CHAPTER 13 Statement of Cash Flows Slide 13-2 Need for a Statement of Cash Flows  Stakeholders want to know how a company generates and spends cash  Can the company  Generate enough cash to pay its wages and bills, including debt payments  Generate cash in order to earn a reasonable return and pay dividends  Generate enough cash to avoid bankruptcy Slide 13-3 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Need for a Statement of Cash Flows  Cash flow is not the same as net income  Under GAAP, income is calculated using the accrual method  The income statement does little to inform managers and other company stakeholders of the sources and uses of cash Slide 13-4 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Need for a Statement of Cash Flows  For the purposes of the cash flow statement, cash includes both cash and cash equivalents  Cash equivalents are short term investments that can be readily converted into cash  Examples include 90 day US Treasury Bills and money market funds Slide 13-5 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Types of Business Activities  Operating activities  Cash flows related to production and delivery of goods and services  Reflect the day to day profit oriented activities of a business  Principal cash inflows are cash sales and collection of accounts receivable  Major sources of cash outflows include payments to suppliers, employees and taxing authorities Slide 13-6 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Examples of Operating Activities Slide 13-7 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Types of Business Activities  Investing activities  Cash flows related to buying and selling of long-term assets  Examples include collections from long term loans, collections from the sale of equipment no longer in use, payments to buy securities of other companies, buying a building and buying a business Slide 13-8 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Examples of Investing Activities Slide 13-9 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Types of Business Activities  Financing activities  Cash inflows related to issuing stock and issuing long-term debt  Cash outflows related to repurchasing stock, paying off loans and making dividend payments Slide 13-10 Learning objective 1: Explain the need for the statement of cash flows and identify the three types of business activities presented in a statement of cash flows Cash Flows from Operating Activities (Direct Method)  Current asset and current liability accounts  Purchases of $8,286,993 are used in the next calculation, which solves for cash payments for purchases of inventory of $8,202,703 Beginning balance accounts payable $575,000 Plus purchases 8,286,993 Less cash paid for inventory purchases Equals ending balance accounts payable Slide 13-24 ? $659,290 Learning objective 2: Prepare a statement of cash flows using the direct method Cash Flows from Operating Activities (Direct Method)  Analyze other current asset and liability accounts  Use prepaid insurance and insurance expense to solve for cash payments for insurance  Use accrued wages and salaries and wages and salaries expense to solve for cash payments for wages and salaries  Use income taxes payable and income tax expense to solve for cash payments for income taxes Slide 13-25 Learning objective 2: Prepare a statement of cash flows using the direct method Cash Flows from Operating Activities (Direct Method)  Long term asset accounts  Use accumulated depreciation, depreciation expense, book value of equipment sold, and loss on sale to solve for  Cash proceeds related to sale of equipment, and  Cash paid for purchases of equipment Slide 13-26 Learning objective 2: Prepare a statement of cash flows using the direct method Cash Flows from Operating Activities (Direct Method)  Long term liabilities and stockholders’ equity  Cash paid to reduce debt (or cash proceeds from borrowing) is the difference between the beginning and ending balance of long term debt  Use beginning and ending retained earnings plus net income to solve for cash payments for dividends Slide 13-27 Learning objective 2: Prepare a statement of cash flows using the direct method Test Your Knowledge RS Inc has the following information:  Taxes payable 12/31/2016: $171,000  Income tax expense 2017: $585,000  Taxes payable 12/31/2017: $150,000 Calculate cash paid for taxes in 2017 Answer: $171,000 + ? - $150,000 = $585,000 ? = 564,000 Slide 13-28 Learning objective 2: Prepare a statement of cash flows using the direct method Preparing the Statement of Cash Flows (Indirect Method)  The indirect method is much more common  The two methods differ only in terms of the presentation of cash flows related to operating activities  There are no differences for inventing activities and financing activities Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Preparing the Statement of Cash Flows (Indirect Method)  step approach to calculate cash flows from operating activities – indirect Start with net income Add non-cash expenses such as depreciation and amortization Subtract gains and add back losses Subtract (add) increases (decreases) in current assets other than cash Add (subtract) increases (decreases) in current liabilities Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Preparing the Statement of Cash Flows (Indirect Method)  The operating activities section is a reconciliation of net income to cash flows from operating activities  Current assets  Increases in current assets indicate we must reduce income to convert to cash basis  Decreases indicate we must increase income to convert to cash basis Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Preparing the Statement of Cash Flows (Indirect Method)  Current liabilities  Increases in current liabilities indicate we must increase income to convert to cash basis  Decreases in current liabilities indicate we must reduce income to convert to cash basis Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Slide 13-33 Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Slide 13-34 Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Test Your Knowledge Using the indirect method, changes in current assets other than cash and current liabilities are used to adjust net income to determine: a Income from operations b Net cash from investing activities c Net cash provided by operating activities d None of the above Answer: c Net cash provided by operating activities Slide 13-35 Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows  In general, the most important part is the cash flows from operating activities  Unless a company is able to generate cash from its core operations, it is unlikely to succeed  If cash flows in this section are low, this implies that a company must offset them by changes in investing and financing decisions Slide 13-36 Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Statement of Cash Flows Slide 13-37 Learning objective 3: Prepare a statement of cash flows using the direct method and interpret information in the statement of cash flows Copyright © 2016 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Slide 13-38 .. .CHAPTER 13 Statement of Cash Flows Slide 13- 2 Need for a Statement of Cash Flows  Stakeholders want to know how a company... suppliers Payments to employees Purchase of land Payment of dividends Answer: c Purchase of land Slide 13- 13 Learning objective 1: Explain the need for the statement of cash flows and identify the three... Slide 13- 18 Learning objective 2: Prepare a statement of cash flows using the direct method Preparing the Statement of Cash Flows  Cash flows from financing activities      Slide 13- 19