Bài giảng Managerial Accounting - Chapter 11: Statement of Cash Flows

John Wiley & Sons, Inc.Prepared byKarleen Nordquist..The College of St. Benedict... and St. John’s University...with contributions byDr. Jessica J. Frazier.. and Philip Li...Eastern Kentucky University.Managerial Accounting Weygandt, Kieso, & KimmelChapter 11Statement of Cash FlowsAfter studying this chapter, you should be able to:1 Indicate the primary purpose of the statement of cash flows.2 Distinguish among operating, investing, and financing activities.3 Explain the impact of the product life cycle on a company’s cash flows.4 Prepare a statement of cash flows using one of two approaches: (a) the indirect method or (b) the direct method.5 Use the statement of cash flows to evaluate a company.Chapter 11Statement of Cash FlowsPreview of Chapter 11The Statement of Cash Flows: Purpose and FormatPurposeClassificationsSignificant Noncash ActivitiesFormatCorporate Life CycleUsefulnessPreparationSTATEMENT OF CASH FLOWSPreview of Chapter 11Section 1: Indirect MethodDetermining Net Increase/ Decrease in CashDetermining Net Cash Provided/ Used by Operating ActivitiesDetermining Net Cash Provided/ Used by Investing and Financing ActivitiesSummary of Indirect MethodSTATEMENT OF CASH FLOWSPreview of Chapter 11Section 2: Direct MethodDetermining Net Increase/ Decrease in CashDetermining Net Cash Provided/ Used by Operating ActivitiesDetermining Net Cash Provided/ Used by Investing and Financing ActivitiesSTATEMENT OF CASH FLOWSPreview of Chapter 11Using Cash Flows to Evaluate a CompanyFree Cash FlowCapital Expenditure RatioAssessing Liquidity, Solvency, and ProfitabilitySTATEMENT OF CASH FLOWSIndicate the primary purpose of the statement of cash flows.Study Objective 1The Primary Purpose of the Statement of Cash FlowsThe primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. These activities involving cash are reported in a format that reconciles the beginning and ending cash balances. The Primary Purpose of the Statement of Cash FlowsReporting the causes of changes in cash is useful because investors, creditors, and other interested parties want to know what is happening to a company's most liquid resource – its cash.The statement of cash flows provides answers to the following important questions about an enterprise:Where did the cash come from during the period? What was the cash used for during the period?What was the change in the cash balance during the period?Distinguish among operating, investing, and financing activities.Study Objective 2Classification of Cash FlowsThe statement of cash flows classifies cash receipts and cash payments into operating, investing, and financing activities. Operating ActivitiesOperating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.Operating activities is the most important category because it shows the cash provided or used by company operations.Cash provided by operations is generally considered to be the best measure of whether a company can generate sufficient cash to continue as a going concern and to expand.Investing ActivitiesInvesting activities include purchasing and disposing of investments and productive long-lived assets using cash, and lending money and collecting the loans.Financing ActivitiesFinancing activities include obtaining cash from issuing debt and repaying the amounts borrowed and obtaining cash from stockholders and paying them dividends.Typical Cash Receipts and Payments Classified by ActivityOperating activitiesCash inflows:From sale of goods or servicesFrom returns on loans (interest received) and on equity securities (dividends received)Cash outflows:To suppliers for inventoryTo employees for servicesTo government for taxesTo lenders for interestTo others for expensesIllustration 11-1aIllustration 11-1bTypical Cash Receipts and Payments Classified by ActivityInvesting activitiesCash inflows:From sale of property, plant, and equipmentFrom sale of debt or equity securities of other entitiesFrom collection of principal on loans to other entitiesCash outflows:To purchase property, plant, and equipmentTo purchase debt or equity securities of other entitiesTo make loans to other entitiesTypical Cash Receipts and Payments Classified by ActivityFinancing activitiesCash inflows:From sale of equity securities (company's own stock)From issuance of debt (bonds and notes)Cash outflows:To stockholders as dividendsTo redeem long-term debt or reacquire capital stockIllustration 11-1cOperating ActivitiesSome cash flows relating to investing or financing activities are classified as operating activities. For example, receipts of investment revenue (interest and dividends) and payments of interest to lenders are classified as operating activities because these items are reported in the income statement.Operating ActivitiesAs a general rule:Operating activities involve income determination (income statement) items.Investing activities involve cash flows resulting from changes in investments and long-term asset items.Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items.!Significant Noncash ActivitiesNot all of a company's significant activities involve cash. Four examples of significant noncash activities are:Issuance of common stock to purchase assetsConversion of bonds into common stockIssuance of debt to purchase assetsExchanges of plant assetsSignificant Noncash ActivitiesSignificant noncash financing and investing activities are not reported in the body of the statement of cash flows. Rather, they are reported either in a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.This reporting of these significant noncash activities in a separate note or supplementary schedule satisfies the full disclosure principle.Format of the Statement of Cash FlowsThe three activities (operating, investing, and financing), plus the significant noncash investing and financing activities make up the general format of the statement of cash flows. The cash flows from operating activities section always appears first, followed by the investing activities, and the financing activities sections. The individual inflows and outflows form investing and financing activities are reported separately.The reported operating, investing, and financing activities result in net cash provided or used by each activity. Format of the Statement of Cash FlowsThe net cash provided or used by each activity is totaled to show the net increase (decrease) in cash for the period.The net increase (decrease) in cash for the period is then added or subtracted from the beginning-of-period cash balance to obtain the end-of-period cash balance.Any significant noncash investing and financing activities are (usually) reported in a separate schedule at the bottom of the statement.Format of the Statement of Cash FlowsCash flows from operating activities (List of individual items) XXNet cash provided (used) by operating activities XXXCash flows from investing activities (List of individual items) XXNet cash provided (used) by investing activities XXXCash flows from financing activities (List of individual items) XXNet cash provided (used) by financing activities XXXNet increase (decrease) in cash XXXCash at beginning of period XXXCash at end of period XXXNoncash investing and financing activities (List of individual noncash transactions) XXXCompany NameStatement of Cash FlowsPeriod CoveredIllustration 11-2Explain the impact of the product life cycle on a company’s cash flows.Study Objective 3The Corporate Life CycleAll products go through a series of phases called the product life cycle.The phases (in order of their occurrence) are often referred to as the introductory phase, growth phase, maturity phase, and decline phase. We can characterize a company as being in one of these four phases because the majority of its products are usually in a particular phase. The phase a company is in affects its cash flows.Corporate Life Cycle: Introductory PhaseThe introductory phase occurs when the company is purchasing fixed assets and beginning to produce and sell.When a company is in the introductory stage, one would expect that it will be spending considerable amounts to purchase productive assets, but will not be generating much (if any) cash from operations.To support asset purchases the company may have to issue stock or debt.One would expect cash from operations to be negative, cash from investing to be negative, and cash from financing to be positive.Corporate Life Cycle: Growth PhaseDuring the growth phase, the company is striving to expand its production and sales.Cash from operations continues to be less than net income during this phase because inventory must be purchased for future projected sales.Cash needed for asset acquisitions will continue to exceed cash provided by operations, requiring that the company make up the deficiency by issuing new stock or debt.Thus, the company continues to show negative cash from investing and positive cash from financing in this phase.Corporate Life Cycle: Maturity PhaseIn the maturity phase, sales and production level off.Cash from operations and net income are approximately the same.Cash generated from operations exceeds investing needs.Thus, in the maturity phase the company can actually start to retire debt or buy back stock.Corporate Life Cycle: Decline PhaseDuring the decline phase, sales of the product fall due to a weakening in consumer demand.During this phase, cash from operations decreases.Cash from investing might actually become positive as the firm sells off excess assets, and cash from financing may be negative as the company buys back stock and retires debt.Usefulness of the Statement of Cash FlowsMany investors believe cash flow is less susceptible to management manipulation and