Managerial Accounting-VII

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Managerial Accounting Ninth Edition

Weygandt Kimmel Mitchell

Chapter 13

Statement of Cash Flows

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Chapter Outline

Learning Objectives LO 1 Discuss the usefulness and format of the statement

of cash flows. LO 2 Prepare a statement of cash flows using the indirect

method. LO 3 Analyze the statement of cash flows.

Usefulness of the Statement of Cash Flows LEARNING OBJECTIVE 1 Discuss the usefulness and format of the statement of cash flows.

Provides information to help assess: 1. Entity’s ability to generate future cash flows. 2. Entity’s ability to pay dividends and meet obligations. 3. Reasons for difference between net income and net

cash provided (used) by operating activities. 4. Cash investing and financing transactions during the

period.

LO 1

Classification of Cash Flows Three classifications for cash receipts and payments

Operating Activities Investing Activities Financing Activities

Income Statement Items Changes in Investments and Long-Term Asset Items

Changes in Long-Term Liabilities and Stockholders’ Equity Items

LO 1

Classification of Cash Flows Operating activities Income statement items Cash inflows:

From sale of goods or services From interest received and dividends received

Cash outflows: To suppliers for inventory To employees for wages To government for taxes To lenders for interest To others for expenses

LO 1

Classification of Cash Flows Investing activities Changes in investments and long-term assets Cash inflows:

From sale of property, plant, and equipment From sale of investments in 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 investments in debt or equity securities of other entities To make loans to other entities

LO 1

Classification of Cash Flows Financing activities Changes in long-term liabilities and stockholders’ equity Cash inflows:

From sale of common and preferred stock From issuance of debt (bonds and notes)

Cash outflows: To stockholders as dividends To redeem long-term debt or reacquire capital stock (treasury stock)

LO 1

Significant Noncash Activities

1. Direct issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Direct issuance of debt to purchase assets. 4. Exchanges of plant assets. Companies report noncash activities in either a • separate schedule (bottom of the statement) or • separate note to the financial statements.

LO 1

Format of the Statement of Cash Flows Order of presentation

1. Operating activities o Direct Method o Indirect Method

2. Investing activities 3. Financing activities

LO 1

Format of the Statement of Cash Flows Illustration

Illustration 13.2

LO 1

DO IT! 1: Classification of Cash Flows

During its first week, Duffy & Stevenson Company had these transactions. Classify each transaction by type of cash flow activity.

1. Issued 100,000 shares of common stock at par for $800,000 cash.

Financing

2. Borrowed $200,000 from Castle Bank, signing a 5-year note bearing 8% interest.

Financing

3. Purchased two semi-trailer trucks for $170,000 cash.

Investing

4. Paid employees $12,000 for salaries and wages.

Operating

5. Collected $20,000 cash for services performed.

Operating

LO 1

Preparing the Statement of Cash Flows—Indirect Method

LEARNING OBJECTIVE 2 Prepare a statement of cash flows using the indirect method.

Three sources of information: 1. Comparative balance sheets 2. Current income statement 3. Additional information

LO 2

Indirect Method Step 1 Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Step involves analyzing the current year’s income statement, comparative balance sheets, and selected additional data.

LO 2

Indirect Method Step 2 Analyze changes in noncurrent asset and liability accounts and stockholders’ equity accounts and report as investing and financing activities or disclose as noncash transactions. Step involves analyzing comparative balance sheet data and selected additional information for their effects on cash.

LO 2

Indirect Method Step 3 Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree. Difference between beginning and ending cash balances can be easily computed from comparative balance sheets.

LO 2

Indirect and Direct Methods

Companies favor the indirect method for two reasons: 1. Easier and less costly to prepare. 2. Focuses on differences between net income and net

cash flow from operating activities.

LO 2

Indirect Method Income statement

Illustration 13.4 (partial)

LO 2

Indirect Method Comparative balance sheets

Illustration 13.4 (partial)

LO 2

Indirect Method Comparative balance sheets continued

Illustration 13.4 (partial)

LO 2

Indirect Method Additional information for 2022 1. Depreciation expense was comprised of $6,000 for building and

$3,000 for equipment. 2. The company sold equipment with a book value of $7,000 (cost

$8,000, less accumulated depreciation $1,000) for $4,000 cash. 3. Issued $110,000 of long-term bonds in direct exchange for land. 4. A building costing $120,000 was purchased for cash. Equipment

costing $25,000 was also purchased for cash. 5. Issued common stock at par for $20,000 cash. 6. The company declared and paid a $29,000 cash dividend.

