Chapter 23 - SCF

Chapter 23 Statement of Cash Flows Primary Purpose o Provide information about a companys cash receipts and cash payments during a period Secondary Objective o Provide cash-basis information about a companys operating, investing and financing activities Q1 - The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of an entity during a period. b. that is useful in assessing cash flow prospects. c. about the cash receipts and cash payments of an entity during a period. d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing.

Usefulness of the Statement of Cash Flows Provides information to help assess: o Entitys ability to generate future cash flows o Entitys ability to pay dividends and obligations o Reasons for difference between net income and net cash flow from operating activities o Cash and noncash investing and financing transactions Classification of Cash Flows 1. Operating Activities a. Income statement transactions 2. Investing Activities a. Changes in investments and long-term asset items 3. Financing Activities a. Changes in long-term liabilities and stockholders equity Operating Activities Income Statement Items Involve the cash effects of transactions that enter into the determination of net income o Cash Inflows From sales of goods or services From returns on loans (interest) or on equity securities (dividends) o Cash Outflows To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses

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Investing Activities Generally Long Term Asset Items Cash Inflows o From sale of property, plant & equipment o From sale of debt or equity securities of other entities o From collection of principal on loans to other entities Cash Outflows o To purchase property, plant & equipment o To purchase debt or equity securities of other entities o To make loans to other entities Financing Activities Generally Long Term Liability & Equity Items Cash Inflows o From sale of equity securities o From issuance of debt (bonds & notes) Cash Outflows o To stockholders as dividends o To redeem long-term debt or reacquire capital stock Example 1 Classify the following items as (1) Operating, (2) investing, (3) financing or (4) significant noncash investing and financing activities a. Purchase of equipment b. Redemption of bonds payable c. Sale of building d. Cash payment to suppliers e. Exchange of equipment for furniture f. Issuance of preferred stock g. Cash received from customers h. Purchase of treasury stock i. Issuance of bonds for land j. Payment of dividends k. Cash payments to employees l. Cash payments for operating expenses m. Received dividends Cash = Cash + Cash Equivalents Cash Equivalents Short term, highly liquid investments that are both: 1. Readily convertible to known amounts of cash and 2. So near their maturity that they present insignificant risk of changes in interest rates Generally, only investments with original maturities of three months or less qualify under this definition

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Example 1 - Cash & Cash Equivalent Compute the amount of cash & cash equivalents on Qs Corps balance sheet if on the balance sheet date, it has: o Coins and currency on hand of $500 o Deposits in checking accounts of $3,000 o U.S. Treasury bill due in 80 days of $30,000 o U.S. Treasury bond due in 200 days $50,000 Example 2 - Cash & Cash Equivalent Compute the amount of cash & cash equivalents on Qs Corps balance sheet if on the balance sheet date, it has: o Coins and currency in cash registers of $2,800 o Money orders from customers $5,000 o Deposits in checking accounts of $32,000 o U.S. Treasury bill due in 70 days of $90,000 o Certificate of deposit at the bank that matures in 6 months $100,000 o U.S. Treasury bond due in 1 year $50,000 Q2 - Cash equivalents are
a. treasury bills, commercial paper, and money market funds purchased with excess cash. b. investments with original maturities of three months or less. c. readily convertible into known amounts of cash. d. all of these.

Format of SCF - Presentation: 1. Operating activities. Direct Method Indirect Method 2. Investing activities. 3. Financing activities. Sources of Information to Complete SCF Comparative balance sheet Current income statement Selected transaction data Determine Net Cash Flow from Investing Activities Analyze changes in investment items and other data Example 3 Net Cash Flow from Investing Activities G Corp had the following activities in 2008: a. Sale of land $130,000

Chapter 23 - SCF b. Purchase of inventory $845,000 c. Purchase of treasury stock $72,000 d. Purchase of equipment $415,000 e. Issuance of common stock $320,000 f. Purchase of available-for-sale securities $59,000 Compute the amount G Corp should report as net cash provided (used) by investing activities in the statement of cash flows.

Determine Net Cash Flow from Financing Activities Analyze changes in Financing items and other data Example 4 Net Cash Flow from Financing Activities G Corp had the following activities in 2008: a. Payment of accounts payable $770,000 b. Issuance of common stock $250,000 c. Payment of dividends $300,000 d. Collection of note receivable $100,000 e. Issuance of bonds payable $510,000 f. Purchase of treasury stock $46,000 Compute the amount G Corp should report as net cash provided (used) by financing activities in the statement of cash flows.

