Chapter 11 Notes

Chapter 11
The Statement of
Cash Flows
Learning Objective One

Identify the ________ of the statement of
cash flows
Copyright 2014 Pearson Education.
Timing of the Financial Statements

12-31-10
(a point in time)
For the year ended 12-31-11

(a period of time)
12-31-11
(a point in time)
Income
Balance
Statement
Sheet
Balance
Sheet
Accrual
Statement of
Changes in
Equity
Statement
of Cash
Flows
Balance
Sheet
Focus on cash
_______________________
Purposes of Cash Flow Statements

________future cash flows
Past payments and receipts predict future
payments and receipts
________management decisions
Running a business requires cash, so information
on operations, investments, and financing
indicates management performance
Show _____________________________
Income is measured under __________, so it
may not match with ____. Important to
understand the cash position
Learning Objective Two

Distinguish among operating, investing and
financing cash flows
Copyright 2 010 Pearson Education Inc. Publishing as Prentice Hall.
Cash Flow Categories

_______
_______
_______
Create
revenue,
expenses,
gains and
losses
Relate to
noncurrent
assets
Obtain
cash from
and pay
cash to
investors
and
creditors
PPE
Investments
Cash Flow Categories

Increases Cash
______________________
Payment to suppliers
Collections from customers

Receipts of interests & dividends
Sale of short-term investments
Decreases Cash
Operating
Activities
Other operating receipts
Payments to employees
Payments of interest & income tax
Purchase of short-term investments
Other operating payments
Sale of PPE
Sale of long-term investments
Collections of loans from others
Investing
Activities
Acquisition of PPE
Purchase of long-term investments
Making loans to others
Payment of dividend
Issuance of shares
Sale of treasury shares
Proceeds from loans & borrowings
Financing
Activities
Repurchase of shares
Purchase of treasury shares
Payment of debt principal
7
Exercise 11-16A
Indicate whether each of the following items relates to operating (O), investing (I),
financing (F), noncash investing and financing (NIF), or a transaction that is not
reported on the statement of cash flows (N). Indicate whether each item
increases (+) or decreases () cash. The indirect method is used for operating
activities.
Sale of long-term investment
Issuance of long-term note payable to borrow cash
Increase in prepaid expenses
Payment of cash dividend
Loss on sale of equipment (remove from O)
Decrease in merchandise inventory
Acquisition of equipment by issuance of a note payable
Increase in accounts payable
Amortization of intangible assets
Net income
Exercise 11-16A
K
Payment of long-term debt
Accrual of salary expense
Cash sale of land
Purchase of long-term investment
Acquisition of building by cash payment
Issuance of share capital for cash
Decrease in accrued liabilities
Depreciation of equipment (add back non-cash exp)
Relationship to Balance Sheet

________
cash flows
Current assets
Current liabilities
Long-term liabilities
________
cash flows
Long-term assets
________
cash flows
________
cash flows
Owners equity
10
Formats for Cash Flow Statement

related to _____________________
_____
Reconciles from __
______ to cash
provided by
operating activities
Most
companies use
the Indirect
Method
_____
Reports all cash

receipts and cash
payments from
operating activities
The IASB
suggests the
Direct Method
because it
better predicts
future cash flow
11
Learning Objective Three

Prepare cash flows from operating activities by
the __________
12
Operating Activities
Net Income
Under the indirect method,

operating cash flows starts
with ________! We then
adjust for _________items
Depreciation, Depletion & Amortization

Gains on sales of
long-term assets
Increases
in current
assets
Decreases
in current
liabilities
Losses on sales of
long-term assets
Decreases
in current
assets
Increases
in current
liabilities
13
Indirect Cash Flows Steps

Step 1
Start with ________(or pretax income) from the income statement.
Step 2
From the income statement, add back ________, depletion, and
amortization expense, and remove any gains (or add back losses) on
the sale of long-term assets.
Step 3
Examine the balance sheet, identify changes in ______ ______
(current assets and current liabilities), except for cash and cash
equivalents.
Step 4
Deduct increases in current assets other than cash and add decreases
in current assets other than cash.
Step 5
Deduct decreases in current liabilities and add increases in current
liabilities.
14
Cash Flow Template: Operating

Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
+
Depreciation/depletion/amortization expense
Loss on sale of long-term assets
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current assets other than cash
Increases in current liabilities
Decreases in current liabilities
Net cash provided by operating activities

