Chapter 13. Statement of Cash Flows, Part 2

Chapter 13 “How Well Am I Doing?” Statement of Cash Flows Part 2 13-32 Learning Objective 3 Prepare a statement of cash flows using the indirect method to determine the net cash provided by operating activities. 13-33 Statement of Cash Flows: Indirect Method 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) - $ $ Let’s revisit the comparative balance sheet account balances for Ed’s Pizza Hut. 13-34 Statement of Cash Flows: Indirect Method Refresh your memory regarding the following 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. 13-35 Step 1 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet AdjustSource Cash Flow Change or Use? Effect ments Assets (except cash and cash equivalents) Current assets Accounts receivable Inventory Noncurrent assets Land Equipment Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation Current liabilities Accounts payable Salaries payable Noncurrent liabilities Notes payable Stockholders' equity Common stock Retained earnings Net loss Dividends Total (net cash flow) Adjusted Effect Classification List each account appearing on the comparative balance sheets except for cash and cash equivalents and retained earnings. 13-36 Step 2 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet AdjustSource Cash Flow Change or Use? Effect ments Assets (except cash and cash equivalents) Current assets $ (17,000) Accounts receivable 22,000 Inventory Noncurrent assets Land (32,000) Equipment 28,000 Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Current liabilities Accounts payable 11,000 Salaries payable (5,000) Noncurrent liabilities Notes payable (50,000) Stockholders' equity Common stock 50,000 Retained earnings Net loss (27,000) Dividends 3,000 Total (net cash flow) Adjusted Effect Classification Compute the change from the beginning balance to the ending balance for each account. 13-37 Step 3 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet AdjustSource Cash Flow Adjusted ClassifiChange or Use? Effect ments Effect cation Assets (except cash and cash equivalents) Current assets $ (17,000) Source Accounts receivable 22,000 Use Inventory Noncurrent assets Land (32,000) Source Equipment 28,000 Use Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source Current liabilities Accounts payable 11,000 Source Use Salaries payable (5,000) Noncurrent liabilities Notes payable (50,000) Use Recall that the transaction Stockholders' equity involving the Notes Payable and Common stock 50,000 Source Common Stock was noncash. Retained earnings Use Net loss (27,000) Dividends 3,000 Use Total (net cash flow) Code each entry on the worksheet as a source or use of cash. { 13-38 Step 4 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustChange or Use? Effect ments Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 Inventory 22,000 Use (22,000) Noncurrent assets Land (32,000) Source 32,000 Equipment 28,000 Use (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 Current liabilities Accounts payable 11,000 Source 11,000 Salaries payable (5,000) Use (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) Stockholders' equity Common stock 50,000 Source 50,000 Retained earnings Net loss (27,000) Use (27,000) Dividends 3,000 Use (3,000) Total (net cash flow) $ (19,000) Adjusted Effect Classification Code sources of cash as positive numbers and uses of cash as negative numbers. 13-39 Step 5 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet ClassifiSource Cash Flow AdjustAdjusted Change cation or Use? Effect ments Effect Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 $ 17,000 Inventory 22,000 Use (22,000) (22,000) Noncurrent assets Land (32,000) Source 32,000 32,000 Equipment 28,000 Use (28,000) (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 6,000 Current liabilities Accounts payable 11,000 Source 11,000 11,000 Salaries payable (5,000) Use (5,000) (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) 50,000 We -need to make an adjustment Stockholders' equity for the noncash transaction Common stock 50,000 Source 50,000 (50,000) relating to Notes Payable and Retained earnings Net loss (27,000) Use (27,000) (27,000) Common Stock. Dividends 3,000 Use (3,000) (3,000) Total (net cash flow) $ (19,000) $ $ (19,000) { Make any necessary adjustments, including adjustments for gains and losses. The net effect of these should equal zero. 13-40 Step 6 of 8 Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustAdjusted Change or Use? Effect ments Effect Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 $ 17,000 Inventory 22,000 Use (22,000) (22,000) Noncurrent assets Land (32,000) Source 32,000 32,000 Equipment 28,000 Use (28,000) (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 6,000 Current liabilities Accounts payable 11,000 Source 11,000 11,000 Salaries payable (5,000) Use (5,000) (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) 50,000 Stockholders' equity Common stock 50,000 Source 50,000 (50,000) Retained earnings Net loss (27,000) Use (27,000) (27,000) Dividends 3,000 Use (3,000) (3,000) Total (net cash flow) $ (19,000) $ $ (19,000) Classification Operating Operating Investing Investing Operating Operating Operating Operating Financing Classify each entry as operating, investing, or financing activity. 13-41 Step 7 of 8 Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash $ (27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) Copy the data from the worksheet into the Statement of Cash Flows section by section. 13-42 Step 8 of 8 Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash Cash, beginning Cash, ending $ (27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) 90,000 71,000 Prepare a cash reconciliation at the bottom of the statement. 13-43 Statement of Cash Flows: Indirect Method Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash Cash, beginning Cash, ending (27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) 90,000 $71,000 In addition, on the face of the statement or in a supplemental schedule, disclose the issuance of $50,000 of stock to a creditor, a noncash financing activity. 13-44 Interpretation of the Statement of Cash Flows Examine the operating activities section carefully. ▫ Ed’s Pizza Hut generated a negative net cash provided by operating activities of $20,000. This is usually a sign of fundamental difficulties. ▫ Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-today activities. 13-45 Learning Objective 4 Compute free cash flow. 13-46 Free Cash Flow Free cash flow measures a company’s ability to fund its capital expenditures and dividends from its net cash provided by operating activities. Free Cash Flow = Net Cash Provided by Operating Activities - Capital Expenditures - Dividends 13-47 Free Cash Flow Using the equation shown on the prior slide, the free cash flow for Ed’s Pizza Hut of ($51,000) is computed like this . . . Net Cash Provided by Capital - Expenditures - Dividends Operating Activities (51,000) = $ (20,000) - $ 28,000 - $ 3,000 Free Cash Flow = $