Chapter 12 – Reporting and Analyzing Cash Flows
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VISUAL #12-1
CLASSIFYING ACTIVITIES IN THE STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Cash inflows from Cash outflows to
• Sale of goods or services • Suppliers of goods and
• Interest services
• Dividends • Salaries and wages
• Sale of trading securities • Government for taxes
• Other operating receipts • Lenders for interest
• Purchase trading securities
• Others for expenses
INVESTING ACTIVITIES
Cash inflows from Cash outflows to
• Sale of property, plant, • Purchase property, plant,
and equipment and equipment
• Sale of debt or equity securities • Purchase debt or equity
of other entities securities of other entities
• Collection of principal on loans • Make loans to another entity
to other entities
• Selling (discounting) of loans
FINANCING ACTIVITIES
Cash inflows from Cash outflows to
• Sale of capital stock (or owner • Shareholders as dividends (or
investment) owner’s withdrawal)
• Issuance of debt (bonds and notes) • Repay debts
• Issuing short-term liabilities • Purchase treasury stock
NONCASH INVESTING AND FINANCING ACTIVITIES
• Retirement of debt by issuing stock
• Conversion of preferred stock to common stock
• Purchase of a long-term asset by issuing a note payable
• Leasing of assets classified as a capital lease
Chapter 12 – Reporting and Analyzing Cash Flows
website, in whole or part. 12–10
VISUAL #12-2
STEPS TO DETERMINE INFORMATION
STATEMENT OF CASH FLOWS
1. Find Change in Cash—This is the target number.
2. Find Cash Flow From Operations
(Using direct or indirect method)
3. Find Cash Flow from A. Financing and
B. Investing
Procedure:
In real life: Using data from comparative balance sheets, trace
changes through ledgers and journals probably using a
worksheet to organize, analyze, and prove data disclosed.
In the classroom: Determine the changes in noncurrent accounts
and notes from comparative balance sheets. Use the relevant
data the text provides that comes from the ledgers and the
journals to systematically analyze the data using chart and/or
reconstructing journal entries.
4. Combine cash flows from all three activities (from 2 and 3) to
find net cash flow and prove change in cash. (Target number
determined in Step 1).
Note: Once the above information has been gathered, the statement
can be prepared following the required format. If the direct method
was used, GAAP requires a reconciliation of net income to cash
provided from operations.
Chapter 12 – Reporting and Analyzing Cash Flows
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VISUAL #12-2
Determining Cash Flows from Operating Activities
Indirect Method
START WITH
NET INCOME OR (NET LOSS)
Add Subtract
1. Write-offs or noncash 1. Gains
expenses 2. Increases in current assets
2. Losses 3. Decreases in current
3. Decreases in current assets liabilities
4. Increases in current
liabilities.
RESULT
CASH FLOWS FROM
OPERATING ACTIVITIES
Chapter 12 – Reporting and Analyzing Cash Flows
VISUAL #12-3
Determining Cash Flows from Operating Activities
Direct Method (Appendix 12B)
(Need income statement and balance sheet data)
1. Cash = Sales + Decrease in
Receipts Accounts
from Customers* Receivable
or
– Increase in
Accounts
Receivable
2. Cash = Cost of + Increase in + Decrease in
Payments Goods Sold Inventory Accounts
to Suppliers or Payable
– Decrease in – Increase in
Inventory Accounts
Payable
3. Cash = Operating + Increase in + Decrease in –
Depreciation
Payments Expenses Prepaid Accrued and Other
for Expenses Liabilities Noncash
Operating** or or Expenses
Expenses – Decrease in – Increase in
Prepaid Accrued
Expenses Liabilities
4. Cash = Income + Decrease in
Payments Taxes Income
for Expense Taxes
Income Payable
Taxes or
– Increase in
Income
Taxes
Payable
5. Cash = Interest + Decreases in
Payments Expense Interest Payable **Wage expense would be
for – Increase in taken out if CP for wages was
Interest Interest Payable to be reported separately.