15
Understanding Reconciliation of
Net Income to CFO
Depreciation, Depletion, and Amortization
Expenses
Depreciation ________________________
______. Add-back cancels the earlier deduction
Gains and Losses on Sale of Long-term Assets

These are included in ___________, not
operating
16
Learning Objective Four

Prepare cash flows from investing activities
17
Cash Flow Template: Investing

Cash Flows from Investing Activities
+
Sales of long-term assets
Purchases of long-term assets
Collections of notes receivable
Loans to others
Net cash provided by (used for) investing activities
Long-term assets include PPE, Investments, etc.
18
Computing Purchases and Sales of PPE

PPE, Net
Beginning
balance
+ Acquisitions
Sale
proceeds
Depreciation
= Book value of
assets sold
Book value of
assets sold
+ Gain
Ending
Balance
Loss
19
PPE, Net
Beginning balance
Depreciation
Acquisitions
Book value of assets sold
Ending balance
20
Computing Purchases and Sales of

Investments
Investments
Beginning
balance
Purchases
Book value of
investments sold
Ending
Balance
Investments
Beginning balance
Book value of investments sold
Purchases
Ending balance
21
Loans and Collections

Notes Receivable
Beginning
balance
+ New Loans
made
Collections
Ending
Balance
Notes Receivable
Beginning balance
Collections
New loans made

Ending balance
22
Learning Objective Five

Prepare cash flows from financing activities
23
Cash Flow Template: Financing

Financing Cash Flows mainly come from _________________________
Cash Flows from Financing Activities

+
Issuance of shares
Borrowing
Payment of notes and bonds payable
*Payment of dividends
Net cash provided by (used in) financing activities
24
Computing Issuance and Payments

of Long-Term Debt
Long-Term Debt (Notes payable, Bonds payable)
Beginning
balance
Issuance of
new debt
Payment of debt
= Ending
Balance
Long-Term Debt
Payments of debt
Beginning balance
Issuance of new debt
(borrowing)
Ending balance
25
Computing Issuance of Shares and

Purchases of Treasury Shares
Share Capital
Beginning balance
Issuance of new
shares
Ending Balance
Treasury Share (____________________)

Beginning balance
Treasury Share
Ending Balance
Share Capital
Beginning balance
Purchase of
treasury share
Beginning balance
Ending balance
Ending balance
Issuance of new shares
26
Computing Dividends
Retained Earnings
Beginning
balance
Net income
Dividends
declared
= Ending
Balance
Retained Earnings
Dividends declared
Beginning balance
Net income
Ending balance
27
Noncash Investing and Financing

Activities
Noncash investing and financing activities:
Acquisition of building by issuing shares
$$$$
Acquisition of land by issuing note payable
$$$$
Payment of long-term debt by issuing shares
$$$$
Total noncash investing and financing activities
$$$$$
28
Exercise 11-20A
Prepare a cash flow statement using the indirect
method with the following information:
Net income=$68,900
Dep Exp = $26,000
Acq $212,000 PPE
160,000 cash
52,000 note
Sale of Land $27,000
Issue Shares $80,000
Pay debt $17,000
Pay dividends $13,000
December 31,
2010
2009
$30,000
$10,800
Accounts
receivable
42,000
59,000
Inventory
30,000
91,000
9,400
8,700
$38,000
$27,000
18,000
99,000
29
Current assets:
Cash
Prepaid expenses
Current liabilities:
Accounts
payable
Accrued
liabilities
Exercise 11-20A
December 31,
2010
2009
Current assets:
Cash
Change
$30,000
$10,800
Accounts receivable
42,000
59,000
Inventory
30,000
91,000
9,400
8,700
Accounts payable
$38,000
$27,000
Accrued liabilities
18,000
99,000
Prepaid expenses
Current liabilities:
30
Exercise 11-20A
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
+ Depreciation expense
+ Decrease in accounts receivable
+ Decrease in inventory
- Increase in prepaid expenses
+ Increase in accounts payable
- Decrease in accrued liabilities
= Net cash provided by operating activities
31
Exercise 11-20A
+ Sales of land
- Purchases of PPE
= Net cash used for investing activities
+ Issuance of share capital
- Payment of note payable
- Payment of dividends
= Net cash provided by financing activities
32
Exercise 11-20A (combine O, I, and F)

