Prepare Cash Flow Statement from Financial Statements

The Statement of Cash Flows
Chapter 12


Identify the purposes of the statement of cash
flows


Timing of the Financial Statements
12-31-10 For the year ended 12-31-11 12-31-11
(a point in time) (a period of time) (a point in time)

Income
Balance
Statement
Sheet

Balance Statement of Balance
Sheet Stockholders Sheet
’ Equity Statement
of Cash
Flows


Purposes of Cash Flow Statements


Distinguish among operating, investing and
financing cash flows

Copyright ©2 010 Pearson Education Inc. Publishing as Prentice Hall. 7

Cash Flow Categories


Relationship to Balance Sheet

Operating Operating
cash flows Current assets Current liabilities cash flows

Long-term liabilities
Financing
Investing Long-term assets cash flows
cash flows
Owners’ equity


Formats for Cash Flow Statement


Prepare a statement of cash flows by the
indirect method


Exercise 12-16A
A Sale of long-term investment
B Issuance of long-term note payable to borrow cash
C Increase in prepaid expenses
D Payment of cash dividend
E Loss on sale of equipment
F Decrease in merchandise inventory
G Acquisition of equipment by issuance of a note payable
H Increase in accounts payable
I Amortization of intangible assets
J Net income


Exercise 12-16A
K Payment of long-term debt
L Accrual of salary expense
M Cash sale of land
N Purchase of long-term investment
O Acquisition of building by cash payment
P Purchase of treasury stock
Q Issuance of common stock for cash
R Decrease in accrued liabilities
S Depreciation of equipment


Finding Needed Amounts:
Operating Activities
• From the income statement
▫ Net income
▫ Depreciation, depletion and amortization expense
▫ Gains and losses on sales of long-term asset
• From the comparative balance sheets
▫ Increase or decrease in each current asset (other
than cash)
▫ Increase or decrease in each current liability


Operating Activities
Net Income

Depreciation, Depletion & Amortization

Gains on sales of Losses on sales of
long-term assets long-term assets

Increases Decreases Decreases Increases
in current in current in current in current
assets liabilities assets liabilities

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


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


Computing Purchases and Sales of Plant
Assets
Plant Assets, Net
Beginning + Acquisitions - Depreciation - Book value of = Ending
balance assets sold Balance

Sale = Book value of + Gain - Loss
proceeds assets sold


Plant Assets, Net
Beginning balance Depreciation

Acquisitions Book value of assets sold

Ending balance


Computing Purchases and Sales of
Investments
Investments
Beginning + Purchases - Book value of = Ending
balance investments sold Balance

Investments
Beginning balance Book value of investments sold
Purchases

Ending balance


Loans and Collections

Notes Receivable
Beginning + New Loans - Collections = Ending
balance made Balance

Notes Receivable
Beginning balance Collections
New loans made

Ending balance


Cash Flow Template: Financing
Cash Flows from Financing Activities
Issuance of stock
Purchase of treasury stock
Borrowing
Payment of notes and bonds payable
Payment of dividends
Net cash provided by (used in) financing activities


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

Long-Term Debt
Beginning balance
Payments of debt
Issuance of new debt

Ending balance


Computing Issuance of Stock and
Purchases of Treasury Stock
Common Stock
Beginning balance + Issuance of new stock = Ending Balance

Treasury Stock
Beginning balance + Purchase of treasury stock = Ending Balance

Treasury Stock Common Stock
Beginning balance Beginning balance
Purchase of
Issuance of new stock
treasury stock
Ending balance Ending balance

Computing Dividends

Retained Earnings
Beginning + Net income - Dividends = Ending
balance declared Balance

Retained Earnings
Beginning balance
Dividends declared
Net income

Ending balance


Noncash Investing and Financing
Activities
Noncash investing and financing activities:
Acquisition of building by issuing common stock $$$$
Acquisition of land by issuing note payable $$$$
Payment of long-term debt by issuing stock $$$$
Bonds converted into common stock $$$$
Stock dividends distributed $$$$
Total noncash investing and financing activities $$$$$


Exercise 12-20A
December 31,
2010 2009
Current assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Current liabilities:
Accounts payable
Accrued liabilities


Exercise 12-20A
December 31,
2010 2009
Current assets:
Cash $30,000 $10,800
Accounts receivable 42,000 59,000
Inventory 30,000 91,000
Prepaid expenses 9,400 8,700
Current liabilities:
Accounts payable $38,000 $27,000
Accrued liabilities 18,000 99,000


Exercise 12-20A
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


Exercise 12-20A
+ Sales of land
- Purchases of plant assets
= Net cash used for investing activities
+ Issuance of common stock
- Payment of note payable
- Payment of dividends
= Net cash provided by financing activities


Exercise 12-20A
Net cash provided by operating activities
+ Sales of land
- Purchases of plant assets
= Net cash used for investing activities
+ Issuance of common stock
- 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

Prepare a statement of cash flows by the direct
method


The Direct Method
• Preferred by the Financial Accounting Standards
Board
• Very few companies use
• Only affects operating activities


Operating Cash Flows: Direct
Method
• Receipts:
▫ Collections from customers
▫ Interest and dividends
• Payments
▫ To suppliers
▫ To employees
▫ For interest and income taxes


Computing Operating Cash Flows

Income Statement
Receipts Account Balance Sheet Account
From Customers Sales revenue + Decrease in Accounts Receivable
- Increase in Accounts Receivable
Of interest Interest revenue + Decrease in Interest Receivable
- Increase in Interest Receivable


Income
Statement
Payments Account Balance Sheet Account
To suppliers Cost of + Increase in Inventory + Decrease in Accounts
goods sold Payable
- Decrease in Inventory - Increase in Accounts
Payable
Operating + Increase in Prepaids + Decrease in Accrued
expenses Liabilities
- Decrease in Prepaids - Increase in Accrued
Liabilities
To Salary + Decrease in Salary Payable
employees expense - Increase in Salary Payable


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


Free Cash Flow

Free Cash Flow

Net Cash Provided by Operating Activities

Cash Payments Earmarked for Investments
in Plant Assets

Prepare Cash Flow Statement from Financial Statements

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