The related prepaids and
*use similar computations for payables would be considered
CR from Interest in the computation.
CR from Dividends
Chapter 12 – Reporting and Analyzing Cash Flows
Chapter 12 – Alternate Demonstration Problem #1
The Carpet Company’s 2014 and 2013 balance sheets:
December 31
2014
Debits
Cash ……………………………………………………………………
$10,500
Accounts receivable …………………………………………….
8,000
Merchandise inventory …………………………………………
21,000
Equipment ……………………………………………………………
18,000
Totals ………………………………………………………….
$57,500
Credits
Accumulated depreciation, equipment ………………….
$ 4,000
Accounts payable …………………………………………………
7,000
Taxes payable ………………………………………………………
1,000
Dividends payable ………………………………………………..
1,500
Common stock, $10 par value ……………………………….
27,000
Contributed capital in excess of par, common stock
6,000
Retained earnings ………………………………………………..
11,000
Totals ………………………………………………………….
$57,500
The Carpet Company’s income statement:
For the Year Ended December 31, 2014
Sales ……………………………………………………………………
$61,000
Cost of goods sold ……………………………………………….
$40,000
Wages and other operating expenses……………………
6,300
Income taxes expense ………………………………………….
4,200
Depreciation expense …………………………..………………
1,500
52,000
Net income …………………………………………………………..
$ 9,000
Chapter 12 – Reporting and Analyzing Cash Flows
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Chapter 12 – Alternate Demonstration Problem #1, continued
Additional information includes the following:
a. Equipment costing $3,500 was purchased during the year.
b. Fully depreciated equipment that cost $500 was discarded and its
cost and accumulated depreciation were removed from the
accounts.
c. Two hundred shares of stock were sold and issued at $15 per
share.
d. The company declared $4,000 of cash dividends and paid $2,500.
Required:
Prepare the statement of cash flows for the year ended December 31,
2014, using the:
1. Indirect method.
2. Direct method (Appendix 12B).
Chapter 12 – Reporting and Analyzing Cash Flows
website, in whole or part. 12–15
1. Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2014
Cash flows from operating activities:
Net income …………………………………………………………….
$ 9,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accounts receivable ……………………….
1,000
Increase in merchandise inventory ……………………
(3,000
)
Increase in accounts payable …………………………...
2,000
Decrease in taxes payable …………………………………
(1,000
)
Depreciation expense ……………………………………….
1,500
Net cash provided by operating activities ………….
$ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant asset ……………….
(3,500
)
Net cash used by investing activities ………………..
(3,500
)
Cash flows from financing activities:
Cash received from issuing stock ……………………..
3,000
Cash paid for dividends …………………………………….
(2,500
)
Net cash provided by financing activities ………….
500
Net increase in cash ……………………………………………….
6,500
Cash balance at beginning of 2014 …………………………
4,000
Cash balance at end of 2014 …………………………………..
$10,500
Chapter 12 – Reporting and Analyzing Cash Flows
Solution: Chapter 12 – Alternate Demonstration Problem #1, continued
2. Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2014
Cash flows from operating activities:
Cash received from customers ………………………….
$ 62,000
Cash paid for merchandise ……………………………….
(41,000
)
Cash paid for wages and other operating
expenses ………………………………………………………
(6,300
)
Cash paid for taxes …………………………………………..
(5,200
)
Net cash provided by operating activities ………….
$ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant assets ……………..
(3,500
)
Net cash used by investing activities ………………..
(3,500
)
Cash flows from financing activities:
Cash received from issuing stock ……………………..
3,000
Cash paid for dividends …………………………………….
(2,500
)
Net cash provided by financing activities ………….
500
Net increase in cash ……………………………………………….
$ 6,500
Cash balance at beginning of 2014 …………………………
4,000
Cash balance at end of 2014 …………………………………..
$10,500