LO 2

Step 1: Operating Activities Common adjustments to Net Income (Loss) Determine Net Cash Provided/Used by Operating Activities by Converting Net Income from an Accrual Basis to a Cash Basis • Add back non-cash expenses (depreciation, amortization,

or depletion expense) • Deduct gains and add losses • Analyze changes in noncash current asset and current

liability accounts

LO 2

Step 1: Operating Activities Review Question Which is an example of a cash flow from an operating activity? a. Payment of cash to lenders for interest b. Receipt of cash from the sale of capital stock c. Payment of cash dividends to the company’s

stockholders d. None of the above

LO 2

Step 1: Operating Activities Review Answer Which is an example of a cash flow from an operating activity? a. Answer: Payment of cash to lenders for interest b. Receipt of cash from the sale of capital stock c. Payment of cash dividends to the company’s

stockholders d. None of the above

LO 2

Step 1: Operating Activities Depreciation Expense Although depreciation expense reduces net income, it does not reduce cash. The company must add it back to net income.

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation expense 9,000

Net cash provided by operating activities $154,000

LO 2

Step 1: Operating Activities Gain/Loss on Disposal of Plant Assets Companies report as a source of cash in the investing activities section the actual amount of cash received from the sale. • Any loss on disposal is added to net income in operating

section • Any gain on disposal is deducted from net income in

operating section

LO 2

Step 1: Operating Activities Loss on Disposal of Plant Assets

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation expense 9,000 Loss on disposal of plant assets 3,000 12,000

Net cash provided by operating activities $157,000

LO 2

Step 1: Operating Activities Changes in Accounts Receivable When Accounts Receivable balance decreases, cash receipts are higher than revenue earned under accrual basis.

Illustration 13.8

Company adds the amount of decrease in accounts receivable to net income.

LO 2

Step 1: Operating Activities Adjustment for changes in Accounts Receivable

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation expense 9,000 Loss on disposal of plant assets 3,000 Decrease in accounts receivable 10,000 22,000

Net cash provided by operating activities $167,000

LO 2

Step 1: Operating Activities Changes in Inventory When Inventory balance increases, cost of merchandise purchased exceeds cost of goods sold.

Company deducts increase in inventory from net income.

LO 2

Step 1: Operating Activities Adjustment for changes in Inventory

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation expense 9,000 Loss on disposal of plant assets 3,000 Decrease in accounts receivable 10,000 Increase in inventory (5,000) 17,000

Net cash provided by operating activities $162,000

LO 2

Step 1: Operating Activities Changes in Prepaid Expenses

When the Prepaid Expense balance increases, cash paid for expenses is higher than expenses reported on an accrual basis. The company deducts the decrease from net income to arrive at net cash provided by operating activities. If prepaid expenses decrease, reported expenses are higher than the expenses paid.

LO 2

Step 1: Operating Activities Adjustment for changes in Prepaid Expenses

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

cash provided by operating activities: Depreciation expense 9,000 Loss on disposal of plant assets 3,000 Decrease in accounts receivable 10,000 Increase in inventory (5,000) Increase in prepaid expenses (4,000) 13,000

Net cash provided by operating activities $158,000

LO 2

Step 1: Operating Activities Changes in Current Liabilities

When Accounts Payable increases, company received more in goods than it actually paid for. Increase is added to net income to determine net cash provided by operating activities. When Income Tax Payable decreases, income tax expense reported on the income statement was less than amount of taxes paid during period. Decrease is subtracted from net income to determine net cash provided by operating activities.

LO 2

Step 1: Operating Activities Adjustments for changes in Current Liabilities

Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to net

Net cash provided by operating activities $172,000

LO 2

Step 1: Operating Activities Net Income to Net Cash Provided by Operating Act.

Illustration 13.11

LO 2

DO IT! 2a: Cash from Operating Act. Problem data Josh’s PhotoPlus reported net income of $73,000 for 2022. Included in the income statement were depreciation expense of $7,000 and a gain on disposal of plant assets of $2,500. Josh’s comparative balance sheets show the following balances.

