Review of Chapter 8/9
Current liabilities and Contingent Liabilities Financing with Bonds versus Capital Stock Earnings per share, Interest Coverage & Debt Ratio Issuing Shares Repurchasing shares Cash Dividends and Stock Dividends Return on assets Return on equity
The Statement of Cash Flows
Chapter 12
Objective 1
Identify the purposes of the statement of cash flows
The Statement of Cash Flows
The statement of cash flows reports the entitys cash flows (cash receipts and cash payments) during the period.
Purposes of the Cash Flow Statement
The statement of cash flows serves the following purposes: 1. Predict future cash flows
2. Evaluate management decisions
3. Determine the companys ability to pay dividends to shareholders and payments to creditors 4. Show the relationship of net income to the businesss cash flows
What is Cash?
cash on hand cash in the bank cash equivalents
Cash equivalents are highly liquid, short-term investments that can be converted into cash with little delay. Money-market investments
Canadian government securities
Objective 2
Distinguish among operating, investing, and financing cash flows.
Operating, Investing, and Financing Activities
A business engages in three types of business activities: Operating activities Investing activities
Financing activities
Operating, Investing, and Financing Activities
Operating activities create revenues, expenses, gains, and losses. Investing activities include long-term assets, investments and loaning money.
Financing activities obtain cash from investors and creditors.
Two Formats for Operating Activities
Indirect Method Net income Adjustments: Depreciation, etc. Net income provided by operating activities Direct Method Collection from customers Deductions: Payment to suppliers, etc. Net income provided by operating activities $XXX
XXX $XXX $XXX
XXX $XXX
Objective 3
Prepare a statement of cash flows by the indirect method.
Cash Flows from Operating Activities
Operating activities are related to the transactions that make up net income It begins with net income, taken from the net income, and is followed by adjustments to reconcile net income to cash
Operating Activities Indirect Method
Adjustments to net income include:
Depreciation expense Gains and losses on the sale of long-term assets Changes in the current assets and current liabilities account
Operating Activities Indirect Method
Net income is adjusted for: Depreciation is an allocation of a cost; no effect on cash. Since it is deducted as an expense, it must be added back to net income (to cancel the deduction)
Gains/(Losses) results from selling long-term assets. Originally, it is added (deducted) from net income but since it doesnt represent cash (also, it is an investing activity), it must be subtracted(added) back
Operating Activities Indirect Method
Changes in the current assets and current liabilities account: Add: Decreases in current assets (not cash) Increases in current liabilities
Subtract: Increases in current assets (not cash) Decreases in current liabilities
Operating Activities Indirect Method
Start with Net income Add: Depreciation expense Losses from sales of assets Deduct: Gains from sales of assets Add/Deduct: Non-cash change in working capital Add: Decreases in current assets (not cash) Increases in current liabilities Deduct: Increases in current assets (not cash) Decreases in current liabilities
Operating Activities Indirect Method Steps
1. Determine the change in cash from last year to this year. 2. Determine the change in non-cash working capital items using the balance sheet 3. Start with net income and add back depreciation and losses and deduct any gains. 4. Add or subtract where applicable, the change (increase or decrease) in non-cash working capital items
Question #1
Net income Accounts receivable (net) Inventory Prepaid insurance Accounts payable $750,000 16,000 decrease 14,500 increase 2,900 increase 15,200 decrease
The amount of cash provided by operations is: a. $740,600 b. $750,000 c. $733,400
Investing Activities
Cash Receipts Sales of assets (investments, land, building, equipment, and so on) Collections of loans receivable Cash Payments Purchase of assets (investments,land, building, equipment, and so on) Loans to others
Cash Flow Statement: Investing Activities
Cash Flow Statement For the Year Ended December 31, 2011 (In thousands)
Cash flows from investing activities: Acquisition of property,plant&equip $(306) Loan to another company (11) Proceeds from sale of prop,plant&equip 62 Net cash used for investing activities $(255)
Computing Acquisition and Sales of Property, Plant & Equipment
Property, Plant & Equipment (Net)
Beginning balance Acquisitions Ending balance Depreciation Carrying amount of assets sold
Computing Acquisition and Sales of Property, Plant & Equipment
From the sale of property, plant & equipment:
Cash received = Carrying amount + Gain-Loss
Computing Acquisition and Sales of Investments
Investments
Beginning balance Purchases Ending balance Carrying amount of investments sold
Computing Loans Made & Their Collections
Loans and Notes Receivable
Beginning balance New loans made Ending balance Collections
Question #2
The gain portion of a gain on the sale of machinery would be shown on the cash flow statement as a. b. c. d. An increase to operating activities A decrease to investing activities An increase to investing activities A decrease to operating activities
The Indirect Method: Financing Activities
Cash Receipts Issuance of shares Sale of shares Borrowing (issuance of notes or bonds payable) Cash Payments Repurchase of shares Payment of notes or bonds payable Payment of dividends
Cash Flow Statement: Financing Activities
Cash Flow Statement (Indirect Method) For the Year Ended December 31, 2011 (In thousands)
Cash flows from financing activities: Proceeds from issuance of common shares $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
Computing Issuances and Payments of Long-Term Debt
Long-Term Debt
Payments
Beginning balance Issuance of new debt Ending balance
Computing Issuances and Repurchases of Shares
Common Shares
Repurchase of shares
Beginning balance Issuance of new shares Ending balance
Computing Dividend Payments
Retained Earnings
Dividend declarations and payments Beginning balance Net income Ending balance
Question #3
In 2011, ABC Company borrowed $50,000 (due in 5 years), paid dividends of $12,000, issued 2,000 shares of stock for $30 per share, purchased land for $24,000 and received dividends of $6,000. Net income was $85,000. How much should be reported as net cash provided by financing activities?
a. $110,000
b. $80,000
c. 98,000
Noncash Investing and Financing Activities
Suppose Bradshaw Corporation issued common shares valued at $320,000 to acquire a warehouse.
Warehouse Building Common Shares 320,000 320,000
Noncash Investing and Financing Activities
Non cash investing and financing activities are reported in a separate schedule. They are not reported on the cash flow statement because they do not involve cash
Measuring Cash Adequacy: Free Cash Flow
Free cash flow is the amount of cash available from operations after paying for planned investments in capital, equipment, and other long-term assets.
Free cash flow = Net cash flow from operating activities Cash outflow earmarked for investments in capital, equipment, and other long-term assets
Question #4
A firms predominate recurring source of cash over the long-run should be: a. b. c. d. Borrowing Sale of nonrecurring assets Sale of capital stock Operations
End of Chapter 12
