Finding Your CareerSlide 2Slide 3Statement of Cash FlowsSlide 5Discussion QuestionClassification of Cash FlowsSlide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Red, Inc. Cash Flow ProblemRed, Inc. Cash Flow ProblemRed, Inc. Cash Flow ProblemSlide 22Slide 23Slide 24Slide 25UnileverBalance Sheet ClassificationSlide 28Finding Your CareerCHAPTER 5 – Continued THE BALANCE SHEET AND STATEMENT OF CASH FLOWSSommers – ACCT 3311Word(s) of the DayJOURNAL ENTRYTo provide relevant information about the cash receipts and cash payments of an enterprise during a period. The statement provides answers to the following questions:1. Where did the cash come from?2. What was the cash used for?3. What was the change in the cash balance?Purpose of the Statement of Cash FlowsStatement of Cash FlowsFocus onPerhaps the most noteworthy item reported on an income statement is net income—the amount by which revenues exceed expenses. The most noteworthy item reported on a statement of cash flows is not the amount of net cash flows. The amount of net cash flows may in fact be the least important number on the statement. The increase or decrease in cash can be seen easily on comparative balance sheets. The purpose of the Statement of Cash Flows is not to report that cash increased or decreased by a certain amount, but why cash increased or decreased by that amount. The individual cash inflows and outflows provide that information.Discussion QuestionQ5-24 Differentiate between operating activities, investing activities, and financing activities.Operating activities involve the cash effects of transactions that enter into the determination of net income. Investing activities include making and collecting loans and acquiring and disposing of debt and equity instruments; property, plant, and equipment and intangibles. Financing activities involve liability and owners’ equity items and include obtaining capital from owners and providing them with a return on (dividends) and a return of their investment and borrowing money from creditors and repaying the amounts borrowed.Classification of Cash FlowsBalance SheetCurrent Assets Current LiabilitiesNoncurrent AssetsNoncurrent LiabilitiesEquityOperatingInvestingFinancingClassifying Cash FlowsIndicate the reporting classification of each transaction by entering the appropriate classification code.+I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activity1. Sale of land2. Issuance of common stock for cash3. Purchase of treasury stock4. Conversion of bonds payable to common stock5. Lease of equipment by capital lease6. Sale of patentClassifying Cash Flows+I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activity7. Acquisition of building for cash8. Issuance of common stock for land9. Collection of note receivable (principal amount)10. Issuance of bonds11. Payment of cash dividends12. Issuance of short-term note payable for cash13. Issuance of long-term note payable for cash14. Purchase of marketable securities (“available for sale”)Classifying Cash Flows+I Investing activity (cash inflow)–I Investing activity (cash outflow)+F Financing activity (cash inflow)–F Financing activity (cash outflow)N Noncash investing and financing activityX Not reported as an investing and/or a financing activity15. Payment of note payable16. Sale of equipment17. Issuance of note payable for equipment18. Repayment of long-term debt by issuing common stock19. Loan to another firm20. Sale of inventory to customers21. Purchase of marketable securities (cash equivalents)Reporting Cash Flows from Operating ActivitiesTwo Formats for Reporting Operating ActivitiesReports the cash effects of each operating activityDirect MethodStarts with accrualnet income and converts to cash basisIndirect MethodNote that no matter which format is used, the same amount of net cash flows operating activities is generated.Direct MethodUnder the direct method, the cash effect of each operating activity is reported directly in the statement.Indirect MethodBy the indirect method, we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.Noncash Investing and Financing ActivitiesSignificant investing and financing transactions not involving cash also are reported (usually in a disclosure note).•Acquiring an asset by incurring a debt payable to the seller.•Acquiring an asset by entering into a capital lease.•Converting debt into common stock or other equity securities.•Exchanging noncash assets or liabilities for other noncash assets or liabilities.Determining Cash Received or Paid•When preparing a SCF using direct method, the numbers needed generally are not kept by the accounting system–There is not an account that is the amount (balance) of cash paid to suppliers for merchandise•Most people get these numbers by backing into them using accounting relations via T-accounts or by using journal entriesDetermining Cash Received or PaidGiven: Beginning End of year of yearInventory $ 90 $ 93Accounts payable 14 16Cost of goods sold 300Determine cash paid to merchandise suppliers.•Cash paid to suppliers for merchandiseInventory 3Cost of goods sold 300Accounts payable 2Cash 301Cash from CustomersGiven: Beginning End of year of yearAccounts receivable $ 100 $110Allowance for bad debts 5 3Sales revenue 600Bad debt expense 10Determine cash received from customers.•Cash received from customersAccounts receivable 10Allowance for bad debts 2Bad debt expense 10Cash 578Sales 600Proceeds from SaleOn July 15, 2011, M.W. Morgan Distribution sold land for $35 million that it had purchased in 2006 for $22 million. What would be the amount(s) related to the sale that Morgan would report in its statement of cash flows for the year ended December 31, 2011, using the direct method? The indirect method?Cash 35Land (cost) 22Gain on sale of land (difference) 13Morgan would report the cash inflow of $35 million from the sale as a cash