Statement of Cash Flows: Mcgraw-Hill/Irwin

Slide
13-1
Chapter
STATEMENT OF CASH
13 FLOWS
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
13-2
Purpose of the Statement of Cash
Flows
Provides 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.

Slide
13-3
Company Name
Statement of Cash Flows
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activities $ #####
Cash flows from investing activities:
Net cash provided (used) by investing activities #####
Cash flows from financing activities:
Net cash provided (used) by financing activities #####
Net increase (decrease) in Cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
Slide
13-4
Classification of Cash Flows
The Statement of Cash Flows must

include the following three sections:
 Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities

Slide
13-5
Operating Activities
Inflows from:
 Sales to customers.
 Interest and dividends
received. + Cash
Flows
Outflows to: from
 Suppliers of merchandise Operating
and services.
 Employees.
_ Activities
 Lenders for interest.
 Governments for taxes.

Slide
Types of Cash Flows -

13-6
Operating Activities
 Cash inflows:
 From sale of goods or services
 From return on loans (interest received) and on
equity securities (dividends received)
 Cash outflows:
 To suppliers for inventory
 To employees for services
 To government for taxes
 To lenders for interest
 To others for expenses

Slide
13-7
Investing Activities
Inflows from:
 Selling investments and plant
assets.
 Collecting of principal on loans.
+ Cash
Flows
from
Outflows to:
 Payments to acquire
Investing
investments and plant assets. _ Activities
 Purchase debt or equity
investments.
 Make loans.
Slide

13-8
Investing Activities
 Cash inflows:
 From sale of property, plant, and equipment
 From sale of debt or equity securities of other entities
 From collection of principal on loans to other entities
 Cash outflows:
 To purchase property, plant, and equipment
 To purchase debt or equity securities of other entities
 To make loans to other entities

Slide

13-9
Financing Activities
 Cash inflows:
 From sale of equity securities (company's own stock)
 From issuance of debt (bonds and notes)
 Cash outflows:
 To stockholders as dividends
 To redeem long-term debt or reacquire capital stock

Slide
13-10

Slide
PREPARING
13-11
THE STATEMENT OF CASH

FLOWS
Information to prepare this statement
usually comes from 3 sources:
1) Comparative balance sheet.
2) Current income statement.
3) Additional information.
The SCF deals with cash receipts and
payments, so the accrual concept is
not used in the preparation of the SCF.

THREE MAJOR STEPS IN
Slide
13-12
PREPARING THE STATEMENT OF

CASH FLOWS

Slide
13-13 USAGE OF INDIRECT
AND DIRECT METHODS
In order to determine net cash provided/used by operating activities, the operating
activities section must be converted from accrual basis to cash basis. This
conversion may be accomplished by :
1) the indirect method or
2) the direct method.
The indirect method is used extensively in practice, as shown below.
The indirect is favored by companies for 2 reasons:
- it is easier to prepare and
- it focuses on the differences between net income and net cash flow from operating
activities.

Slide
13-14
Company Name
Period Covered
Cash flows from operating activities:
Net cash provided (used) by operating activities $ #####
Cash flows from investing activities:
The[List
operating
of individual inflows and outflows]
cash Net cash section
flows Let’s
provided (used) by investing activities look #####
at
canflows
Cash be prepared
from financing activities: the Direct
using[Listeither theinflows and outflows] Method for
of individual
Net cash provided (used) by financing activities #####
direct method or preparing the
Net increase (decrease) in Cash $ #####
the indirect Statement of
Cash (and equivalents) balance at beginning of period
method. #####
Cash (and equivalents) balance at end of periodCash Flows.$ #####
Slide
13-15
Direct Method
Cash Received from Customers
 Accrual basis revenue includes sales that
did not result in cash inflows.
 Can be computed as:
Decrease in
+ receivables =
Cash Received from

Net Sales
Customers
Increase in
– receivables =
Slide
13-16
Direct Method
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
+ receivables =
Net Sales Cash Received from
$900,000 Customers
Increase in
– receivables =
Slide
13-17
Direct Method
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
receivables
Net Sales Cash Received from

$900,000 Customers = $870,000
$30,000
Increase in
– receivables =
Slide
13-18
Now that we
understand the
process, let’s look at
some simplified
formulas for
computing direct
method cash flows.
Slide
13-19
Direct Method
Interest and Dividends Received
+ Decrease in
Interest
Received
=
Interest
Revenue { interest receivable
- Increase in interest
receivable
+ Decrease in
Dividends
Received
=
Dividends
Revenue { dividends receivable
- Increase in dividends
receivable

