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Operating
(receipts from Operating
(payments for
revenues) expenses)
Investing
(receipts from sales of Investing
(payments for acquiring
noncurrent assets) noncurrent assets)
Financing
(receipts from issuing Financing
(payments for treasury stock,
equity and debt securities) dividends, and redemption of
debt securities)
Cash
Cash Flows
Flows from
from Operating
Operating Activities
Activities
Typical cash inflows Typical cash outflows
What are some of the What are some of the
typical cash inflows from typical cash outflows from
operating activities?` operating activities?
Sales of goods Merchandise
and services purchases
Interest Payments of
revenue wages and
other expenses
Dividend
revenue Tax payments
Cash
Cash Flows
Flows from
from Investing
Investing Activities
Activities
Typical cash inflows Typical cash outflows
What are some of the typical What are some of the
cash inflows from investing typical cash outflows
activities? from investing
activities?
Sales of fixed
assets Purchase of
fixed assets
Sale of long-
term Purchase of
investments long-term
investments
Cash
Cash Flows
Flows from
from Financing
Financing Activities
Activities
Typical cash inflows Typical cash outflows
What are some of the What are some of the
typical cash inflows from typical cash outflows from
financing activities? financing activities?
Issuing bonds Paying cash
and long-term dividends
notes payable Repaying debt
Issuing Acquiring
preferred and treasury stock
common stock
Noncash
Noncash Investing
Investing and
and
Financing
Financing Activities
Activities
Issuing bonds to acquire land
Start
Start with
with the
the accrual
accrual basis
basis net
net income
income
(shown
(shown inin the
the income
income statement,
statement, thethe
Retained
Retained Earnings
Earnings account,
account, oror the
the
statement
statement ofof stockholders’
stockholders’ equity).
equity).
The
The Indirect
Indirect Method
Method
Find
Find the
the net
net income.
income.
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance
Date Item Debit Credit Debit Credit
2006
To
To statement
statement
Jan. 1 Balance 202,300
Dec. 31 Net income 108,000 310,300
31 Cash dividends 28,000 282,300
Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Inc. in accounts receivable $ 9,000
Deduct:
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activity $100,500
The
The Indirect
Indirect Method
Method
Next,
Next, wewe need
need toto determine
determine depreciation
depreciation expense
expense
for
for the
the year.
year. IfIf itit isn’t
isn’t given
given on
on the
the income
income
statement,
statement, sometimes
sometimes itit can can be
be found
found by
by analyzing
analyzing
the
the Accumulated
Accumulated Depreciation
Depreciation account.
account.
The
The Indirect
Indirect Method
Method
Determine
Determine depreciation
depreciation expense.
expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 58,300
Dec. 31 Depreciation for year 7,000 65,300
to
to statement
statement
Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
Deduct: $125,200
Inc.Because Depreciation
in accounts receivable Expense
$ 9,000
Dec.reduced
in accounts
net payable
income but did 3,200
not
Dec.require
in income
an taxes payable
outflow of cash, 500
it is
Gain on sale of land 12,000 24,700
added back to net income.
Net cash flow from operating
activities $100,500
The
The Indirect
Indirect Method
Method
Select
Select current
current assets
assets and
and current
current
liabilities
liabilities that
that impact
impact cash
cash flow
flow and
and
determine
determine thethe increases
increases and
and decreases.
decreases.
Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
Determine the debit or
credit change of each
item above.
Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
These debit changes are subtracted from net
income in the operating activities section of
the statement of cash flows. Think of these
debits as deductions from net income in
arriving at net cash flow from operations.
Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
These credit changes are added to net income in the
operating activities section of the statement of cash
flows. Think of these credits as additions to net
income in arriving at net cash flow from operations.
Operating Activities—Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating
activities $100,500
The
The Indirect
Indirect Method
Method
Analyze
Analyze the the income
income statement
statement toto determine
determine
ifif there
there are
are any
any gains
gains or
or losses
losses from
from selling
selling
investments,
investments, equipment,
equipment, etc.etc.
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales $1,180,000
Cost of merchandise sold 790,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
$12,000
Other expense:
Interest expense 8,000 4,0000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Operating Activities—Indirect Method
Cash flows from operating activities:
Net income, per income statement $108,000
Add:
Depreciation $ 7,000
This gain was
Decrease included in net income,
in inventories 8,000 but
didIncrease in accrued
not represent anexpenses 2,200flow.
operating cash 17,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating
activities $100,500
The
The Indirect
Indirect Method
Method
IfIf there
there had
had been
been aa loss
loss on
on this
this
sale,
sale, the
the loss
loss would
would have
have been
been
added
added to to net
net income.
income.
Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Dividends
Dividends
ACCOUNT Dividends Payable ACCOUNT NO. 23
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 10,000
10 Cash paid 10,000 -- --
June 20 Dividends declared 14,000 14,000
July 10 Cash paid 14,000 -- --
Dec. 20 Dividends declared 14,000 14,000
Total
Total cash
cash paid
paid $24,000
$24,000
Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Because
Because paying
paying of of dividends
dividends
affects
affects equity,
equity, itit isis aa negative
negative
$24,000
$24,000 cash
cash flowflow fromfrom
financing
financing activities
activities transaction.
transaction.
Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Sale
Sale of
of Common
Common Stock
Stock
ACCOUNT Common Stock ACCOUNT NO. 33
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 16,000
Nov. 1 4,000 shares issued for cash 8,000 24,000
Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Sale
Sale of
of Common
Common Stock
Stock
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 150,000
June 30 Retired by payment of cash
at face amount 50,000 100,000
Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
This
This transaction
transaction isis aa negative
negative
cash
cash flows
flows from
from financing
financing
activities
activities item
item because
because long-
long-
term
term debt
debt isis involved.
involved.
Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Purchased
Purchased aa Building
Building
The
The $12,000
$12,000 gain
gain was
was recorded
recorded earlier
earlier on
on
Slide
Slide 29
29 as
as an
an operating
operating activity.
activity. The
The
purchase
purchase of
of land
land also
also is
is an
an investing
investing activity.
activity.
Click here to return to
Slide 29. To return to
this slide, type “43” and
press the “Enter” key.
Refer
Refer to to Exhibit
Exhibit 66 inin your
your
textbook
textbook to to see
see the
the formal
formal
statement
statement of of cash
cash flows
flows using
using
the
the indirect
indirect approach.
approach.
Rundell Inc.
Statement of Cash Flows
For the Year Ended December 31, 2006
Free
Free Cash
Cash Flow
Flow Dell Corporation
Cash flow from operations $4,195,000
Less: Cash used to purchase fixed
assets to maintain productive
capacity used up in producing
income during the period (482000)
Less: Cash used for dividends —–
Free cash flow $3,713,000
Free cash flow as a percent of cash
flow from operating activities 89%
Financial Analysis and Interpretation
Free
Free Cash
Cash Flow
Flow Dell Corporation
Cash
Use:flow
Use: Tofrom
To operations
measure
measure the
the financial $4,195,000
financial strength
strength of
of aa
Less: Cash used toA
business. purchase fixed
business. A company that
company that hashas
assets to maintain productive
positive
positive free
free cash
cash flow
flow isis able
able to
to fund
fund
capacity used up in producing
internal
internal
income growth,
growth,
during retire
retire debt,
the period debt, andand enjoy
enjoy
(482000)
financial
financial
Less: Cash flexibility.
used forflexibility.
dividends (—)
Free cash flow $3,713,000
Free cash flow as a percent of cash
flow from operations 89%
Chapter 16
The
The End
End