Q3 - Xanthe Corporation had the following transactions occur in the current year: 1. 2. 3. 4. 5. 6. Cash sale of merchandise inventory. Sale of delivery truck at book value. Sale of Xanthe common stock for cash. Issuance of a note payable to a bank for cash. Sale of a security held as an available-for-sale investment. Collection of loan receivable.

How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?
a. Five items b. Four items c. Three items

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d. Two items

Use the following information for questions Q4 and Q5. Napier Co. provided the following information on selected transactions during 2013: Purchase of land by issuing bonds Proceeds from issuing bonds Purchases of inventory Purchases of treasury stock Loans made to other corporations Dividends paid to preferred stockholders Proceeds from issuing preferred stock Proceeds from sale of equipment Q4.
a. b. c. d. $100,000. $(600,000). $(1,100,000). $(2,500,000).

$500,000 1,000,000 1,900,000 300,000 700,000 200,000 800,000 100,000

The net cash provided (used) by investing activities during 2013 is

Q5.

The net cash provided by financing activities during 2013 is

a. b. c. d. $1,100,000. $1,300,000. $1,600,000. $1,800,000.

Net Cash Flow from Operating Activities Company must determine revenues and expenses on a cash basis. Eliminate the effects of income statement transactions that do not result in an increase or decrease in cash. Convert net income to net cash flow from operating activities through either a direct method or an indirect method. Two Methods 1. Indirect method 2. Direct method Indirect Method (Reconciliation Method) Reconciliation of net income to net cash flow from operating activities Focuses on the differences between net income and net cash flow from operating activities Provides link between the statement of cash flows and the income statement and balance sheet Most widely used in practice

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Indirect Method Net Cash Flow from Operating Activities

1 Start with Net Income 2 Non Cash Adjustments
Items Depreciation Expense Amortization Expense Depletion Expense Losss Gains Add to or Deduct from Net Income Add Add Add Add Subtract

3 Current Asset Adjustments (Except Cash)

Current Assets Accounts Receivables (net) Inventory Prepaid Expenses Other Current Assets Add to Net Income Decrease Decrease Decrease Decrease Deduct from Net Income Increase Increase Increase Increase

4 Current Liability Adjustment

Current Liabilities Accounts Payable Accrued Liabilities Income Tax Payables Other Current Liabilities Add to Net Income Increase Increase Increase Increase Deduct from Net Income Decrease Decrease Decrease Decrease

Example 5 - Operating Activities Section of the SCF using the Indirect Method K Companys income statement for the year end December 31, 2007, contained the following condensed information:

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Revenue fom fees Operating expenses (excluding depreciation) Depreciation expense Loss on the sale of equipment Income before income taxes Income tax expense Net Income $ 840,000 $ 624,000 $ 60,000 $ 26,000

$ 710,000 $ 130,000 $ 40,000 $ 90,000

K Company's balance sheet contained the following comparative data at December 31st: 2007 Accounts Receivable Accounts Payable Income Taxes Payable $ 37,000 $ 41,000 $ 4,000 $ $ $ 2006 54,000 31,000 8,500 Increase (decrease)

Prepare the Operating Activities Section of the Statement of Cash Flows using the Indirect Method

Example 6 Operating Activities Section of the SCF using the Indirect Method Presented below is the income statement of Cowan, Inc.: Sales Cost of goods sold Gross profit Operating expenses Income before income taxes Income taxes Net income $380,000 225,000 $155,000 85,000 70,000 28,000 $ 42,000

In addition, the following information related to net changes in working capital is presented: Cash Accounts receivable Inventories Salaries payable (operating expenses) Accounts payable Debit $12,000 25,000 8,000 12,000 Credit $19,400

Chapter 23 - SCF Income taxes payable 3,000

The company also indicates that depreciation expense for the year was $16,700 and that the deferred tax liability account increased $2,600. Instructions Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows using the indirect method.

Q6 - When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net income to compute cash provided by/used by operating activities?
a. b. c. d. Increase in accounts receivable. Gain on sale of land. Amortization of patent. All of the above are added to net income to arrive at cash flow from operating activities.

Q7 - When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is deducted from net income to compute cash provided by/used by operating activities?
a. b. c. d. Decrease in accounts receivable. Gain on sale of land. Amortization of patent. All of the above are deducted from net income to arrive at cash flow from operating activities.