Slide
13-20
Direct Method
Cash Paid for Merchandise
Step 1
+ Increase in inventory
Purchases = COGS
{ - Decrease in inventory
Step 2
Cash paid for + Decrease in A/P

merchandise
= Purchases
{ - Increase in A/P

Slide
13-21
Direct Method
Cash Paid for Merchandise
How much did Lug Lite pay for inventory in

2003?
Inventory, 1/1/03 $ 130,000 A/P, 1/1/03 $ 23,000
Inventory, 12/31/03 $ 165,000 A/P, 12/31/03 $ 35,000
COGS, 12/31/03 $ 900,000
Purchases for 2003 were $935,000.

a. $900,000
b. $923,000 Purchases = $900,000 + $35,000
c. $947,000 Cash Paid for Merchandise in 2003
d. $877,000 was $923,000.
Cash Paid = $935,000 - $12,000
Slide
13-22
Direct Method
Cash Payments for Expenses
After 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.
+ Increase in + Decrease in
Cash Paid for
Expenses
= Expenses
{ prepaid expenses
- Decrease in
prepaid expenses
{ accrued liabilities
- Increase in
accrued liabilities

Slide
13-23
Now, let’s
prepare a direct
method
Statement of
Cash Flows for
Grate Big
Company.
Slide
13-24
Direct Method - Example

Grate Big Company
Comparative Balance Sheets - Assets
December 31,
2002 2003
Cash $ 60,000 $ 70,370
Accounts Receivable, net 27,000 35,000
Inventory 230,000 200,000
Trading Securities - 25,000
Equipment, net 500,000 425,000
Investment in Tiny Co. 100,000 130,000
Total Assets $ 917,000 $ 885,370

Slide
13-25

Grate Big Company
Comparative Balance Sheets - Liabilities and Equity
December 31,
2002 2003
Accounts Payable $ 15,000 $ 12,000
Salaries Payable 7,000 5,000
Interest Payable 11,950 7,350
Income Tax Payable 20,000 17,000
Notes Payable, Bob's Bank 70,000 60,000
Bonds Payable 250,000 150,000
Premium on Bonds Payable 5,000 4,000
Common Stock 450,000 500,000

Retained Earnings 88,050 130,020
Total Liabilities and Equity $ 917,000 $ 885,370
Slide
13-26

Grate Big Company
Income Statement Amounts
For the Year Ending December 31, 2003
Sales Revenues $ 800,000

Cost of Goods Sold 560,000
Depreciation Expense 5,000
Interest Expense 28,050
Income Tax Expense 27,980
Salary Expense 80,000
Other Expenses 71,000
Amortization of Bond Premium 1,000
Gain on Sale of Equipment 3,000
Extraordinary Loss 30,000
Equity in Investee Income 40,000
Net Income $ 41,970
Slide
13-27
Additional Information
 Trading 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.

Slide
13-28

Additional Information
 Grate 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.

Slide
13-29
Sales Revenues $ 800,000

Less: Increase in A/R (8,000)
Cash Received from Customers $ 792,000
Cash Paid to Employees

Salary Expense $ 80,000
2000
Add: Decrease in Salary Payable 2,000
Cash Paid to Employees $ 82,000

Slide
13-30
Cash Paid for Inventory

Cost of Goods Sold $ 560,000
Add : Decrease in A/P 3,000
Less: Decrease in Inventory (30,000)
Cash Paid for Inventory $ 533,000
Cash Paid for Interest

Interest Expense $ 28,050
2000
Add: Decrease in Interest Payable 4,600
Cash Paid for Interest $ 32,650

Slide
13-31
Cash Paid for Taxes

Income Tax Expense $ 27,980
2000
Add: Decrease in Taxes Payable 3,000
Cash Paid for Taxes $ 30,980
Other Operating Cash Flows

Add : Dividends from Tiny Co. $ 10,000
Less: Purchase of Trading Securities (25,000)
Less: Other Operating Expenses (71,000)
Cash Flow from Other Sources $ (86,000)

Slide
13-32
Cash Flows From Operating Activities
Cash Received from Customers $ 792,000

Cash Paid to Employees (82,000)
Cash Paid for Inventory (533,000)
Cash Paid for Interest (32,650)
Cash Paid for Taxes (30,980)
Cash Paid to Other Sources (86,000)
Cash From Operating Activities $ 27,370

Slide
13-33
Grate Big Company

Equipment with a bookofvalue
Statement Cashof Flows
For the
$40,000 Period
was sold Ending December 31, 2003
for $43,000.
I. Operating Cash Flows $ 27,370
II. Investing Cash Flows
Bonds Payable decreased from
Proceeds
$250,000 from saleduring
to $150,000 of Equipment
2003. 43,000
III. Financing Cash Flows
Proceeds from sale of Stock $ 50,000
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period $ 10,370
Notes Payable decreased from
Add: Beginning
$70,000 Cashduring
to $60,000 Balance
2003. 60,000
Ending Cash Balance $ 70,370

