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OF CASH
FLOWS
Learning Objectives
After studying this chapter, you should be able to:
1. Indicate the usefulness of the statement of cash flows.
2. Distinguish among operating, investing, and financing activities.
3. Explain the impact of the product life cycle on a companys cash
flows.
4. Prepare a statement of cash flows using the indirect method.
5. Use the statement of cash flows to evaluate a company.
Preview of Chapter 12
Investing
Activities
Financing
Activities
Income
Changes in
Investments and
Long-Term
Assets
Changes in
Long-Term
Liabilities and
Stockholders
Equity
Statement Items
Illustration 12-1
Typical receipt and
payment classifications
Illustration 12-1
Typical receipt and
payment classifications
Direct Method
Indirect Method
3. Financing activities.
Financing
Financing
Investing
Operating
Operating
Impact
of product life
cycle on
cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 3 Explain the impact of the product life cycle on a companys cash flows.
LO 4
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 companys
stockholders.
d. None of the above.
145,000
9,000
$
154,000
Operating Activities
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.
Operating Activities
Loss on Disposal of Plant Assets
Illustration 12-8
145,000
9,000
3,000
157,000
Operating Activities
Changes to Noncash Current Asset Accounts
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual basis.
Illustration 12-9
Accounts Receivable
1/1/014
Balance
Sales revenue
12/31/14
Balance
30,000
507,000
517,000
20,000
Operating Activities
Changes to Noncash Current Asset Accounts
Illustration 12-10
145,000
9,000
3,000
10,000
167,000
Operating Activities
Changes to Noncash Current Asset Accounts
When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.
Inventory
1/1/14
Balance
Purchases
12/31/14
Balance
10,000
155,000
150,000
15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
LO 4 Prepare a statement of cash flows using the indirect method.
Operating Activities
Changes to Noncash Current Asset Accounts
Illustration 12-10
145,000
9,000
3,000
10,000
Increase in inventory
(5,000)
162,000
Operating Activities
Changes to Noncash Current Asset Accounts
When the Prepaid Expenses 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.
Operating Activities
Changes to Noncash Current Asset Accounts
Illustration 12-10
145,000
9,000
3,000
10,000
Increase in inventory
(5,000)
(4,000)
158,000
Operating Activities
Changes to Noncash Current Liability Accounts
When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Taxes Payable decreases, the income tax
expense reported on the income statement was less than the
amount of taxes paid during the period. The decrease is
subtracted from net income to determine net cash provided by
operating activities.
Operating Activities
Changes to Noncash Current Liability Accounts
Illustration 12-11
145,000
9,000
3,000
10,000
Increase in inventory
(5,000)
(4,000)
16,000
(2,000)
172,000
LO 4
Operating Activities
Summary of Conversion to
Net Cash Provided by
Operating Activities
Indirect Method
Illustration 12-12
Balance
Issued bonds
12/31/14 Balance
20,000
110,000
130,000
Bonds Payable
1/1/14
Balance
For land
20,000
110,000
12/31/14 Balance
130,000
Illustration 12-14
172,000
20,000
(29,000)
(9,000)
22,000
33,000
55,000
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 4
Building
1/1/14
Balance
40,000
Office building 120,000
12/31/14 Balance
160,000
Illustration 12-14
172,000
20,000
(29,000)
(9,000)
22,000
33,000
55,000
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 4
1/1/14
Balance
Purchase
12/31/14 Balance
Journal
Entry
10,000
25,000
8,000
27,000
Cash
4,000
Accumulated Depreciation
1,000
Loss on Disposal of Plant Assets 3,000
Equipment
8,000
Statement
of Cash
Flows
Indirect
Method
Illustration 12-14
145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
55,000
LO 4
1/1/14
Balance
Shares sold
12/31/14 Balance
50,000
20,000
70,000
Partial statement
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
172,000
20,000
(29,000)
(9,000)
22,000
33,000
55,000
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 4
1/1/14
Dividends
29,000
Balance
Net income
12/31/14 Balance
48,000
145,000
164,000
Statement
of Cash
Flows
Indirect
Method
Illustration 12-14
145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
20,000
(29,000)
(9,000)
22,000
33,000
55,000
LO 4
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.
Illustration
Required:
Calculate
Microsofts free
cash flow.
Illustration 12-17
$37,529
7,452
0
$30,077
LO 5 Use the statement of cash flows to evaluate a company.
Appendix 12A
Statement of Cash Flows-Direct Method
1. Compute net cash provided by operating activities by
adjusting each item in the income statement from the
accrual basis to the cash basis.
2. Companies report only major classes of operating cash
receipts and cash payments.
Appendix 12A
Direct
Method
LO 6
Appendix 12A
Direct
Method
Illustration 12A-1
Appendix 12A
Direct
Method
Illustration 12A-1
Appendix 12A
Direct
Method
Illustration 12A-1
LO 4
Direct
Method
Appendix 12A
Cash Receipts from Customers
Accounts Receivable
1/1/014
Balance
Sales revenue
12/31/14 Balance
30,000
507,000
20,000
Illustration 12A-5
Direct
Method
Appendix 12A
Cash Payments to Suppliers
Balance
Purchases
10,000
155,000
12/31/14 Balance
15,000
Illustration 12A-8
Accounts Payable
Payments to suppliers
12/31/14 Balance
150,000
139,000
15,000
1/1/14
Balance
Purchases
12/31/14 Balance
12,000
155,000
28,000
Appendix 12A
Direct
Method
Appendix 12A
Direct
Method
Illustration 12A-11
Direct
Method
Appendix 12A
Cash Payments for Interest
42,000
1/1/14
Balance
Interest expense
12/31/14 Balance
0
42,000
0
Direct
Method
Appendix 12A
Cash Payments for Income Taxes
Cash payments for income taxes were $49,000.
Income Taxes Payable
Cash paid for taxes
49,000
1/1/14
Balance
Income tax expense
12/31/14 Balance
8,000
47,000
6,000
Illustration 12A-13
Appendix 12A
Direct
Method
Illustration 12A-14
Operating activities section
of the statement of cash flows
Direct
Method
Appendix 12A
Equipment
1/1/14
Balance
Purchases
12/31/14 Balance
10,000
25,000
8,000
27,000
Accumulated Depreciation
Equipment sold
1,000
1/1/14
Balance
Depreciation expense
12/31/14 Balance
1,000
3,000
3,000
Direct
Method
Appendix 12A
Cash
4,000
Accumulated Depreciation
1,000
3,000
Equipment
8,000
Appendix 12A
Direct
Method
Significant noncash
investing and financing
transaction.
Investing transaction.
Significant noncash
investing and financing
transaction.
Appendix 12A
Direct
Method
Financing transaction.
Financing transaction
(cash dividend).
Appendix 12A
Step 2:
Investing
and
Financing
Activities
Illustration 12A-16
Statement of cash
flows, 2014direct
method
Direct
Method
Appendix 12A
Direct
Method
Appendix 12B
What this means is that the change in cash is equal to the
change in all of the other balance sheet accounts.
Another way to think about this is that if we analyze the
changes in all of the noncash balance sheet accounts, we will
explain the change in the Cash account.
Illustration 12B-1
Appendix
12B
LO 7