fraud than traditional accounting measures such as net income.Although reliance on cash flows to the exclusion of accrual accounting is inappropriate, comparing cash from operations to net income can reveal important information about the “quality” of reported net income — that is the extent to which net income provides a good measure of actual performance.Usefulness of the Statement of Cash FlowsThe information in a statement of cash flows should help investors, creditors and others evaluate these aspects of the firm's financial position:The entity's ability to generate future cash flows.The entity's ability to pay dividends and meet obligations.The reasons for the difference between net income and net cash provided (used) by operating activities.The cash investing and financing transactions during the period.Preparing the Statement of Cash FlowsThe statement of cash flows is prepared differently from other basic financial statements.First, because the statement requires detailed information concerning the changes in account balances that occurred between two periods of time, an adjusted trial balance does not provide the data necessary for the statement. Second, the statement of cash flows deals with cash receipts and payments. The accrual concept is not used in the preparation of a statement of cash flows.Preparing the Statement of Cash Flows The information to prepare the statement of cash flows usually comes from three sources:Comparative balance sheet. (Indicates the amount of change in assets, liabilities, and stockholders’ equities from the beginning to the end of the period.)Current income statement. (Helps in determining cash provided or used by operations.)Additional information. (Includes transaction data that helps determine how cash was provided or used.)Preparing the Statement of Cash Flows: StepsPreparing the statement of cash flows involves the following steps:1 Determine the net increase/decrease in cash.2 Determine the net cash provided/used by operating activities.3 Determine the net cash provided/used by investing and financing activities.Preparing the Statement of Cash Flows: Indirect and Direct MethodsIn order to determine the cash provided/used by operating activities, net income must be converted from an accrual basis to a cash basis. This conversion may be done by either of two methods: indirect or direct.Both methods arrive at the same total amount for “net cash provided by operating activities.”The investing and financing sections are identical under both methods.The Indirect MethodThe indirect method is used extensively in practice.Most companies favor the indirect method for the following three reasons:it is easier to prepare,it focuses on the differences between net income and net cash flow from operating activities, andit tends to reveal less company information to competitors.The Direct MethodOthers favor the direct method, which is more consistent with the objective of a statement of cash flow because it shows operating cash receipts and payments.The FASB prefers the direct method but allows the use of either method.When the direct method is used, the net cash flow from operating activities as computed using the indirect method must also be reported in a separate schedule.Prepare a statement of cash flows using the indirect methodStudy Objective 4aStatement of Cash Flows - Indirect MethodTransactions of Computer Services Company for two years will be used to explain and the illustrate the indirect method of preparing the statement of cash flows.Computer Services Company started operations on January 1, 1999, when it issued 50,000 shares of $1 par value common stock for $50,000 cash. The company rented its office space and furniture, and performed consulting services throughout the first year. Information needed to prepare the 1999 statement of cash flows is shown on the following two slides.Statement of Cash Flows - Indirect Method Change Assets Dec. 31, 1999 Jan. 1, 1999 Increase/DecreaseCash $34,000 $ - 0 - $34,000 increaseAccounts receivable 30,000 - 0 - 30,000 increaseEquipment 10,000 - 0 - 10,000 increaseTotal $74,000 $ - 0 - Liabilities and Stockholders’ EquityAccounts payable $ 4,000 $ - 0 - $ 4,000 increaseCommon stock 50,000 - 0 - 50,000 increaseRetained earnings 20,000 - 0 - 20,000 increaseTotal $74,000 $ - 0 - Computer Services CompanyComparative Balance SheetDecember 31Illustration 11-5Statement of Cash Flows - Indirect MethodRevenues $85,000Operating expenses 40,000Income before income taxes 45,000Income tax expense 10,000Net income $35,000Computer Services CompanyIncome StatementFor the Year Ended December 31, 1999Illustration 11-6Additional information:(a) Examination of selected data indicates that a dividend of $15,000 was declared and paid during the year.