity
P1
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ACCRUAL AND CASH: BASIC IDEAS
Company A all cash sales andcash payments of expenses
Dr Cash 100
Cr Rev 100
Dr Exp 20
Cr Cash 20
Income = 80
Cash = 80
Company B all credit sales andcash payments of expenses
Dr AR 100
Cr Rev 100
Dr Exp 20
Cr Cash 20
Income = 80
Cash = (20)
For company B, to go from its Income to Cash:
Income ± Increase in AR = 80 ± 100 = (20)
1st
year of operations:S
cenario 1
P1
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ACCRUAL AND CASH: BASIC IDEAS
Company A all cash sales andcash payments of expenses
Dr Cash 100
Cr Rev 100
Dr Exp 20
Cr Cash 20
Income = 80
Cash = 80
Company B all cash sales andaccrued expenses
Dr Cash 100
Cr Rev 100
Dr Exp 20
Cr Payable 20
Income = 80
Cash = 100
For company B, to go from its Income to Cash:
Income + Increase in Payable = 80 + 20 = 100
1st
year of operations:S
cenario 2
P1
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Use this table when adjusting Income or Profit to Operating Cash Flows.
Change in Account Balance During Year
Increase Decrease
Current
Subtract from Add to incomeAssets income
Current Add to income Subtract from
Liabilities income
Indirect MethodP2
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Incomebeforetaxes
Cash Flowsfrom Operating
Activities
Most companies use the indirect method.
Changes in current assetsand current liabilities.
+ Losses and
- Gains
+ Noncash
expenses such asdepreciation and
amortization.
Indirect MethodP2
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East, Inc. reports $125,000 income before taxesfor the year ended December 31, 2010.
Accounts Receivable increased by $7,500during the year and Accounts Payableincreased by $10,000.
During 2010, East reported $12,500 of Depreciation Expense.
What is East, Inc.¶s OperatingCash Flow for 2010?
Indirect Method ExampleP2
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Net income 125,000$
Deduct: Increase in accountsreceivable
Cash provided by operating
activities
Income before taxes 125,000$
Deduct: Increase in accountsreceivable
Cash provided by operating
activities
For the indirectmethod, start withincome before
taxes.
Indirect Method ExampleP2
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Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable
Cash provided by operating
activities
Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable
Cash provided by operating
activities
Add noncash expenses suchas depreciation, depletion,amortization, or bad debtexpense.
Indirect Method ExampleP2
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Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Cash provided by operating
activities
Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Change in Account Balance During Year
Increase Decrease
Current Subtract from Add to income
Assets income
Current Add to income Subtract from
Liabilities income
Indirect Method ExampleP2
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Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Add: Increase in accounts payable 10,000
Cash provided by operating
activities
Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Add: Increase in accounts payable 10,000
Indirect Method ExampleP2
Change in Account Balance During Year
Increase DecreaseCurrent Subtract from Add to income
Assets income
Current Add to income Subtract from
Liabilities income
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Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Add: Increase in accounts payable 10,000
Cash provided by operating
activities 140,000$
Income before taxes 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accountsreceivable (7,500)
Add: Increase in accounts payable 10,000
Cash generated from operations 140,000$
Indirect Method ExampleP2
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Interest revenue, interest expenses,Dividend revenue and income taxes paid
Interest and dividends received, and income
taxes and interest paid must be separately disclosed.
Since interest and dividend income are added to
derive income amount, adjustments involvededucting these amounts from income.Interest expenses are added to income to
cancel the earlier deduction.
P2
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Solving for tax and interest paid
Beginning balance + Income tax expense ± Ending balance = Income tax paid
Beginning balance + Interest expense ± Ending balance = Interest paid
IncomeTax Payable
Beg bal
Income tax paid IncomeTax Exp
End Bal
Interest Payable
Beg bal
Interest paid Interest Exp
End Bal
P2
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Let¶s prepare a Statement of Cash Flows for B&G Companyusing the Indirect Method.
