MB - 103 - AFM - 5 - Unit 2b - Aug2011 - Gurdeepak - SR PDF

Unit 2b
Statement of Cash Flows
Slide 1 of Unit 2b MB-103 AFM ~Gurdeepak 2011~
Learning Objectives
LO1 Types of cash flow activities LO2 Indirect method to prepare CFS
LO3 Direct method to prepare CFS

LO4 Free Cash Flow
Reporting Cash Flows

The statement of cash flows reports cash flows by three types of activities: 1. Cash flows from operating activities transactions that affect net income. 2. Cash flows from investing activities transactions that affect noncurrent assets. 3. Cash flows from financing activities transactions that affect equity and debt of the entity.
Reporting Cash Flows

Increases in Cash Decreases in Cash
Operating
(receipts from revenues)
Operating
(payments for expenses)
Investing
(receipts from sales of noncurrent assets)
Investing
(payments for acquiring noncurrent assets)
Financing
(receipts from issuing equity and debt securities)
Financing
(payments for treasury stock, dividends, and redemption of debt securities)
Cash Flows from Operating Activities

Typical cash inflows What are some of the typical cash inflows from operating activities?` Sales of goods and services Interest revenue Dividend revenue
Typical cash outflows What are some of the typical cash outflows from operating activities? Merchandise purchases Payments of wages and other expenses Tax payments
Cash Flows from Investing Activities

Typical cash inflows What are some of the typical cash inflows from investing activities? Sales of fixed assets Sale of longlongterm investments
Typical cash outflows What are some of the typical cash outflows from investing activities? Purchase of fixed assets Purchase of longlong -term investments
Cash Flows from Financing Activities

Typical cash inflows Typical cash outflows What are some of the What are some of the typical cash inflows from typical cash outflows financing activities? from financing activities? Issuing bonds and longlong-term notes payable Issuing preferred and common stock
Paying cash dividends Repaying debt Acquiring treasury stock
Noncash Investing and Financing Activities

Issuing bonds to acquire land Issuing common stock for convertible preferred stock Issuing a long-term note to acquire equipment Issuing a stock dividend
No cash flow per share is reported in the financial statements because the user might incorrectly interpret this as the amount available for dividends.
The Indirect Method

Balance Sheet
Cash Liabilities Noncash Assets Stockholders Equity
Assets = Liabilities + Stockholders Equity Cash + Noncash Assets = Liabilities + Stockholders Equity Cash = Liabilities + Stockholders Equity Noncash Assets
The Indirect Method

Balance Sheet
Cash Liabilities Noncash Assets Stockholders Equity
Assets = Liabilities + Stockholders Equity Cash + Noncash Assets = Liabilities + Stockholders Equity Cash = Liabilities + Stockholders Equity Noncash Assets
1 2 3
The cash flows are determined by analyzing liabilities, stockholders equity, and noncash assets.
The Indirect Method
Start with the accrual basis net income (shown in the income statement, the Retained Earnings account, or the statement of stockholders equity).
The Indirect Method

Find the net income.
ACCOUNT Retained Earnings Date
2006
ACCOUNT NO. 32 Debit Credit Balance Debit Credit 202,300 310,300 282,300
Item
To statement
108,000
Jan. 1 Balance Dec. 31 Net income 31 Cash dividends
28,000
Operating Activities Indirect Method

Cash flows from operating activities: Net income per income statement Add: Depreciation Decrease in inventories Increase in accrued expenses Deduct: Inc. in accounts receivable Dec. in accounts payable Dec. in income taxes payable Gain on sale of land Net cash flow from operating activity
$108,000 $ 7,000 8,000 2,200 $ 9,000 3,200 500 12,000
17,200 $125,200
24,700 $100,500
The Indirect Method
Next, we need to determine depreciation expense for the year. If it isnt given on the income statement, sometimes it can be found by analyzing the Accumulated Depreciation account.
The Indirect Method

Determine depreciation expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17 Date
2006
Item
Debit
Credit
Balance Debit Credit 58,300 65,300
Jan. 1 Balance Dec. 31 Depreciation for year
7,000
to statement
Operating Activities Indirect Method Cash flows from operating activities: Net income per income statement $108,000 Add: Depreciation $ 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 Deduct: $125,200 Because Depreciation Inc. in accounts receivable Expense $ 9,000 Dec. in accounts payable but did 3,200 reduced net income not Dec. in income taxes payable 500 require an outflow of cash, it is Gain on sale of land 12,000 24,700 added back to net income. Net cash flow from operating activities $100,500
The Indirect Method
Select current assets and current liabilities that impact cash flow and determine the increases and decreases.
Changes in Current Accounts

Change Debit Credit 9,000 8,000 3,200 2,200 500
Accounts Accounts receivable (net) Inventories Accounts payable (mdse.) Accrued expenses payable Income taxes payable
2006 $74,000 172,000 43,500 26,500 7,900
2005 $65,000 180,000 46,700 24,300 8,400
Determine the debit or credit change of each item above.