12/31/21 12/31/22

Accounts receivable $17,000 $21,000

Accounts payable 6,000 2,200

Calculate net cash provided by operating activities for Josh’s PhotoPlus.

LO 2

DO IT! 2a: Cash from Operating Act. Solution Calculate net cash provided by operating activities.

LO 2

Step 2: Investing and Financing Act. Increase in Land Company purchased land of $110,000 by issuing long- term bonds.

LO 2

Step 2: Investing and Financing Act. Significant noncash investing and financing activity

Noncash investing and financing activates Issuance of bonds payable to purchase land $ 110,000

LO 2

Step 2: Investing and Financing Act. Increase in Building From the additional information, the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section.

LO 2

Step 2: Investing and Financing Act. Purchase of building

Net cash provided by operating activities $172,000 Cash flows from investing activities:

Purchase of building $(120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash provided by investing activities (141,000) Cash flows from financing activities:

Issuance of common stock 20,000 Payment of cash dividends (29,000)

Net cash provided by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period $55,000

LO 2

Step 2: Investing and Financing Act. Increase in Equipment The equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000.

LO 2

Step 2: Investing and Financing Act. Journal entry for sale of equipment

Cash 4,000 Accumulated Depreciation 1,000 Loss on Disposal of Equipment 3,000

Equipment 8,000

LO 2

Step 2: Investing and Financing Act. Purchase and sale of equipment

LO 2

Step 2: Investing and Financing Act. Increase in common stock The increase in common stock resulted from the issuance of new shares.

LO 2

Step 2: Investing and Financing Act. Issuance of common stock

Net cash provided by operating activities $172,000 Cash flows from investing activities:

Purchase of building $(120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash provided by investing activities (141,000) Cash flows from financing activities:

Issuance of common stock 20,000 Payment of cash dividends (29,000)

Net cash provided by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period $55,000

LO 2

Step 2: Investing and Financing Act. Increase in Retained Earnings Retained earnings increased $116,000 during the year. This increase can be explained by two factors: (1) Net income of $145,000 increased retained earnings, and (2) Dividends of $29,000 decreased retained earnings.

LO 2

Step 2: Investing and Financing Act. Statement of cash flows 2022 – indirect method

LO 2

Step 2: Investing and Financing Act. Review Question

Which is an example of a cash flow from an investing activity? a. Receipt of cash from the issuance of bonds payable. b. Payment of cash to repurchase outstanding capital

stock. c. Receipt of cash from the sale of equipment. d. Payment of cash to suppliers for inventory.

LO 2

Step 2: Investing and Financing Act. Review Answer

Which is an example of a cash flow from an investing activity? a. Receipt of cash from the issuance of bonds payable. b. Payment of cash to repurchase outstanding capital

stock. c. Answer: Receipt of cash from the sale of equipment. d. Payment of cash to suppliers for inventory.

LO 2

Step 3: Net Change in Cash

Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree

LO 2

Analyzing the Statement of Cash Flows LEARNING OBJECTIVE 3

Analyze the statement of cash flows.

Free Cash Flow Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.

Illustration 13.15

Free Cash Flow

= Net cash Provided by Operating

Activities

− Capital Expenditures

− Cash Dividends

LO 3

Free Cash Flow

Calculate Apple’s free cash flow.

Illustration 13.16

Illustration 13.17

Net cash provided by operating activities $69,391

Less: Expenditures on property, plant, and equipment

10,495

Dividends paid 14,119

Free cash flow $44,777

LO 3

Preparing the Statement of Cash Flows – Direct Method LEARNING OBJECTIVE *4 Prepare a statement of cash flows using the direct method.

Under the direct method, companies calculate just the operating activities section differently

LO 4

Appendix 13A Statement of Cash Flows- Direct Method • Compute net cash provided by operating activities by

adjusting each item in the income statement from accrual basis to cash basis

• Companies report only major classes of operating cash receipts and cash payments

• For these major classes, difference between cash receipts and cash payments is net cash provided by operating activities

LO 4

Step 1: Operating Activities Illustration 13A.2

LO 4

Direct Method Income statement

Illustration 13A.1 (partial)

LO 4

Direct Method Comparative balance sheets

Illustration 13A.1 (partial)

LO 4

Direct Method Comparative balance sheets continued

Illustration 13A.1 (partial)

LO 4

Direct Method Additional information for 2022 1. Depreciation expense was comprised of $6,000 for

building and $3,000 for equipment. 2. The company sold equipment with a book value of $7,000

(cost $8,000, less accumulated depreciation $1,000) for $4,000 cash.

