Review of Chapter 9/10

Current liabilities and Contingent Liabilities

Financing with Bonds versus Capital Shares
Accounts payable turnover, Earnings per share,
Times Interest Earned & Debt Ratio
Issuing Shares
Repurchasing shares
Cash Dividends and Stock Dividends
Return on assets
Return on equity

The Statement of Cash Flows

Chapter 12

Objective 1
Explain the uses of
the statement of cash flows

The Statement of Cash Flows

The statement of cash flows

reports the entitys cash flows
(cash receipts and cash payments)
during the period.

Purposes of the Cash Flow

Statement
The statement of cash flows serves the following purposes:
1. Predict future cash flows
2. Evaluate management decisions
3. Determine the companys ability to pay dividends to
shareholders and payments to creditors
4. Show the relationship of net income
to the businesss cash flows

What is Cash?
cash on hand

cash in the bank cash equivalents

Cash equivalents are highly liquid,

short-term investments that can be
converted into cash with little delay.
Money-market investments
Canadian government securities

Objective 2
Explain and classify cash flows
from operating, investing, and
financing activities

Operating, Investing, and

Financing Activities
A business engages in three
types of business activities:
Operating activities
Investing activities
Financing activities

Operating, Investing, and

Financing Activities
Operating activities create revenues,
expenses, gains, and losses.
Investing activities include
long-term assets, investments and
loaning money.
Financing activities include changes
relating to contributed equity (investors)
& borrowings (creditors).

Two Formats for

Operating Activities
Indirect Method
Net income
Adjustments:
Depreciation, etc.
Net income provided by operating activities
Direct Method
Collection from customers
Deductions:
Payment to suppliers, etc.
Net income provided by operating activities

$XXX
XXX
$XXX
$XXX
XXX
$XXX

Objective 3
Prepare a statement of cash flows
using the indirect method
of determining cash flows
from operating activities

Cash Flows from Operating

Activities
Operating activities are related to the
transactions that make up net income
It begins with net income, taken from the net
income, and is followed by adjustments to
reconcile net income to cash

Operating Activities Indirect

Method
Adjustments to net income include:
Depreciation expense
Gains and losses on the sale of long-term
assets
Changes in the current assets and current
liabilities account

Operating Activities Indirect Method

Net income is adjusted for:
Depreciation is an allocation of a cost; no effect on
cash. Since it is deducted as an expense, it must be
added back to net income (to cancel the deduction)
Gains/(Losses) results from selling long-term assets.
Originally, it is added (deducted) from net income but
since it doesnt represent cash (also, it is an investing
activity), it must be subtracted(added) back

Operating Activities Indirect Method

Changes in non-cash working capital accounts:
Add:

Decreases in current assets (not cash)

Increases in current liabilities

Subtract: Increases in current assets (not cash)

Decreases in current liabilities

Operating Activities Indirect

Method
Start with Net income
Add:
Depreciation expense
Losses from sales of assets
Deduct:
Gains from sales of assets
Add/Deduct: Non-cash changes in working capital
Add:
Decreases in current assets (not cash)
Increases in current liabilities
Deduct:
Increases in current assets (not cash)
Decreases in current liabilities

Operating Activities Indirect Method

Steps
1. Determine the change in cash from last year
to this year.
2. Determine the change in non-cash working
capital accounts using the balance sheet
3. Start with net income and add back
depreciation and losses and deduct any gains.
4. Add or subtract where applicable, the change
(increase or decrease) in non-cash working
capital accounts

Question #1
Net income
$750,000
Accounts receivable (net)
16,000 decrease
Inventory
14,500 increase
Prepaid insurance
2,900 increase
Accounts payable
15,200 decrease
The amount of cash provided by operations is:
a. $740,600
b. $750,000
c. $733,400

Investing Activities
Cash Receipts
Sales of assets (investments, land, building,
equipment, intangible assets and so on)
Collections of loans receivable
Cash Payments
Purchase of assets (investments,land, building,
equipment, intangible assets and so on)
Loans to others

Cash Flow Statement:

Investing Activities
Cash Flow Statement
For the Year Ended December 31, 2014 (In thousands)

Cash flows from investing activities:

Acquisition of property,plant&equip
$(306)
Loan to another company
(11)
Proceeds from sale of prop,plant&equip
62
Net cash used for investing activities $(255)

Computing Acquisition and

Sales of Property, Plant &
Equipment
Property, Plant & Equipment (Net)
Beginning balance
Acquisitions
Ending balance

Depreciation
Carrying amount of assets sold

Computing Acquisition and

Sales of Property, Plant &
Equipment
From the sale of property, plant & equipment:

Cash received = Carrying amount + Gain-Loss

Computing Acquisition and

Sales of Investments
Investments
Beginning balance
Purchases
Ending balance

Carrying amount of investments

sold

Computing Loans Made & Their

Collections
Loans and Notes Receivable
Beginning balance
New loans made
Ending balance

Collections

Question #2
The gain portion of a gain on the sale of
machinery would be shown on the cash flow
statement as
a.
b.
c.
d.

An increase to operating activities

A decrease to investing activities
An increase to investing activities
A decrease to operating activities

The Indirect Method:

Financing Activities
Cash Receipts
Issuance of shares
Sale of shares
Borrowing (issuance of notes or bonds
payable)
Cash Payments
Repurchase of shares
Payment of notes or bonds payable
Payment of dividends

Cash Flow Statement:

Financing Activities
Cash Flow Statement (Indirect Method)
For the Year Ended December 31, 2014 (In thousands)

Cash flows from financing activities:

Proceeds from issuance of common shares $101
Proceeds from issuance of long-term debt
94
Payment of long-term debt
(11)
Payment of dividends
(17)
Net cash provided by financing activities $167

Computing Issuances and

Payments of Debt
Notes payable
Payments

Beginning balance
Issuance of new debt
Ending balance

Computing Issuances and

Repurchases of Shares
Common Shares
Repurchase of shares

Beginning balance
Issuance of new shares
Ending balance

Computing Dividend Payments

Retained Earnings
Dividend declarations
and payments

Beginning balance
Net income
Ending balance

Question #3
In 2011, ABC Company borrowed $50,000 (due
in 5 years), paid dividends of $12,000, issued
2,000 shares of stock for $30 per share,
purchased land for $24,000 and received
dividends of $6,000. Net income was $85,000.
How much should be reported as net cash
provided by financing activities?
a. $110,000

b. $80,000

c. 98,000

Noncash Investing and

Financing Activities
Suppose Bradshaw Corporation issued common
shares valued at $320,000 to acquire a warehouse.
Warehouse Building
Common Shares

320,000
320,000

Noncash Investing and

Financing Activities
Non cash investing and financing activities are
disclosed in a note to the financial statements
They are not reported on the cash flow statement
because they do not involve cash

Measuring Cash Adequacy:

Free Cash Flow
Free cash flow is the amount of cash available from
operations after paying for planned investments in
property, plant & equipment,
Free cash flow
=
Net cash flow from operating activities

Cash outflow earmarked for investments in

property, plant & equipment

Question #4
A firms predominate recurring source of cash
over the long-run should be:
a.
b.
c.
d.

Borrowing
Sale of nonrecurring assets
Sale of capital stock
Operations

End of Chapter
12