Indirect MethodP2
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2010 2009
Increase
or
(Decrease)
Cash 63,000$ 22,000$ 41,000$
Accounts receivable 85,000 76,000 9,000 Inventories 170,000 189,000 (19,000)
Land 75,000 100,000 (25,000)
Equipment 270,000 200,000 70,000
Accumulated depreciation-equipment (66,000) (32,000) (34,000)
Total Assets 597,000$ 555,000$ 42,000$
Liabilities and Stockholders' Equity
Accounts payable 39,000$ 47,000$ (8,000)
Bonds payable 150,000 200,000 (50,000)
Common stock, $1 par 209,000 174,000 35,000
Retained earnings 199,000 134,000 65,000
Total Liabilities and Stockholders' Equity 597,000$ 555,000$ 42,000$
B&G Company
Comparative Balance
Sheets
December 31
Assets
P2
Indirect Method
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Additional Information for 2010:
Net income was $105,000.
Income tax expense (the same as tax paid for
the year) was $20,000.
There was no sale of old equipment.
Cash dividends declared and paid were $40,000.
Bonds payable of $50,000 were redeemed for
$50,000 cash.
Common stock was issued for $35,000 cash.
P2
Indirect Method
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Cash flows from operating activities
Income before taxes 125,000$
Adjustments to accrual-basis income:
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010
Add noncash expenses andlosses.
Subtract noncash revenuesand gains.
Start with
accrual-basisincome.
Then, analyze the changes incurrent assets and currentliabilities.
P1
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Cash flows from operating activities
Income before taxes 125,000$
Adjustments to accrual-basis income:
Depreciation expense 34,000$
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Cash generated from operations 161,000 Income taxes paid 20,000
Net cash provided by operating activites 141,000
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010
Change in Account Balance During Year
Increase Decrease
Current Subtract from Add to income
Assets income
Current Add to income Subtract from
Liabilities income
P2
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Cash flows from operating activities
Net income 105,000$
Adjustments to accrual-basis net income:
Depreciation expense 34,000$
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000 Cash flows from investing activities
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flows from operating activities
Income before taxes 125,000$
Adjustments to accrual-basis income:
Depreciation expense 34,000$
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Cash generated from operations 161,000 Income taxes paid 20,000
Net cash provided by operating activites 141,000
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010
Let¶s do the investing
section next.
P3
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Cash flows from operating activities
Income before taxes 125,000$
Adjustments to accrual-basis income:
Depreciation expense 34,000$
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Cash generated from operations 161,000 Income taxes paid 20,000
Net cash provided by o operating activities 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010
Finally, let¶s complete thefinancing section.
P3
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Cash flows from operating activities
Income before taxes 125,000$
Adjustments to accrual-basis income:Depreciation expense 34,000$
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Cash generated from operations 161,000 Income taxes paid 20,000
Net cash provided by operating activites 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
Cash flows from financing activities
Proceeds from issuance of common stock 35,000
Redemption of bonds (50,000)
Payment of dividends (40,000)
Net cash used by financing activities (55,000)
Net increase in cash 41,000
Cash, January 1, 2010 22,000 Cash, December 31, 2010 63,000$
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010P3
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Used, along with income-based ratios, toassess company performance.
Cash flow on
total assets
=Operating cash flows
Average total assets
Cash Flow on Total AssetsA2
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Analyzing the Cash Account
Balance, Jan. 1, 2010 22,000 Payments for merchandise 150,000
Receipts from customers 466,000 Payments for wages 145,000
Receipts from sale of land 25,000 Payments for interest 10,000
Receipts from stock issuance 35,000 Payments for taxes 20,000
Payments for equipment 70,000
Payments for bond retirement 50,000
Payments for dividends 40,000
Balance, Dec. 31, 2010 63,000
Cash
Let¶s use this Cash account to prepare B&GCompany¶s Statement of Cash Flows under theDirect Method.
P4
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Cash flows from operating activities
Cash received from customers 466,000$
Cash paid for merchandise (150,000)
Cash paid for wages (145,000) Cash paid for interest (10,000)
Cash paid for taxes (20,000)
Net cash provided by operating activities 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
Cash flows from financing activitiesProceeds from issuance of common stock 35,000
Redemption of bonds (50,000)
Payment of dividends (40,000)
Net cash used by financing activities (55,000)
Net increase in cash 41,000
Cash, January 1, 2010 22,000
Cash, December 31, 2010 63,000$
B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2010
P4 Preparing the Statement of CashFlows