Prepare a statement of cash flow

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 1 of 8

Purpose of the Statement of Cash Flows • Reports a firm’s major cash inflows and outflows for a period. • Provides useful information about a firm’s ability to generate cash from operations,

maintain and expand its operating capacity, meet financial obligations, and pay dividends.

• One of the basic financial statements. o Income Statement o Statement of Retained Earnings o Statement of Cash Flows

Importance of Cash Flows

• We look more favorably at a company that is financing its expenditures with cash from operations than one that does it by selling its assets

• Whether company has enough cash to pays its existing debts as they mature. Classifications:

:

Cash Flows from Operating Activities Include those transactions and events that determine net income.

• Cash inflows include o Cash from sales o Cash from credit collections o Cash from interest income

• Cash outflows include o Cash to pay bills

Operating Activities

Investing Activities

Financing Activities

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 2 of 8

o Cash to pay for merchandise o Cash to pay taxes

Cash Flows from Investing Activities

Generally include those transactions and events that affect long-term assets. • Purchase and sale of short-term investments • Lending and collecting money for notes receivable • Cash inflows

o From selling securities o From selling notes o From collecting principal on loans o From selling assets

• Cash outflows o To make loans to others o To purchase securities o To purchase assets

Cash Flows from Financing Activities

Include those transactions and events that affect long-term liabilities and equity • Obtaining cash from issuing debts and repaying the amounts borrowed • Receiving cash from or distributing cash to owners • Cash inflows

o Received monies from loans issued o Received monies from stock sold o Received monies from bonds issued

• Cash outflows o Paid on principal of loans o Purchased treasury stock o Redeemed bonds

Noncash Investing and Financing

When important investing and financing activities do not affect cash receipts or payments, they are still disclosed.

• Exchange of stocks for bonds

The sum of these three sections is the difference in cash between last year and this year.

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 3 of 8

Format of the Statement of Cash Flows Company Name

Statement of Cash Flows For period ended

Cash flows from operating activities: Cash inflows -Cash outflows Net cash provided by operating activities $$$$ Cash flows from investing activities: Cash inflows -Cash outflows Net cash provided by operating activities $$$$ Cash flows from financing activities: Cash inflows -Cash outflows Net cash provided by operating activities $$$$ Net increase (decrease) in cash $$$ Cash balance at beg of period $$$ Cash balance at end of period $$$

Two methods of Preparing the Statement

• Direct Method – requires an analysis of the cash account • Indirect Method – requires analysis of the financial statements

Indirect Method: • Steps

o Find the differences in the Balance Sheet account balances for last year and this year

Jason Enterprises Comparative Balance Sheet

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 4 of 8

For year ended 2011 and 2010 2011 2010 Difference CASH $140,350 $95,900 $44,450 TRADE RECEIVABLES $95,300 $102,300 -$7,000 INVENTORIES $165,200 $157,900 $7,300 PREPAID EXP $6,240 $5,860 $380 INVESTMENTS $35,700 $84,700 -$49,000 LAND $75,000 $90,000 -$15,000 BUILDING $375,000 $260,000 $115,000 ACCUM DEP -$71,300 -$58,300 -$13,000 MACHINERY $428,300 $428,300 $0 ACCUM DEP -$148,500 -$138,000 -$10,500 PATENTS $58,000 $65,000 -$7,000 TOTAL $1,159,290 $1,093,660 $65,630 ACCOUNTS PAY $43,500 $46,700 -$3,200 ACCRUED EXP $14,000 $12,500 $1,500 INCOME TAX PAY $7,900 $8,400 -$500 DIV PAYABLE $14,000 $10,000 $4,000 MORTGAGE $40,000 $0 $40,000 BOND $150,000 $250,000 -$100,000 COMMON STOCK $450,000 $375,000 $75,000 PAID IN CAPITAL $66,250 $41,250 $25,000 RETAINED EARNINGS $373,640 $349,810 $23,830 $1,159,290 $1,093,660 $65,630 Jason Enterprises Income Statement For year ended 2011

SALES $1,180,000 COST OF MERCHANDISE $790,000 GROSS PROFIT $390,000 OPERATING EXPENSES DEPRECIATION $23,500 PATENT AMORTIZATION $7,000 OTHER OPERATING $196,000 TOTAL $223,500 INCOME FROM OPERATIONS $163,500 OTHER INCOME GAIN ON SALE OF INVESTMENTS $11,000 OTHER EXPENSES

INTEREST EXPENSE $26,000 -$15,000 INCOME BEFORE TAXES $148,500

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 5 of 8

INCOME TAX $50,000 NET INCOME $98,500

o Analyze the General Ledger accounts

Land costing $15,000 was sold for $15,000 A mortgage note was issued for $40,000 Building costing $115,000 constructed 2,500 shares of common stock were issued at 40 in exchange for bonds payable Cash dividends declared were $74,670

Operating Activities: Begin with operating section by starting with net income

• Add any items that are included in net income that are not part of operations. o Such as gains or losses on sale of investments, depreciation, and amortization.

