Bài giảng Financial & Managerial Accounting - Chapter 13: Statement of cash flows

STATEMENT OF CASH FLOWSChapter13Provides information about the cash receipts and cash payments of a business entity during the accounting period. Helps investors with questions about the company’s:Ability to generate positive cash flows.Ability to meet its obligations and to pay dividends.Need for external financing.Investing and financing transactions for the period. Purpose of the Statement of Cash FlowsThe Statement of Cash Flows must include the following three sections:Cash Flows from Operating ActivitiesCash Flows from Investing ActivitiesCash Flows from Financing ActivitiesClassification of Cash FlowsOutflows to:Suppliers of merchandise and services.Employees.Lenders for interest.Governments for taxes.Inflows from:Sales to customers.Interest and dividends received.Cash Flows from Operating Activities+_ Operating ActivitiesCash Flows from Investing Activities+_Inflows from:Selling investments and plant assets.Collecting of principal on loans.Outflows to:Payments to acquire investments and plant assets.Purchase debt or equity investments.Make loans. Investing Activities+_Inflows from:Short-term and long-term borrowing.Owners (for example, from issuing stock).Outflows to:Repayments of borrowed funds.Owners for dividends.Purchase treasury stock. Financing ActivitiesCash Flows from Financing ActivitiesCash EquivalentsCashCurrencyShort-term, highly liquid investments.Readily convertible into cash.So near maturity that market value is unaffected by interest rate changes.Cash and Cash EquivalentsThe operating cash flows section can be prepared using either the direct method or the indirect method.Let’s look at the Direct Method for preparing the Statement of Cash Flows.Accrual basis revenue includes sales that did not result in cash inflows.Can be computed as:Cash Received from CustomersDecrease in receivablesIncrease in receivables+– = = Net SalesDirect MethodCash Received from Customers+– = = The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue?Decrease in receivablesIncrease in receivablesNet Sales$900,000Direct MethodCash Received from CustomersCash Received from CustomersCash Received from Customers = $870,000Decrease in receivables$30,000 Increase in receivables– = Net Sales$900,000The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue?Direct MethodCash Received from CustomersNow that we understand the process, let’s look at some simplified formulas for computing direct method cash flows.Direct MethodInterest and Dividends ReceivedStep 1Step 2Direct MethodCash Paid for MerchandiseHow much did Lug Lite pay for inventory in 2003?a. $900,000b. $923,000c. $947,000d. $877,000Direct MethodCash Paid for MerchandisePurchases for 2003 were $935,000. Purchases = $900,000 + $35,000Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by(1) whether the expense was prepaid, and(2) whether the expense was accrued. Cash Paid for Expenses =Expenses + Increase in prepaid expenses - Decrease in prepaid expenses + Decrease in accrued liabilities - Increase in accrued liabilities{{Direct MethodCash Payments for ExpensesNow, let’s prepare a direct method Statement of Cash Flows for Grate Big Company.Direct Method - ExampleDirect Method - ExampleDirect Method - ExampleDirect Method - ExampleAdditional InformationTrading Securities were purchased during 2003 at a cost of $25,000.Equipment with a book value of $40,000 was sold during the year for $43,000.Equipment with a book value of $30,000 was destroyed during a freak flood in 2003. There was no insurance.Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method.Direct Method - ExampleAdditional InformationGrate Big’s tax rate is 40%.The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month.The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1.Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny Co.Direct Method - ExampleCash Received from CustomersCash Paid to EmployeesDirect Method - ExampleCash Paid for InventoryCash Paid for InterestDirect Method - ExampleCash Paid for TaxesOther Operating Cash FlowsDirect Method - ExampleCash Flows From Operating ActivitiesEquipment with a book value of $40,000 was sold for $43,000.Notes Payable decreased from $70,000 to $60,000 during 2003.Bonds Payable decreased from $250,000 to $150,000 during 2003.Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/03 Cash balance on the Balance Sheet.Let’s look at the Indirect Method that is used by over 97% of all companies.Net IncomeCash Flows from Operating ActivitiesIndirect MethodChanges in current assets and current liabilities as shown on the following table.+ Losses and - Gains+ Noncash expenses such as depreciation and amortization.Use this table when adjusting Net Income to Operating Cash Flows.Indirect MethodLet’s prepare a complete Statement of Cash Flows using the Indirect Method.Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended 3/31/03 has also been prepared. Joe needs help preparing the Statement of Cash Flows. Joe’s PlaceIndirect Method - ExampleThe $8,000 gain was the result of selling land costing $32,000 for $40,000 during the period.Indirect Method - ExampleIndirect Method - ExampleJoe’s Place issued $50,000 of no par common stock to settle the $50,000 note payable.Indirect Method - ExampleIndirect Method - ExampleWith the indirect method, always start with the net income or net loss for the period.Indirect Method - ExampleIndirect Method - ExampleAccounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000)Indirect Method - ExampleAccounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000Indirect Method - ExampleInventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000Indirect Method - ExampleSalaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000)Indirect Method - ExampleAdd back non-cash expenses. Indirect Method - ExampleSubtract gains. Indirect Method - ExampleThe operating cash flows amount comes from the schedule just prepared.Indirect Method - ExampleLand originally costing $32,000 was sold for $40,000.Indirect Method - ExampleDividends of $20,000 were paid to owners during the year.Indirect Method - ExampleCompute the net change in cash for the period.Indirect Method - ExampleComplete the Statement of Cash Flows by reconciling beginning cash to ending cash.Indirect Method - ExampleNote that the ending cash amount ties back to the Joe’s Place Balance Sheet at 3/31/03.Indirect Method - ExampleIn addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity.Indirect Method - ExampleIn addition, cash interest payments and cash tax payments must also be disclosed separately.Indirect Method - ExampleCash Budgets are used by management to plan and forecast future cash flows.Managing Cash FlowsIncrease collection of accounts receivables.Keep inventory low.Delay payment of liabilities.Plan timing of major expenditures.Invest idle cash.Managing Cash FlowsCash BudgetingThe ending cash balance of one month becomes the beginning cash balance of the next month.Cash BudgetingFinancing is needed in June because the company must maintain a minimum cash balance of $10,000.End of Chapter 13Chester, ol’ buddy, I wonder if you could help me with a little cash flow problem I’m having?