ACCT 209 1nd Edition Lecture 14 Outline of Last Lecture I Comparison of organizations II Bonds compared to capital stock III Stock Terms IV Stock Holder rights V Issuing stock a Example VI Cash Dividends a Example VII Sock Dividends a Example VIII Stock Splits IX Treasury Stocks X Summary of effects of Stock Transactions a Example XI Earnings per share XII Retained Earnings Outline of Current Lecture XIII Types of Cash Flow a Example XIV How to determine Cash flows a Example b Another Example c Another Example Current Lecture THE STATEMENT OF CASH FLOWS Purpose The Statement of Cash flows is needed to show the total change in cash and the reasons for the change This information is not available from the other statements since they are prepared on an accrual basis The Statement of Cash flows complements the other statements by reporting and explaining changes in cash over a period of time in three categories operating investing and financing These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Cash in statement of cash flows includes cash and cash equivalents readily convertible to a known amount of cash original maturity of three months or less Usefulness of statement 1 helps predict firm s ability to generate future cash flows 2 helps predict firm s ability to pay dividends and meet obligations pay debts 3 explains differences between reported accrual basis net income and cash flows 4 explains investing and financing cash flows and shows significant non cash transactions likely to affect future cash flows 5 Helps evaluate management decisions Format Shows cash receipts inflows sources increases and payments outflows uses disbursements decreases in three categories ACTIVITY GENERAL GUIDELINES EXAMPLES OPERATING Transactions that involve producing and selling goods and services Inflows selling goods and services dividend revenue interest revenue Income statement Items Outflows for inventory salaries taxes interest other expenses Transactions that involve acquiring and disposing of long term assets Inflows sale of plant assets sale of investments collection of loans INVESTING Outflows purchase of plant assets purchasing investments lending funds FINANCING Transactions that involve obtaining Inflows selling stock issuing resources and providing a return bonds notes mortgages long term debt and equity Outflows purchasing treasury financing stock paying dividends repaying SH principal on borrowings Also significant non cash transactions Recorded at bottom of cash flow statement or in notes Are things that probably affect cash in the future Example 1 For each of the following items state whether the item would be shown on the statement of cash flows as an operating investing or financing activity If the item would not be shown on the statement of cash flows indicate non cash item a Salary payments to employees O b Cash to acquire new computers for use in the business I c Cash proceeds from sale of common stock at an amount greater than par value F d Cash dividends declared and paid on common stock F e Stock dividends declared and distributed on common stock company distributed additional shares of stock to stockholders Non cash transactions f Interest paid during the year O g Cash used to pay dividends declared but not paid last year F h Cash used to purchase long term investments in common stock of another companyI i Cash used to pay bonds payable at the maturity date F j cash payments for income taxes O PREPARING THE STATEMENT OF CASH FLOWS We know from the balance sheet equation that Assets Liabilities Equity We can expand the equation to Cash Non cash assets Liabilities Equity In order for the equation to stay in balance every change in cash must be accompanied by a change in another balance sheet account We can find the reasons for the increases and decreases in Cash indirectly by analyzing changes in the balance sheet accounts other than cash we can determine how cash was affected OPERATING ACTIVITIES Generally cash flows from operating activities are determined using income statement amounts adjusted by changes in current assets other than cash and current liabilities Two approaches to determining operating cash flows 1 indirect method starts with net income loss then adjusts for revenues and expenses that did not create an equal change in cash Is over whelming used in practice because it is easier 2 direct method shows major categories of gross cash receipts and gross cash payments companies using direct method must reconcile change in cash with net income Financial Acct standard boards prefers this method BOTH METHODS PRODUCE SAME RESULT companies can choose either approach INVESTING ACTIVIITES analyze changes in long term asset accounts FINANCING ACTIVITIES analyze changes in long term liability and equity accounts Example 2 The following information pertains to Grimes Company Grimes Company Comparative Balance Sheets December 31 Assets 20X5 20X4 Cash 273 210 Up 63 Accounts receivable 120 80 Down 40 Inventory 85 100 Down 15 Prepaid rent 35 30 up 5 Land Equipment Accumulated depreciation Total assets 30 40 400 400 100 75 843 785 175 160 up 15 Liabilities and stockholders equity Accounts payable Wages payable 20 32 down 12 Bonds payable 120 135 down 15 Common stock 80 70 up 10 Additional paid in capital 125 115 up 10 Retained earnings 323 273 843 785 Total liabilities and stockholders equity Grimes Company Income Statement For the year ended December 31 20X5 Sales revenue 625 Cost of goods sold 375 Gross profit 250 Operating expenses Selling and administrative Depreciation 120 25 145 105 Gain on sale of land 4 Income before taxes 109 Income tax expense 25 Net income 84 Operating activites Indirect method Order not important Net Income Depreciation expense Gain or loss Change in CA and CL Increases in CA other than Cash Decreases in CA othe than Cash Increases in CL Decreases in CL Cash Flows Required 1 Reconcile cash flows with the change in cash shown on the balance sheet Grimes Company Statement of Cash Flows For the year ended 12 31 20X5 Operating cash flows Net income 84 1 Add non cash expenses 2 Add losses subtract gains 3 Adjust for changes in current assets other Than cash and current liabilities Net increases in cash from Operating cash flows Investing cash flows Sold land 10 4 14 Cash flow Financing cash flows BRE NI 273 84 357 25 4 40 15 5 5 12 75 D ERE X 323 X 34