University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

362

Pages:

31
Author:

Efrain Villa

Chapter 13 “How Well Am I Doing?” Statement of Cash Flows Part 1 13-2 Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Will the company have to borrow money to make needed investments? Can we meet our obligations to creditors? Can we pay dividends? Why is there a difference between net income and net cash flow? 13-3 Learning Objective 1 Classify changes in noncash balance sheet accounts as sources or uses of cash. 13-4 Definition of Cash The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Currency and Bank Accounts Treasury Bills Cash Money Market Funds Commercial Paper 13-5 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts 4. Changes in Capital Stock 5. Dividends Paid to Stockholders 3. Changes in Liabilities Net Cash Flows for a Period 1. Net Income 2. Changes in Noncash Assets 13-6 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts Net Income Net Loss Changes in noncash assets Changes in liabilities* Changes in capital stock accounts Dividends paid to stockholders Sources Always Decreases Increases Uses Always Increases Decreases Increases Decreases Always Total sources - Total uses = Net cash flow * Contra asset accounts, such as the Accumulated Depreciation and Amortization account, follow the rules for liabilities. 13-7 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts Increases in noncash asset accounts imply uses of cash. Example: Inventory is purchased on credit from a supplier. It is implied that cash was used to acquire the inventory. 13-8 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts Increases in liability accounts imply sources of cash. Example: Inventory is purchased on credit from a supplier. It is implied that an increase in a payable has the effect of increasing cash available for other uses. 13-9 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts Decreases in noncash assets accounts imply sources of cash. Example: Accounts receivable decreases when a company pays its bill. The company’s cash increases accordingly. 13-10 Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts Decreases in liability accounts imply uses of cash. Example: If a company makes a payment on a note payable. The company’s cash balance decreases accordingly. 13-11 A Simplified Statement of Cash Flows Ed's Pizza Hut Comparative Balance Sheet Account Balances Cash Accounts Receivable Inventory Land Equipment Accumulated Depr. Accounts Payable Salaries Payable Note Payable - Joe Doe Common Stock Retained Earnings 3/31/2009 3/31/2008 Change DR (CR) DR (CR) Incr. (Decr.) $ 71,000 $ 90,000 $ (19,000) 23,000 40,000 (17,000) 322,000 300,000 22,000 68,000 100,000 (32,000) 112,000 84,000 28,000 (45,000) (39,000) 6,000 (38,000) (27,000) 11,000 (9,000) (14,000) (5,000) (50,000) (50,000) (500,000) (450,000) 50,000 (4,000) (34,000) (30,000) $ - $ - 13-12 A Simplified Statement of Cash Flows Additional Information:  There was a net loss for the year of $27,000.  Depreciation charges for the year were $6,000.  During the year, Ed sold land originally costing $32,000 for $32,000.  During the year, Ed purchased equipment for $28,000.  During the year, Ed paid dividends of $3,000 to the stockholders.  Ed issued $50,000 of common stock to settle the note due to Joe Doe. 13-13 A Simplified Statement of Cash Flows Here is a summary of the sources of cash for Ed’s Pizza Hut. Ed's Pizza Hut Sources of Cash $ Decrease in A/R Decrease in Land Increase in A/P Depreciation charges Total sources of cash $ 17,000 32,000 11,000 6,000 66,000 13-14 A Simplified Statement of Cash Flows Here is a summary of the uses of cash. Ed's Pizza Hut Uses of Cash Net loss Increase in Inventory Increase in Equipment Increase in Salaries Payable Dividends paid Total uses of cash $ $ 27,000 22,000 28,000 5,000 3,000 85,000 The net cash flow for Ed’s Pizza Hut is ($19,000): $66,000 in sources minus $85,000 in uses. 13-15 A Simplified Statement of Cash Flows Ed's Pizza Hut Sources of Cash Decrease in A/R $ Decrease in Land Increase in A/P Depreciation charges Total sources of cash $ Ed's Pizza Hut Uses of Cash Net loss Increase in Inventory Increase in Equipment Increase in Salaries Payable Dividends paid Total uses of cash 17,000 32,000 11,000 6,000 66,000 $ $ 27,000 22,000 28,000 5,000 3,000 85,000 This simplified approach does not follow the format required for external reporting purposes. It is for illustrative purposes only. 13-16 Learning Objective 2 Classify transactions as operating, investing, or financing activities. 13-17 The Three Sections of the Statement of Cash Flows Operating activities are those activities that enter into the determination of net income. 1. Transactions affecting current assets 2. Transactions affecting current liabilities 3. Changes in noncurrent balance sheet accounts that directly affect net income 13-18 The Three Sections of the Statement of Cash Flows Investing activities relate to transactions involving the acquiring or disposing of noncurrent assets. 1. Acquiring or selling property, plant and equipment 2. Acquiring or selling securities held for long-term investments 3. Lending money to another entity and subsequently collecting on the loan 13-19 The Three Sections of the Statement of Cash Flows Financing activities relate to transactions involving borrowing from creditors or repaying creditors and engaging in transactions with the company’s owners. 