ACCTG 211 1 st Edition Lecture 14 Outline of Last Lecture I Example Problems From Unit 6 II Stock and Financing Outline of Current Lecture II Statement of Cash Flows III Two Methods of Flows IV Unit 7 Example Problem Current Lecture Lecture 14 Accounting I Statement of Cash Flows a Income Statement is an accrual statement b Statement of Stockholders Equity is an accrual statement c Balance Sheet is an accrual statement i And although GAAP requires the use of accrual accounting it really helps users of the financial statements if we provide them with a cash based picture of the business ii In 1987 a GAAP standard was implemented that required firms to provide a Statement of Cash Flows SOCF iii SOCF is essentially a statement that reconciles accrual accounting with cash accounting II Format of SOCF a Inflows positive cash b Outflows negative cash c Cash flows are put into 3 categories i Operating 1 Income statement activities ii Financing 1 Long term liabilities and equity iii Investing 1 Long term assets d To prepare a SOCF you need i Income statement ii Balance sheet iii Any additional information about clarification of transactions III Two Methods of Preparing SOCF a Direct Method i CFFO is the difference between cash inflows and cash outflows related to operating activities b Indirect Method i CFFO can be derived by reconciling accrual based net income to cash based CFFO ii The indirect method is the more often used method iii Provides less company sensitive information to readers iv Tends to be easier to derive IV GAAP requires companies that use the direct method to also provide a reconciliation of net income to CFFO So companies that use the direct method also have to provide the indirect method Here less disclosure is more desirable to companies V Unit 7 Example Problem a Attic Treasures Comparative Financials I Using the direct method a Objective for each income statement account determine the cash effect if any i Start with Sales 1 Beginning A R 12 000 2 Plus Credit Sales 234 900 3 Minus Cash Collections a Will be 223 450 b Beginning A R Credit Sales Cash Collections Ending A R 4 Equals Ending A R 23 450 ii Next do COGS 1 Beginning Inventory 25 200 2 Plus Purchases a Will equal 181 750 b Beginning Inventory Purchases COGS Ending Inventory 3 Minus COGS 178 850 4 Equals Ending Inventory 28 100 5 But we shouldn t assume all payments were made in cash a Beginning A P b Plus Purchases 12 300 181 750 c Minus Cash Payments i Will be 167 850 d Equals Ending A P 26 200 iii Next selling expenses 1 Total Cash Payments for Selling Expenses 24 000 a Includes 2 000 rent and 6 000 depreciation expense iv Next General expenses 1 What is included in general expenses a 2 000 in rent expense 6 000 in depreciation expense and assumed 500 other 2 Any relevant accrual accounts a Prepaid Rent 3 Beginning Prepaid Rent 6 000 4 Plus Prepayments a Will be 1 500 b Beginning Prepaid Rent Prepayments Rent Expense Ending prepaid Rent 5 Minus Rent Expense 2 000 6 Equals Ending Prepaid Rent 5 500 7 Depreciation expense is a non cash expense so no cash payments there 8 No related accrual accounts for the other expenses so it is fair to assume that is a cash expense 9 Prepayments of Rent 1 500 10 Other Cash Payments 500 11 Total Cash Payments for General Expenses 2 000 v Next Interest Expense 1 Seeing no accrual accounts related to interest expense it is fair to assume that this item is entirely in cash 2 Total Cash Payments for Interest Expense 1 200 vi Finally Income Tax Expense 1 Question should we assume that this item is entirely in cash a No which accrual account is related to income tax expense i Income tax payable 2 Beginning Income Taxes Payable 10 000 3 Plus Income Tax Expense 4 Minus Cash Payments 3 400 5 300 a Beg Income Taxes Payable Income Tax Expense Cash Payments Ending Income Taxes Payable 5 Equals Ending Income Taxes Payable 8 100 vii Now you have the operating portion of the SOCF from the direct method 1 Cash Collected from Customers 223 450 2 Cash Paid to Vendors for Inventory 167 850 3 Cash Paid for Selling Expenses 24 000 4 Cash Paid for General Expenses 2 000 5 Cash Paid for Interest 1 200 6 Cash Paid for Income Taxes 5 300 7 Net Cash Provided by Operating Activities 23 100 b Now find CFFI using either method i Objective account for cash changes to Long Term Assets 1 Relevant accounts in our example a Property Plant and Equipment b Accumulated Depreciation c PP E decreased by 9 500 implying a sale of PP E d But consider also A D i When we sell PP E we remove the cost AND the A D ii Depreciation Expense should have increased A D by 6 000 iii But A D only increased by 5 000 implying that A D must have increased by 6 000 AND decreased by 1 000 iv So 1 000 must be the A D associated with the sale 2 Run a sale of PP E a Cash 8 500 Plug Asset 9 500 A D 1 000 Gain 0 b Cash Proceeds from Sale of PP E 8 500 c Now find CFFF using either method i Objective account for cash changes to Long Term Liabilities and Equity ii Relevant accounts in our example 1 Long Term Notes Payable 2 Common Stock and APIC 3 Retained Earnings for Dividends 4 Long Term Notes Payable decreased by 13 900 a No other information so assume a cash decrease 5 Common Stock and APIC increased by 1 500 a No other information so assume a cash increase iii Retained Earnings increased by 15 950 1 Test for Dividends run a R E Roll forward and see if any dividends were declared 2 Absent a Dividends Payable account or absent any change in an existing Dividends Payable account the Dividends from the R E Roll forward may be assumed to be a cash amount a Beginning R E 41 200 Plus Net Income Minus Dividends Equals Ending R E 18 950 3 000 Plug 57 150 b Cash Paid on Loan Principal 13 900 c Cash Proceeds from Stock Issuance d Cash Paid for Dividends d Final SOCF for Attic Treasures using Direct Method i 3 000 1 500