Net cash provided by operating activities
+ Sales of land
- Purchases of PPE
= Net cash used for investing activities
+ Issuance of share capital
- Payment of note payable
- Payment of dividends
= Net cash provided by financing activities
Net increase in cash
Cash balance, December 31, 2009
Cash balance, December 31, 2010
33
Learning Objective Six

Prepare cash flows from operating activities
using the direct method
34
The Direct Method

Preferred by the International Accounting
Standards Board
Provides ______________about the sources
and uses of cash
Used by very few companies

Takes more computations
35
Operating Cash Flows: Direct

Method
________:
Collections from customers
Interest and dividends
________:
To suppliers
To employees
For interest and income taxes
36
Computing Operating Cash Flows

Receipts
From Customers
Income Statement
Account
Sales revenue
Balance Sheet Account

+ Decrease in Accounts Receivable
- Increase in Accounts Receivable
Of interest
Interest revenue
+ Decrease in Interest Receivable

- Increase in Interest Receivable
37

Payments
To suppliers
Income
Statement
Account
Cost of
goods sold
Operating
expenses
To
employees
Salary
expense

+ Increase in Inventory
+ Decrease in Accounts
Payable
- Decrease in Inventory
- Increase in Accounts
Payable
+ Increase in Prepaids
+ Decrease in Accrued
Liabilities
- Decrease in Prepaids
- Increase in Accrued
Liabilities
+ Decrease in Salary Payable

- Increase in Salary Payable
38

Payments
For interest
For income
taxes
Income
Statement
Account
Interest
expense
+ Decrease in Interest Payable
Income tax
expense
+ Decrease in Income Tax Payable
- Increase in Interest Payable

- Increase in Income Tax Payable
39
Learning Objective Seven

Analyze cash flows
40
Free Cash Flow

Free Cash Flow
Net Cash Provided by Operating Activities
Cash Payments Earmarked for Investments

in Property, Plant and Equipment (PPE)
41
Cash realization ratio

Cash realization
rate
Net Cash Provided by Operating Activities
Net Income
How much of net profits actually generates cash?
42

Chapter 11 Notes

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Chapter 11

Learning Objective One

Copyright 2014 Pearson Education.

Timing of the Financial Statements

For the year ended 12-31-11

Copyright 2014 Pearson Education.

Purposes of Cash Flow Statements

Learning Objective Two

Copyright 2 010 Pearson Education Inc. Publishing as Prentice Hall.

Cash Flow Categories

Copyright 2014 Pearson Education.

Cash Flow Categories

Collections from customers

Other operating receipts

Copyright 2014 Pearson Education.

Sale of long-term investment

Issuance of long-term note payable to borrow cash

Increase in prepaid expenses

Payment of cash dividend

Loss on sale of equipment (remove from O)

Decrease in merchandise inventory

Acquisition of equipment by issuance of a note payable

Increase in accounts payable

Amortization of intangible assets

Copyright 2014 Pearson Education.

Payment of long-term debt

Accrual of salary expense

Cash sale of land

Purchase of long-term investment

Acquisition of building by cash payment

Purchase of treasury shares

Issuance of share capital for cash

Decrease in accrued liabilities

Depreciation of equipment (add back non-cash exp)

Copyright 2014 Pearson Education.

Relationship to Balance Sheet

Copyright 2014 Pearson Education.

Formats for Cash Flow Statement

Reports all cash

Copyright 2014 Pearson Education.

Learning Objective Three

Copyright 2014 Pearson Education.

Under the indirect method,

Depreciation, Depletion & Amortization

Indirect Cash Flows Steps

Cash Flow Template: Operating

Loss on sale of long-term assets

Gain on sale of long-term assets

Increases in current assets other than cash

Decreases in current assets other than cash

Increases in current liabilities

Decreases in current liabilities

Net cash provided by operating activities

Gains and Losses on Sale of Long-term Assets

Copyright 2014 Pearson Education.

Learning Objective Four

Copyright 2014 Pearson Education.

Cash Flow Template: Investing

Sales of long-term assets

Purchases of long-term assets

Collections of notes receivable

Net cash provided by (used for) investing activities

Long-term assets include PPE, Investments, etc.

Copyright 2014 Pearson Education.