2006 $74,000 172,000 43,500 26,500 7,900
2005 $65,000 180,000 46,700 24,300 8,400
These debit changes are subtracted from net income in the operating activities section of the statement of cash flows. Think of these debits as deductions from net income in arriving at net cash flow from operations.

2006 $74,000 172,000 43,500 26,500 7,900
2005 $65,000 180,000 46,700 24,300 8,400
These credit changes are added to net income in the operating activities section of the statement of cash flows. Think of these credits as additions to net income in arriving at net cash flow from operations.
Operating Activities ActivitiesIndirect Method Cash flows from operating activities: Net income per income statement $108,000 Add: Depreciation $ 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable $ 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities $100,500
The Indirect Method
Analyze the income statement to determine if there are any gains or losses from selling investments, equipment, etc.
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Total operating expenses Income from operations Other income: Gain on sale of land Other expense: Interest expense Income before income tax Income tax Net income
$1,180,000 790,000 $ 390,000 $ 7,000 196,000 203,000 $ 187,000 $12,000 12,000 8,000 4,0000 $ 191,000 83,000 $ 108,000
Operating Activities ActivitiesIndirect Method Cash flows from operating activities: Net income, per income statement $108,000 Add: This gain was included in net income, but Depreciation $ 7,000 did not represent an operating cash flow. Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable $ 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities $100,500
The Indirect Method

If there had been a loss on this sale, the loss would have been added to net income.

Dividends
ACCOUNT Dividends Payable Date
2006
ACCOUNT NO. 23 Debit Credit Balance Debit Credit 10,000 -14,000 -14,000
Item Balance Cash paid Dividends declared Cash paid Dividends declared
Jan.
1 10 June 20 July 10 Dec. 20
10,000 14,000 14,000 14,000
---
Total cash paid

$24,000

Because paying of dividends affects equity, it is a negative $24,000 cash flow from financing activities transaction.

Sale of Common Stock
ACCOUNT Common Stock Date
2006
ACCOUNT NO. 33 Debit Credit Balance Debit Credit 16,000 24,000
Item
Jan. Nov.
1 Balance 1 4,000 shares issued for cash
8,000

Sale of Common Stock
ACCOUNT Paid-In Capital in Excess of Par--Common ACCT. NO. 34 Date
2006
Item
Debit
Credit
Balance Debit Credit 80,000 120,000
Jan. Nov.
1 Balance 1 4,000 shares issued for cash
40,000

Issuing common stock affects equity; therefore, we have a total positive cash flow of $48,000 from this financing activities transaction.

Retirement of Bonds Payable
ACCOUNT Bonds Payable Date
2006
ACCOUNT. NO. 25 Debit Credit Balance Debit Credit 150,000 50,000 100,000
Item
Jan. 1 Balance June 30 Retired by payment of cash at face amount

This transaction is a negative cash flows from financing activities item because longterm debt is involved.

Purchased a Building
ACCOUNT Building
Date
2006
ACCOUNT NO. 18 Debit Credit Balance Debit Credit 200,000 260,000
Item
Jan. 1 Balance Dec. 27 Purchased for cash
60,000

Purchased a Building Purchasing a building involves a noncurrent asset, so this is a negative cash flows from investing activities item.

Land Transactions
ACCOUNT Land
Date
2006
ACCOUNT NO. 16 Debit Credit Balance Debit Credit
Item
Jan. 1 Balance June 8 Sold for $72,000 cash Oct. 12 Purchased for $15,000 cash
125,000 60,000 65,000 15,000 80,000

Land Transactions The first transaction, the sale of land, results in a positive cash flow from investing activities because land is a noncash asset.