Q8 - Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold for $121,000. This transaction should be shown on the statement of cash flows (indirect method) as a(n)
a. addition to net income of $22,000 and a $121,000 cash inflow from financing activities. b. deduction from net income of $22,000 and a $99,000 cash inflow from investing activities. c. deduction from net income of $22,000 and a $121,000 cash inflow from investing activities. d. addition to net income of $22,000 and a $99,000 cash inflow from financing activities.

Use the following information for questions Q9 and Q10. Equipment that cost $350,000 and had a book value of $156,000 was sold for $180,000. Data from the comparative balance sheets are:

Chapter 23 - SCF 12/31/13 $2,160,000 660,000 12/31/12 $1,950,000 570,000

Equipment Accumulated Depreciation Q9.

a. b. c. d. $308,000. $284,000. $54,000. $36,000.

Depreciation expense for 2013 was

Q10.

Equipment purchased during 2013 was

a. b. c. d. $560,000. $350,000. $210,000. $366,000.

Direct Method Operating Activities Companies adjust each item in the income statement from the accrual basis to the cash basis Example line items found in the operating section: o Cash receipts from customers o Cash payments to suppliers o Cash payments for operating expenses o Cash payments for income taxes Shows operating cash receipts and payments Information about cash receipts and payments is more revealing of a companys ability: o To generate sufficient cash from operating activities to pay its debt o To reinvest in its operations, and o To make distributions to its owners
Use the following information for questions Q11 through Q13. Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below. BALANCE SHEETS Cash Accounts receivable Merchandise inventory Property, plant and equipment Less accumulated depreciation 328,000 Accounts payable 48,000 Income taxes payable Bonds payable Common stock Retained earnings 12/31/08 $204,000 180,000 192,000 $304,000 (160,000) 144,000 $720,000 $ 88,000 176,000 180,000 108,000 168,000 12/31/07 $ 96,000 108,000 240,000 $480,000 (152,000) $772,000 $ 196,000 300,000 108,000 120,000

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$720,000 INCOME STATEMENT For the Year Ended December 31, 2008 Sales $4,200,000 Cost of sales 3,576,000 Gross profit Selling expenses Administrative expenses 396,000 Income from operations Interest expense 36,000 Income before taxes Income taxes 48,000 Net income 144,000 The following additional data were provided: 1. 2. 3. Dividends for the year 2008 were $96,000. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally and had a book value of $144,000 at the time of sale. All depreciation expense is in the selling expense category. 624,000 $300,000 96,000 228,000 192,000 $ $772,000

Questions 11 through 13 relate to a statement of cash flows (indirect method) for the year ended December 31, 2008, for Paxson Mining Company. Q11. The net cash provided by operating activities is a. $204,000. b. $144,000. c. $120,000. d. $100,000. Q12. The net cash provided (used) by investing activities is a. $(176,000). b. $24,000. c. $120,000. d. $(144,000). The net cash provided (used) by financing activities is a. $(120,000). b. $24,000. c. $(216,000). d. $96,000.

Q13.

Use the following information for questions Q14 through Q16. The balance sheet data of Kohler Company at the end of 2013 and 2012 follow: 2013 2012 Cash Accounts receivable (net) Merchandise inventory Prepaid expenses Buildings and equipment Accumulated depreciationbuildings and equipment Land Totals Accounts payable Accrued expenses Notes payablebank, long-term $ 100,000 $ 140,000 240,000 180,000 280,000 180,000 40,000 100,000 360,000 300,000 (72,000) (32,000) 360,000 160,000 $1,308,000 $1,028,000 $272,000 48,000 $220,000 72,000 160,000

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Chapter 23 - SCF
Mortgage payable Common stock, $10 par Retained earnings (deficit) 120,000 936,000 636,000 32,000 (60,000) $1,308,000 $1,028,000

Land was acquired for $200,000 in exchange for common stock, par $200,000, during the year; all equipment purchased was for cash. Equipment costing $20,000 was sold for $8,000; book value of the equipment was $16,000 and the loss was reported as an ordinary item in net income. Cash dividends of $40,000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other entry in the Retained Earnings account. In the statement of cash flows for the year ended December 31, 2013, for Naley Company: The net cash provided by operating activities was a. $104,000. b. $132,000. c. $112,000. d. $96,000. Q15.The net cash provided (used) by investing activities was a. $52,000. b. $(80,000). c. $(272,000). d. $(72,000). Q16.The net cash provided (used) by financing activities was a. $ -0-. b. $(40,000). c. $(80,000). d. $120,000. Q14.

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