Slide
13-34
Grate Big Company

For the Period Ending December 31, 2003
Notice that the Ending
I. Operating Cash Flows $ 27,370
Cash Balance per the
II. Investing Cash Flows
Proceeds from sale of Equipment
agrees with the 12/31/03 43,000
III. Financing Cash Cash
Flows balance on the
Proceeds from saleBalance
of Stock Sheet.
$ 50,000
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period $ 10,370
Add: Beginning Cash Balance 60,000

Slide
13-35
Let’s look at the

Indirect Method
that is used by
over 97% of all
companies.

Slide
13-36
Indirect Method
Changes in current assets and current

liabilities as shown on the following table.
Cash Flows
Net
from Operating
Income
Activities
+ Losses and + Noncash

- Gains expenses such as
depreciation and
amortization.

Slide
13-37
Indirect Method
Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Use this table when adjusting Net Income

to Operating Cash Flows.

Slide
13-38
Let’s prepare a
complete
Statement of
Cash Flows
using the
Indirect Method.
Slide
13-39
Indirect Method - Example
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
Place

Slide
13-40
The $8,000 gain was the

Joe's Place
result of selling land
Income Statement
costing $32,000
For the for $40,000
Year Ending 3/31/03
during the period.
Revenues $ 727,000
Operating Expenses (748,000)
Depreciation Expense (6,000)
Gain on Sale of Land 8,000
Net Loss $ (19,000)

Slide
13-41
Joe's Place
Balance Sheets
3/31/02 3/31/03
Assets
Cash $ 90,000 $ 62,000
Accounts Receivable 40,000 23,000
Inventory 300,000 350,000
Land 112,000 80,000
Equipment, net 45,000 39,000
Total Assets $ 587,000 $ 554,000

Slide
13-42

Joe's Place
Joe’s Place issued $50,000
Balance Sheets (cont.)
of no par common stock to 3/31/02 3/31/03
settle theLiabilities
$50,000 note
payable.
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities $ 91,000 $ 47,000
Owners' Equity
Common Stock $ 450,000 $ 500,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000

Slide
13-43

Joe's Place
Ending Retained Earnings
Balance Sheets (cont.)
at 3/31/03 was computed 3/31/02 3/31/03
as follows:
Liabilities
Beginning
Salaries PayableR/E, 3/31/02 $ 14,000
46,000 9,000
–Long-Term
Net Loss Note
for 2003
Payable (19,000)
50,000 -
–Total
Dividends Paid in 2003 $ (20,000)
Liabilities 91,000 $ 47,000
= Ending
Owners'R/E, 3/31/03
Equity $ 7,000
Common Stock $ 450,000 $ 500,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000

Slide
13-44
Joe's Place
Cash Flows from Operations:
Net Loss $ (19,000)
With the indirect method, always

start with the net income or net
loss for the period.

Slide
13-45
Joe's Place
Net Loss $ (19,000)

Add/Less: Changes in Current Assets & ?
Current Liabilities
Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Slide
13-46
Joe's Place
Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Accounts receivable decreased.

3/31/03 3/31/02
$23,000 - $40,000 = $(17,000)

Slide
13-47
Joe's Place
Net Loss $ (19,000)

Increase in Accounts Payable 11,000
Accounts payable increased.

3/31/03 3/31/02
$38,000 - $27,000 = $11,000

Slide
13-48
Joe's Place
Net Loss $ (19,000)

Subtract: Increase in Inventory (50,000)
Inventory increased.
3/31/03 3/31/02
$350,000 - $300,000 = $50,000

Slide
13-49
Joe's Place
Net Loss $ (19,000)

Decrease in Salaries Payable (5,000)
Salaries payable decreased.
3/31/03 3/31/02
$ 9,000 - $14,000 = $(5,000)
Slide
13-50
Joe's Place
Net Loss $ (19,000)

Add back in
Decrease non-cash
Salariesexpenses.
Payable (5,000)
Add: Depreciation Expense 6,000

Slide
13-51
Joe's Place
Net Loss $ (19,000)

Decrease in Salaries Payable (5,000)
Subtract gains.
Add: Depreciation Expense 6,000
Subtract: Gain on Sale of Land (8,000)
Net cash flow from operations $ (48,000)

Slide
13-52
Joe's Place
For the Year Ending 3/31/03
Cash Flows from Operating Activities $ (48,000)
Investing
Cash Flows fromThe Activities
operating cash
flows amount comes
Cash Flows from from the schedule
Financing Activities
just prepared.
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance

Slide
13-53
Joe's Place
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows
Land from Financing
originally Activities
costing $32,000
was sold for $40,000.
Net Change in Cash for the Period
Ending Cash Balance

Slide
13-54
Joe's Place
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Net
Dividends in Cash
Change of forwere
$20,000 the Period
paid to
owners during the year.
Ending Cash Balance

Slide
13-55
Joe's Place
Compute
Cash Flowsthe
fromnet change in
Financing cash
Activities
forpaid
Dividends the period.
to owners (20,000)
Decrease in Cash for the Period $ (28,000)
Ending Cash Balance

Slide
13-56
Joe's Place
Complete the Statement of Cash
Flows by reconciling
Dividends beginning
paid to owners (20,000)
cash to ending cash.
Beginning Cash Balance 90,000

Slide
13-57
Joe's Place
Note that the ending
cash amount ties
back to the Joe’s
Cash Flows from Operating Activities (48,000)
Place Balance$ Sheet
Joe's Place
Cash Flows from Investing
Balance Sheets at 3/31/03.
Activities
Proceeds from sale of land
3/31/02 3/31/03 40,000
Assets
Cash $ owners
Dividends paid to 90,000 $ 62,000 (20,000)

Slide
13-58
Joe's Place
Infrom
Cash Flows Operating
addition, onActivities
the face $ (48,000)
offrom
Cash Flows the Investing
statement or in
Activities a
supplemental
from Financing
Cash Flowsschedule, Activities
disclose the
$50,000 noncash
Decrease in Cash for the Period
financing activity. $ (28,000)

Slide
13-59
Joe's Place
Cash Flows from Operating Activities
In addition, cash $ (48,000)
Cash Flowsinterest payments
from Investing and
Activities
cash tax payments
Cash Flows
must Financing
from also Activities
be disclosed
separately.

Slide
13-60
Managing Cash Flows
Cash Budgets are used by management to plan and

forecast future cash flows.
A Cash Budget can be used to:
Force management to coordinate activities.
Provide managers with advance notice of available resources.
Provide targets useful in evaluating performance.
Provide advance warnings of potential cash shortages.

Slide
13-61
Managing Cash Flows
 Increase collection of accounts

receivables.
 Keep inventory low.
 Delay payment of liabilities.
 Plan timing of major expenditures.
 Invest idle cash.

Slide
13-62
Cash Budgeting
Cash Budget
May June July August
Beginning cash balance $ 27,500 $ 15,000 $ - $ -
Add: Cash receipts 3,500
Total available cash $ 31,000
Less: Cash disbursements 16,000

Excess (deficiency) of
available cash over cash
disbursements $ 15,000
Financing needed
Financing repayments -
Ending cash balance $ 15,000
The ending cash balance of one month becomes the

beginning cash balance of the next month.
Slide
13-63
Cash Budgeting
Cash Budget
May June July August
Beginning cash balance $ 27,500 $ 15,000 $ 10,000 $ 10,000
Add: Cash receipts 3,500 2,000 9,000 14,000
Total available cash $ 31,000 $ 17,000 $ 19,000 $ 24,000
Less: Cash disbursements 16,000 18,000 6,000 8,000

Excess (deficiency) of
available cash over cash
disbursements $ 15,000 $ (1,000) $ 13,000 $ 16,000
Financing needed 11,000 - -
Financing repayments - - 3,000 6,000
Ending cash balance $ 15,000 $ 10,000 $ 10,000 $ 10,000
Financing is needed in June because the company

must maintain a minimum cash balance of $10,000.
Slide
13-64
End of Chapter 13
Chester, ol’
buddy, I wonder if
you could help
me with a little
cash flow
problem I’m
having?

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Classification of Cash Flows

The Statement of Cash Flows must

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Types of Cash Flows -

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Types of Cash Flows -

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Types of Cash Flows -

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

THE STATEMENT OF CASH

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

PREPARING THE STATEMENT OF

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Cash Received from

Net Sales Cash Received from

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Cash paid for + Decrease in A/P

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

How much did Lug Lite pay for inventory in

Purchases for 2003 were $935,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

Common Stock 450,000 500,000

Direct Method - Example

Sales Revenues $ 800,000

Direct Method - Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

Cash Received from Customers

Sales Revenues $ 800,000

Cash Paid to Employees

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

Cash Paid for Inventory

Cash Paid for Interest

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

Cash Paid for Taxes

Other Operating Cash Flows

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Direct Method - Example

Cash Flows From Operating Activities

Cash Received from Customers $ 792,000

Cash From Operating Activities $ 27,370

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Grate Big Company

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Grate Big Company

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002