• Follow by changes in current assets and current liabilities o Decreases in current assets increases cash flows since assets are used instead of

purchasing new ones o Increases in current liabilities increase cash flows since we incur debt instead of

paying o Increases in current assets decrease cash flows since monies are used to buy

assets o Decreases in current liabilities decrease cash flows since monies are used to pay

bills o Current assets

 Accounts receivable  Merchandise inventory  Prepaid expenses

o Current liabilities  Accounts payable  Accrued expenses  Salaries payable  Income taxes payable

» STEPS: 1. Take the comparative balance sheet and computed the differences in the end of year balances

for all accounts. 2. Review the general ledger for any major transactions which affect cash 3. Review the income statement 4. Begin with net income 5. Add back items that cause a cash inflow 6. Deduct items that cause a cash outflow 7. Adjust for items on income statement that are not operating transactions.

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 6 of 8

Jones Company Statement of Cash Flows For period ended December 31, 2011 Net cash flows from operations: Net income from operations $98,500.00 ADD: Depreciation $23,500.00 Patent amortization $7,000.00 Decrease in trade receivables $7,000.00 Increase in accrued expenses $1,500.00 $39,000.00 DEDUCT: Increase in inventories $7,300.00 Increase in prepaid expenses $380.00 Decrease in accounts payable $3,200.00 Decrease in income tax payable $500.00 Gain on sale of investments $11,000.00 -$22,380.00 Net cash flows from operations $115,120.00

Note that the majority of the information came from the balance sheet or the income statement. Amounts from the balance sheet were the differences between years. For the investing section:

• Review the income statement for sale of long-term assets which cause a cash inflow. Report the total cash collected not the change in the balance sheet account.

• Review the long-term asset accounts in the balance sheet for changes in these accounts • Purchase of long-term assets are cash outflows even if paid on account

To complete the financing section:

• Report issuance of mortgages and payment of principal

Net cash flows from investing Cash inflows: Sale of land $15,000.00 Sale of investments $60,000.00 $75,000.00 Cash outflows: Construction of building $115,000.00 -$115,000.00 Net cash flows from investing -$40,000.00

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 7 of 8

• Report issuance of stock at the selling price • Report the issuance of bonds at the selling price • Report the payment of the company’s dividends

Dividends: computation

Beginning dividends payable as of Dec 31, 2005 $10,000

Cash dividends declared $74,670

Total dividends owed $84,670

Ending dividends payable as of Dec 31, 2006 $14,000

Dividends paid $70,670

Net cash flows from financing Cash inflows: Mortgage issued $40,000.00 Cash outflows: Dividends paid $70,670.00 * Net cash flows from financing -$30,670.00 Net increase in cash $44,450.00 Beginning cash balance $95,900.00 Ending cash balance $140,350.00

Jones Company Statement of Cash Flows For period ended December 31, 2011 Net cash flows from operations: Net income from operations $98,500.00 ADD: depreciation $23,500.00 Patent amortization $7,000.00 Decrease in trade rec $7,000.00 Increase in accrued exp $1,500.00 $39,000.00 DEDUCT: Increase in inventories $7,300.00 Increase in prepaid exp $380.00 Decrease in accts pay $3,200.00 Decrease in income tax $500.00 Gain on sale of investments. $11,000.00 -$22,380.00

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari Fall, 20011-2 Page 8 of 8

Schedule of Non Cash Activities:

• Listed on the bottom of statement of cash flows • Shows exchanges

Net cash flows from operations $115,120.00 Net cash flows from investing Cash inflows: Sale of land $15,000.00 Sale of investments $60,000.00 $75,000.00 Cash outflows: Construction of building $115,000.00 -$115,000.00 Net cash flows from investing -$40,000.00 Net cash flows from financing Cash inflows: Mortgage issued $40,000.00 Cash outflows: Dividends paid $70,670.00 Net cash flows from financing -$30,670.00 Net increase in cash $44,450.00 Beginning cash balance $95,900.00 Ending cash balance $140,350.00