Land Transactions The $12,000 gain was recorded earlier on Slide 25 as an operating activity. The purchase of land also is an investing activity.
Click here to return to Slide 25. To return to this slide, type 39 and press the Enter key.
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Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Total operating expenses Income from operations Other income: Gain on sale of land Other expense: Interest expense Income before income tax Income tax Net income
$1,180,000 790,000 $ 390,000 $ 7,000 196,000 203,000 $ 187,000 $12,000 8,000 4,000 $ 191,000 83,000 $ 108,000
This is an accrual basis income statement. The direct method of reporting cash flows will essentially convert this to ~ aGurdeepak cash basis Slide 42 of Unit 2b MB-103 AFM 2011~ statement.
Cash Basis
Sales $1,180,000 Cost of merchandise sold 790,000 Cash collected Gross profit $ 390,000 Changes from customers Operating expenses: Debit Credit Depreciation expense $ 7,000 Sales 1,180,000 Other operating expenses 196,000 Total operating Receivables expenses 203,000 9,000 Income from operations $ 187,000 Other income: Note: The changes in the current balance sheet accounts Gain on sale of land $12,000 are determined by comparing the beginning and Other expense: ending balances. Receivables 4,000 by $9,000 Interest expense 8,000 increased during Income before income tax the period. $ 191,000 Income tax 83,000 Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales $1,180,000 Cost of merchandise sold 790,000 Cash collected Gross profit $390,000 Changes from customers Operating expenses: Debit Credit Depreciation expense $ 7,000 Sales 1,180,000 Other operating expenses 196,000 Total operating Receivables expenses 203,000 9,000 Income from operations $187,000 Cash 1,171,000 Other income: Gain on sale of land $12,000represents a The increase in receivables Other expense: reduction in cash inflow relative to the Interest expense 8,000 4,000 accrual revenue reported on the income Income before income tax $ 191,000 statement. Income tax 83,000 Net income $ 108,000
Cash Basis
$1,171,000
Sales Cost of merchandise sold Gross profit Cash payments for Operating expenses: merchandise Depreciation expense Other operating expenses Cost of mdse. sold Total operating expenses Inventories Income from operations Accounts payable Other income: Cash Gain on sale of land Other expense: Interest expense Income before income tax Income tax Net income $1,180,000 790,000 $390,000
Cash Basis
$1,171,000
Changes $ 7,000 Debit Credit 196,000 790,000 203,000 8,000 $187,000 3,200
$12,000 8,000 4,000 $ 191,000 83,000 $ 108,000
Cash Basis
Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $390,000 Cash payments for Operating expenses: Changes merchandise Depreciation expense $ 7,000 Debit Credit Other operating expenses 196,000 Cost of mdse. sold 790,000 Total operating expenses 203,000 Inventories 8,000 minus Income from operations $187,000 Accounts payable plus 3,200 Other income: Cash 785,200 Gain on sale of land $12,000 Other expense: (credit change) Interest expenseA decrease in Inventories 8,000 4,000 and an in Accounts Payable$ (debit change) Income before incomedecrease tax 191,000 have the opposite effects. Income tax 83,000 Net income $ 108,000
Cash Basis
Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 Depreciation Changes Total operating expenses 203,000 Debit Credit Income from operations $ 187,000 Depreciation expense 7,000 Other income: Accumulated depreciation 7,000 Gain on sale of land $12,000 Other expense: There is no cash flow 8,000 for depreciation expense. 4,000 Interest expense Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Total operating expenses Cash payments for Income from operations operating expenses Other income: Gain on sale of land Operating expenses Other expense: Accrued expenses Cash Interest expense Income before income tax Income tax Net income $1,180,000 790,000 $ 390,000 $ 7,000 196,000 203,000 $ 187,000 Changes Changes Credit Debit $12,000 196,000
Cash Basis
$1,171,000 (785,200)
0 (193,800)
minus
8,000
2,200 4,000 193,800 $ 191,000 83,000 $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $ 390,000 Changes Gain on sale of investments Operating expenses: Depreciation expense $Debit 7,000 Credit Cash 72,000 Other operating expenses 196,000 Investments 60,000 Total operating expenses 203,000 Gain on sale of invest. 12,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: 4,000 Interest expense 8,000 The cash inflow of $72,000 will be shown in Income before income tax $ 191,000 the investing section of the statement of cash Income tax 83,000 flows and the gain is ignored. Net income $ 108,000
Cash Basis
$1,171,000 (785,200)
0 (193,800)
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 Cash paid for Changes Other operating expenses 196,000 interest expense Debit Credit TotalInterest operating expenses 203,000 expense 8,000 Income from operations $ 187,000 Cash Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax is no interest payable $ 191,000 There Income tax 83,000 account at the end of the year. Net income $ 108,000
Cash Basis
$1,171,000 (785,200)
0 (193,800)
0 (8,000)
Cash Basis
$1,180,000 790,000 $ 390,000 $1,171,000 (785,200)
Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Cash paid for Total operating expenses income taxes Income from operations Other income: Income tax expense Gain on sale of land Income tax payable plus Other expense: Cash Interest expense Income before income tax Income tax Net income
$ 7,000 196,000
Changes Debit
0 (193,800) 203,000 $ Credit 187,000
$12,000 500 8,000 4,000 $ 191,000 83,000 $ 108,000