(b) The equipment was purchased at the end of 1999. No depreciation was taken in 1999.Step 1: Determining the Increase/Decrease in CashDetermining the increase/decrease in cash during the year is a simple computation. As shown on the comparative balance sheet, Computer Services had no cash on hand at the beginning of 1999 and a balance of $34,000 at the end of 1999. Therefore, cash increased by $34,000.Step 2: Determining Net Cash Provided/Used by Operating ActivitiesTo determine net cash provided/used by operating activities under the indirect method, net income is adjusted for income items that did not affect cash. Accrual basis net income is converted to cash basis. This process is graphically illustrated on the next slide.Net income must be converted because earned revenues may include credit sales that have not been collected in cash and incurred expenses that may not have been paid in cash.A useful starting point in identifying the needed adjustments to net income is the current asset and current liability accounts.Net Income Versus Net Cash Provided by Operating ActivitiesNet IncomeEarned RevenuesIncurred ExpensesAccrual Basis of AccountingCash Basis of AccountingNet Cash Provided/Used by Operating ActivitiesAdjustments to Reconcile Net Income to Net Cash Provided/Used by OperationsIllustration 11-7Operations of the period led to revenues. Not all of these revenues resulted in an increase in cash, however. When accounts receivable increase during the year, revenues on an accrual basis are higher than revenues on a cash basis. Computer Services Company had revenues of $85,000 during its first year of operation, but collected only $55,000 in cash. On an accrual basis, revenue was $85,000, but on a cash basis, only $55,000 of revenue was received during the period.To convert net income to net cash provided by operating activities, the $30,000 increase in accounts receivable must be deducted from net income.Step 2: Determining Net Cash Provided/Used by Operating ActivitiesOperations of the period also led to expenses. Not all of these expenses resulted in a decrease in cash. When accounts payable increase during the year, expenses on an accrual basis are higher than expenses on a cash basis. Computer Services shows $40,000 of operating expenses on its income statement. However, since accounts payable increased by $4,000 during the year, only $36,000 of those expenses were paid in cash ($40,000 - $4,000).To convert net income to net cash provided by operating activities, the $4,000 increase in accounts payable must be added to net income.Step 2: Determining Net Cash Provided/Used by Operating ActivitiesT-account Analysis of AccountsThe T-accounts shown below may help illustrate the preceding discussion.Balance, Jan. 1 0 Receipts from customers 55,000Revenues 85,000Balance, Dec. 31 30,000Accounts ReceivablePayments to creditors 36,000 Balance, Jan. 1 0 Operating expenses 40,000 Balance, Dec. 31 4,000Accounts PayableIllustrations 11-8 & 9Cash amounts for statement of cash flowsAccrual amounts on income statementStep 2: Determining Net Cash Provided/Used by Operating ActivitiesFor Computer Services, the changes in accounts receivable and accounts payable were the only changes in current assets and current liability accounts. Therefore, any other revenues or expenses reported in the income statement were received or paid in cash, and no other adjustment of net income is necessary.The operating activities section of the statement of cash flows for Computer Services Company is shown on the next slide.Step 2: Determining Net Cash Provided/Used by Operating ActivitiesCash flows from operating activities Net income $ 35,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable $(30,000) Increase in accounts payable 4,000 (26,000)Net cash provided by operating activities $ 9,000 Computer Services CompanyPartial Statement of Cash Flows - Indirect MethodFor the Year Ended December 31, 1999Illustration 11-10Step 3: Determining Net Cash Provided/Used by Investing & Financing ActivitiesTo find net cash provided/used by investing and financing activities, determine the changes in the noncurrent accounts on the balance sheet. Those changes are then analyzed using selected transaction data to determine the effect, if any, the changes had on cash.Computer Service Company's three noncurrent accounts are Equipment, Common Stock, and Retained Earnings, all three of which had increases during the year.Step 3: Determining Net Cash Provided/Used by Investing & Financing ActivitiesNo transaction data are given for the increases in Equipment of $10,000, and Common Stock of $50,000. When other explanations are lacking, assume any differences involve cash. The increase in equipment is assumed to be a purchase of equipment for $10,000 cash. This purchase is reported as a cash outflow in the investing activities section.The increase of common stock is assumed to result from the issuance of common stock for $50,000 cash. It is repor