1. Issuing stock and purchasing treasury stock 2. Issuing longterm debt and repayment of debt 3. Payment of dividends (note that interest on debt is classified as an operating activity) 13-20 Format of the Statement of Cash Flows (Indirect Method) Operating Activities: Net income Changes in current assets Changes in noncurrent assets that affect net income (e.g., depreciation) Changes in current liabilities (except for debts to lenders and dividends payable) Changes in noncurrent liabilities that affect net income Investing Activities: Changes in noncurrent assets that are not included in net income Financing Activities: Changes in the current liabilities that are debts to lenders rather than obligations to suppliers, employees, or the government Changes in noncurrent liabilities that are not included in net income Changes in capital stock accounts Dividends 13-21 Format of the Statement of Cash Flows (Indirect Method) Operating Activities Investing Activities Financing Activities Reconciliation of the beginning cash balance with the ending cash balance Noncash Investing and Financing Activities 13-22 Operating Activities Net Income or Loss Add: Less: $ XXX Decrease in current noncash assets XXX Increase in current liabilities XXX Depreciation charges XXX Losses XXX Increase in current noncash assets (XXX) Decrease in current liabilities (XXX) Gains (XXX) Cash Flows from Operating Activities $ XXX Includes those activities that affect current assets, current liabilities, or net income. 13-23 Operating Activities Sources of cash are added to and uses of cash are subtracted from net cash provided by operating activities. Impact on Net Cash Provided by Operating Activities Sources of Cash Uses of Cash (Add to Net Income) (Subtract from Net Income) Current Noncash Assets Current Liabilities Decreases Increases Increases Decreases 13-24 Operating Activities Net Income or Loss Add: Less: $ XXX Decrease in current noncash assets XXX Increase in current liabilities XXX Depreciation charges XXX Losses XXX Increase in current noncash assets (XXX) Decrease in current liabilities (XXX) Cash Flows from Operating Activities $ XXX Impact on Net Cash Provided by Operating Activities Gains Sources of Cash Uses of(XXX) Cash (Add to Net Income) (Subtract from Net Income) Current Noncash Assets Current Liabilities Decreases Increases Increases Decreases 13-25 Operating Activities Net Income or Loss Add: Less: $ XXX Decrease in current noncash assets XXX Increase in current liabilities XXX Depreciation charges XXX Losses XXX Increase in current noncash assets (XXX) Decrease in current liabilities (XXX) Gains (XXX) Impact on Net Cash Provided by Operating Activities Sources of Cash Uses of Cash $ XXX (Subtract from Net Income) Decreases Increases Increases Decreases Cash Flows from Operating Activities (Add to Net Income) Current Noncash Assets Current Liabilities 13-26 Operating Activities Net Income or Loss Add: Less: $ XXX Decrease in current noncash assets XXX Increase in current liabilities XXX Depreciation charges XXX Losses XXX Increase in current noncash assets (XXX) Decrease in current liabilities (XXX) Gains (XXX) Cash Flows from Operating Activities $ XXX Depreciation and Amortization charges are added back because they are decreases in noncash assets. 13-27 Operating Activities Net Income or Loss Add: Less: $ XXX Decrease in current noncash assets XXX Increase in current liabilities XXX Depreciation charges XXX Losses XXX Increase in current noncash assets (XXX) Decrease in current liabilities (XXX) Gains (XXX) Cash Flows from Operating Activities Gains are subtracted. $ XXX Losses are added. 13-28 Investing Activities Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets Receipt of principal from investments Less: Payments to acquire land, buildings, equipment, or other noncurrent assets Payments to acquire investments Net Cash Flows from Investing Activities $ XXX XXX (XXX) (XXX) $ XXX Includes transactions that involve the acquisition or disposal of noncurrent assets. 13-29 Financing Activities Add: Proceeds from borrowings Proceeds from issuing capital stock Proceeds from sale of bonds Less: Principal payments on borrowed funds Payments related to bond maturities Dividend payments Net Cash Flows from Financing Activities $ XXX XXX XXX (XXX) (XXX) (XXX) $ XXX Includes transactions involving receipts from or payments to creditors and owners. 13-30 Cash Flows: Gross or Net? For investing and financing activities, items on the statement of cash flows should be presented in gross amounts rather than in net amounts. Example: • Assume Macy’s purchases $50 million in property during the year and sells other property for $30 million. • Instead of showing the net change of $20 million, the company must report the gross amounts of both transactions. 13-31 Operating Activities: Direct or Indirect Method? Two Formats for Reporting Operating Activities Direct Method Indirect Method Reports the cash effects of each operating activity Starts with accrual net income and adjusts it to the cash basis No matter which format is used, the same amount of net cash provided by operating activities is generated.