(83,500)
83,000
(8,000) (83,500)
Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Total operating expenses Income from operations Other income: Gain on sale of land Other expense: Interest expense Income before income tax Income tax Net income
Cash Basis
$1,180,000 790,000 $ 390,000 $1,171,000 (785,200)
Two different viewpoints of income from $ 7,000 0 196,000 operations (193,800)

203,000 $ 187,000 $12,000 8,000 0
Accrual 4,000 Basis

$ 191,000 83,000 $ 108,000
Cash (8,000) Basis

(83,500) $ 100,500
Operating Activities ActivitiesDirect Method

Cash flows from operating activities:
Cash inflows: Cash received from customers Cash outflows: Cash payments for merchandise Cash payments for interest Cash payments for income tax Net cash flow from operating activities
$1,171,000 $785,200 8,000 83,500 1,070,500 $ 100,500
Cash payments for operating expenses 193,800
Financial Analysis and Interpretation

Free Cash Flow Dell Corporation
Cash flow from operations $4,195,000 Less: Cash used to purchase fixed assets to maintain productive capacity used up in producing income during the period (482000) Less: Cash used for dividends Free cash flow $3,713,000 Free cash flow as a percent of cash flow from operating activities
89%
Financial Analysis and Interpretation

Free Cash Flow Dell Corporation
Cash operations $4,195,000 Use:flow To from measure the financial strength of Less: Cash used to purchase fixedthat has a business. A company assets to maintain productive positive free cash flow is able to capacity used up in producing fund internal growth, retire debt, income during the period (482000) andused enjoy financial Less: Cash for dividendsflexibility. () Free cash flow $3,713,000 Free cash flow as a percent of cash flow from operations
89%

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Unit 2b

Statement of Cash Flows

Slide 1 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

LO3 Direct method to prepare CFS

Slide 2 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Reporting Cash Flows

Reporting Cash Flows

Cash Flows from Operating Activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Paying cash dividends Repaying debt Acquiring treasury stock

Noncash Investing and Financing Activities

Slide 9 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Slide 10 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

Slide 11 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

Cash Liabilities Noncash Assets Stockholders Equity

Slide 12 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

The Indirect Method

Jan. 1 Balance Dec. 31 Net income 31 Cash dividends

Slide 14 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Operating Activities Indirect Method

$108,000 $ 7,000 8,000 2,200 $ 9,000 3,200 500 12,000

The Indirect Method

Slide 16 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

Balance Debit Credit 58,300 65,300

Jan. 1 Balance Dec. 31 Depreciation for year

Slide 17 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

Changes in Current Accounts

2006 $74,000 172,000 43,500 26,500 7,900

2005 $65,000 180,000 46,700 24,300 8,400

Determine the debit or credit change of each item above.

Changes in Current Accounts

2006 $74,000 172,000 43,500 26,500 7,900

2005 $65,000 180,000 46,700 24,300 8,400

Changes in Current Accounts

2006 $74,000 172,000 43,500 26,500 7,900

2005 $65,000 180,000 46,700 24,300 8,400

The Indirect Method

Slide 24 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

The Indirect Method

Slide 27 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Cash Flows from Financing Activities

1 10 June 20 July 10 Dec. 20

10,000 14,000 14,000 14,000

Total cash paid

Cash Flows from Financing Activities

Slide 29 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Cash Flows from Financing Activities

ACCOUNT NO. 33 Debit Credit Balance Debit Credit 16,000 24,000

1 Balance 1 4,000 shares issued for cash

Slide 30 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Cash Flows from Financing Activities

Balance Debit Credit 80,000 120,000

1 Balance 1 4,000 shares issued for cash

Slide 31 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Cash Flows from Financing Activities

Slide 32 of Unit 2b MB-103 AFM ~Gurdeepak 2011~

Cash Flows from Financing Activities