3. Issued $110,000 of long-term bonds in direct exchange for land.

4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash.

5. Issued common stock for $20,000 cash. 6. The company declared and paid a $29,000 cash dividend. LO 4

Step 1: Operating Activities Cash Receipts from Customers For Computer Services, accounts receivable decreased $10,000.

Illustration 13A.4

Illustration 13A.5

LO 4

Step 1: Operating Activities Cash Payments to Suppliers Inventory increased $5,000, cash payments to suppliers were $139,000.

Illustration 13A.7

Illustration 13A.9

LO 4

Step 1: Operating Activities Equation to compute cash payments to suppliers Inventory increased $5,000, cash payments to suppliers were $139,000.

Illustration 13A.10

LO 4

Step 1: Operating Activities Equation for cash payments for operating expenses

Illustration 13A.11

Operating expenses $111,000

Add: Increase in prepaid expenses 4,000

Cash payments for operating expenses $115,000

Illustration 13A.12

LO 4

Step 1: Operating Activities Cash Payments for Interest

Computer Services reported interest expense of $42,000 on the income statement.

LO 4

Step 1: Operating Activities Equation for cash payments for income taxes Computer Services reported income tax expense of $47,000 on the income statement.

Illustration 13A.14

Illustration 13A.15

LO 4

Step 1: Operating Activities Operating activities section

Illustration 13A.16

Cash flows from operating activities

Cash receipts from customers $517,000

Less: Cash payments:

To suppliers $139,000

For operating expenses 115,000

For interest expense 42,000

For income taxes 49,000 345,000

Net cash provided by operating activities

$172,000

LO 4

Step 2: Investing and Financing Act. Increase in Equipment-same as indirect approach Increase in Equipment. (1) Equipment purchased for $25,000, and (2) equipment sold for $4,000, cost $8,000, book value $7,000.

Illustration 13A.17

LO 4

Step 2: Investing and Financing Act. JE for sale of equipment-same as indirect approach

Cash 4,000 Accumulated Depreciation-Equipment 1,000 Loss on Disposal of Plant Assets 3,000

Equipment 8,000

LO 4

Step 2: Investing and Financing Act. Changes in Noncurrent Assets and Liab. Accounts

Increase in Land. Land increased $110,000. The company purchased land of $110,000 by issuing bonds.

Significant noncash investing and financing

transaction

Increase in Building. Acquired building for $120,000 cash.

Investing transaction

Increase in Bonds Payable. Bonds Payable increased $110,000. The company acquired land by exchanging bonds for land.

Significant noncash investing and

financing transaction

LO 4

Step 2: Investing and Financing Act. Changes in Stockholders’ Equity Accounts

Increase in Common Stock. Increase in Common Stock of $20,000. Increase resulted from the issuance of new shares of stock.

Financing transaction

Increase in Retained Earnings. The $116,000 net increase in Retained Earnings resulted from net income of $145,000 and the declaration and payment of a cash dividend of $29,000.

Financing transaction (cash

dividend)

LO 4

Step 2: Investing and Financing Act. Statement of cash flows 2022 – direct method

Illustration 13A.18

LO 4

Step 3: Net Change in Cash Identical to the indirect method

Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree

LO 4

Worksheet for the Indirect Method

LEARNING OBJECTIVE *5 Use a worksheet to prepare the statement of cash flows using the indirect method.

Companies may use a worksheet to assemble and classify data that will appear on the statement of cash flows. The worksheet is merely an aid in preparing the statement. Its use is optional.

LO 5

App. 13B Worksheet Indirect Method Format of worksheet

Illustration 13B.1

LO 5

Cash Flows – T-Account Approach

LEARNING OBJECTIVE *6 Use the T-account approach to prepare a statement of cash flows.

Many people like to use T-accounts to provide structure to the preparation of a statement of cash flows. The use of T-accounts is based on the accounting equation:

Assets = Liabilities + Stockholders’ Equality

LO 6

Appendix 13C T-Account Approach

The change in cash is equal to the change in all of the other balance sheet accounts. If we analyze the changes in all of the noncash balance sheet accounts, we will explain the change in the cash account.

LO 6

Appendix 13C T-Account Approach Illustration

Illustration 13C.1

LO 6

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Managerial Accounting
Chapter Outline
Usefulness of the Statement of Cash Flows
Classification of Cash Flows�Three classifications for cash receipts and payments
Classification of Cash Flows�Operating activities
Classification of Cash Flows�Investing activities
Classification of Cash Flows�Financing activities
Significant Noncash Activities
Format of the Statement of Cash Flows�Order of presentation
Format of the Statement of Cash Flows�Illustration
DO IT! 1: Classification of Cash Flows
Preparing the Statement of Cash Flows—Indirect Method
Indirect Method�Step 1
Indirect Method�Step 2
Indirect Method�Step 3
Indirect and Direct Methods
Indirect Method�Income statement
Indirect Method�Comparative balance sheets
Indirect Method�Comparative balance sheets continued
Indirect Method�Additional information for 2022
Step 1: Operating Activities�Common adjustments to Net Income (Loss)
Step 1: Operating Activities�Review Question
Step 1: Operating Activities�Review Answer
Step 1: Operating Activities�Depreciation Expense
Step 1: Operating Activities�Gain/Loss on Disposal of Plant Assets
Step 1: Operating Activities�Loss on Disposal of Plant Assets
Step 1: Operating Activities�Changes in Accounts Receivable
Step 1: Operating Activities�Adjustment for changes in Accounts Receivable
Step 1: Operating Activities�Changes in Inventory
Step 1: Operating Activities�Adjustment for changes in Inventory
Step 1: Operating Activities�Changes in Prepaid Expenses
Step 1: Operating Activities�Adjustment for changes in Prepaid Expenses
Step 1: Operating Activities�Changes in Current Liabilities
Step 1: Operating Activities�Adjustments for changes in Current Liabilities
Step 1: Operating Activities�Net Income to Net Cash Provided by Operating Act.
DO IT! 2a: Cash from Operating Act.�Problem data
DO IT! 2a: Cash from Operating Act.�Solution
Step 2: Investing and Financing Act.�Increase in Land
Step 2: Investing and Financing Act.�Significant noncash investing and financing activity
Step 2: Investing and Financing Act.�Increase in Building
Step 2: Investing and Financing Act.�Purchase of building
Step 2: Investing and Financing Act.�Increase in Equipment
Step 2: Investing and Financing Act.�Journal entry for sale of equipment
Step 2: Investing and Financing Act.�Purchase and sale of equipment
Step 2: Investing and Financing Act.�Increase in common stock
Step 2: Investing and Financing Act.�Issuance of common stock
Step 2: Investing and Financing Act.�Increase in Retained Earnings
Step 2: Investing and Financing Act.�Statement of cash flows 2022 – indirect method
Step 2: Investing and Financing Act.�Review Question
Step 2: Investing and Financing Act.�Review Answer
Step 3: Net Change in Cash
Analyzing the Statement of Cash Flows
Free Cash Flow
Preparing the Statement of Cash Flows – Direct Method
Appendix 13A Statement of Cash Flows-�Direct Method
Step 1: Operating Activities
Direct Method�Income statement
Direct Method�Comparative balance sheets
Direct Method�Comparative balance sheets continued
Direct Method�Additional information for 2022
Step 1: Operating Activities�Cash Receipts from Customers
Step 1: Operating Activities�Cash Payments to Suppliers
Step 1: Operating Activities�Equation to compute cash payments to suppliers
Step 1: Operating Activities�Equation for cash payments for operating expenses
Step 1: Operating Activities�Cash Payments for Interest
Step 1: Operating Activities�Equation for cash payments for income taxes
Step 1: Operating Activities�Operating activities section
Step 2: Investing and Financing Act.�Increase in Equipment-same as indirect approach
Step 2: Investing and Financing Act.�JE for sale of equipment-same as indirect approach
Step 2: Investing and Financing Act.�Changes in Noncurrent Assets and Liab. Accounts
Step 2: Investing and Financing Act.�Changes in Stockholders’ Equity Accounts
Step 2: Investing and Financing Act.�Statement of cash flows 2022 – direct method
Step 3: Net Change in Cash�Identical to the indirect method
Worksheet for the Indirect Method
App. 13B Worksheet Indirect Method�Format of worksheet
Cash Flows – T-Account Approach
Appendix 13C T-Account Approach
Appendix 13C T-Account Approach�Illustration
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