Marley's Cash Flow

Intermediate Accounting October 21st,2010
1. 2. 3. General Course Questions Questions on Balance Sheet Homework Cash Flow Statement A. Reporting items as Operating, Investing & Financing B. Preparing an Indirect Statement of Cash Flows (pr. 5-6)
1.
Review Quiz #3 Chapters 4, 17 & 22

A. Chapter 5 Problem 7
5. Assignments for Tuesday, October 26th:
B. Chapter 23 Exercise 15
6. Return and Review Quiz #3 Chapters 4, 17 & 22
1
Cash Flow Statement Learning Objectives

Objectives:
1. 2. 3. 4. 5. 6. 7. Describe the purpose of the Cash Flow Statement (how it meets GAAPs Objectives of Financial Reporting) Prepare a Statement of Cash flows under both the Direct and Indirect Method. Differentiate between Net Income and Cash from Operations (CFO) and use it to assess a companys ability to generate reconciling net income to cash Determine whether a company is expanding or contracting using the Investing section of the Cash Flow Statement Evaluate the companys financing activity are they relying on internal or external financing, and debt or equity
future Cash Flows (CFO) Evaluate the companys quality of earnings by comparing and
financing?
Assess a companys need for external financing and its ability to
pay its debts and dividends
The Cash Flow Statement

What is included in cash? The cash flow statement provides information for a period of time about:
cash receipts (cash inflows) uses of cash (cash outflows)
Inflows and outflows are reported for:

operating investing financing activities Summing to the net increase/decrease in cash over the period
Cash is King
Remember the 2nd Objective of Financial Reporting: to Provide Information that is useful in assessing future ________ flows. (see the House of
GAAP from our first class, and repeated on the next slide)
A good place to start predicting future cash flows is the companys historical cash flows. The Statement of Cash Flows provides information about the cash receipts and cash disbursements during a specific time period, the same time period covered by the income statement.
4 4
GAAPs Objective is to provide Financial Information that is:
HOUSE OF GAAP
1. 2. 3.
Useful in investment & credit decisions Useful in assessing future ______ flows About the enterprise resources (assets), claims (liabilities & owners equity) to resources, and _________ in them
Elements Assets Liabilities Stockholders Equity Other Comprehensive Income Revenues Expenses Constraints Cost/Benefit Materiality Industry Practice Conservatism
Qualitative Characteristics Relevance Predictive or Feedback Value Timeliness Reliability Comparability Consistency Assumptions Economic Entity Going Concern Monetary Unit Periodicity
Principles Historical Cost Revenue Recognition Matching Full Disclosure
Highlighting Balance Sheet Changes

The 3rd Objective of Financial Reporting is to Provide Information about the enterprise resources (assets), claims (liabilities & owners equity) to resources, and _________ in them The Cash Flow Statement also highlights how the Balance Sheet Accounts have changed.
Changes in Balance Sheet Accounts: 1. Most Current Assets and Current Liabilities (working capital accts) 2. Most Long-term Assets 3. Most Non-operating Liabilities Stockholders Equity accounts Located in Cash Flow Statement
(see the House of GAAP Prior slide and first class)
Operating Section
Investing Section Financing Section
6
Which Financial Statement should you use?

If you want to know the Balance of an Asset account, i.e. how much inventory a company has at the end of the period?
Income Statement Balance Sheet Statement of Stockholders Equity Cash Flow Statement
If you want to know how much an asset account changed during the period, i.e. how much inventory increased or decreased?
Which Financial Statement should you use?

If you want to know the Balance of an Liability account, i.e. how much a company owes its suppliers at the end of the period?
If you want to know how much liability account has changed during the period, i.e. how much accounts payable has increased or decreased?
Using the Statement of Cash Flows

In addition to reporting the changes to each current operating asset & liability (accounts receivable, inventory, accounts payable) the Statement of Cash Flows also helps: assess a companys ability to generate positive future cash flows from operations,
reconcile differences between net income and the change in the cash balance.
monitor a companys investment in property, plant and equipment is it more or less than their depreciation expense? Is the company expanding or contracting? assess a companys need for external financing, source of external financing (debt or equity) and its ability to pay its debts and dividends.
9

:
Cash Inflows
Beginning Operating Cash
Investing
Financing
Ending Cash
Cash Outflows
10
The Three Sections of the Cash Flow Statement Operating - cash inflows and outflows resulting form
activities that are central to the day-to-day operation of the business. Cash flows from Revenue and Expenses.
Investing - cash inflows and outflows from the sale
or purchase of property, plant & equipment, investment in other companies and loans to other companies. (Changes in non-current and/or non-operating assets) or re-purchase of the companies stock, borrowing or repaying interest bearing debt, and paying dividends to stockholders. (Changes in Non-operating liabilities and shareholders equity)
11
Financing - cash inflows and outflows from the sale
Changes to all Balance Sheet Accounts are on the Cash Flow Statement
Decision Tree to determine where change will be: Operating changes to all current & operating accounts
Start with accrual accounting income and adjust it to get cash from operations
Non-Operating changes to all non-current and/or

non-operating accounts
Investing non-current &/or non-operating ASSETS Financing interest bearing debt and non-current &/or
non-operating Liabilities & Stockholders Equity accts

12
Classification of Cash Flows

For each item or event listed below, indicate whether the related it would be reported in the Operating, Investing or Financing section of the Cash Flow Statement: 1. Payment on long-term debt 2. Issuance of bonds at a premium 3. Collection (reduction) of accounts receivable 4. Cash dividends declared and paid 5. Collection (reduction) of notes receivable, affiliated company 6. Sale of (reduction) of trading securities (marketable securities) 7. Payment of wages (decrease in wages payable) 8. Issuance of common stock for cash, C.S increases 9. Payment of income taxes (decrease in income taxes payable) 10. Purchase of equipment (equipment increases) 11. Purchase of treasury stock (T.S. increases) 12. Sale of real estate held as a long-term investment 13. Purchase of inventory (inventory increases)
Preparing a Statement of Cash Flows

The choice between methods of preparing the statement of cash flows only affects the Cash from Operations section.
Indirect method: derives cash flows from operations by starting with net income and adjusting it to get Cash from Operations
Used almost exclusively Most be provided as a schedule if Direct Method is Used
Direct method: derives cash flows directly for each source or use of cash
The Choice of Method has no effect on the other two sections of the Cash Flow Statement (the Cash Flows from Investing and Financing)
Operating Activities
Operating activities consist of those activities that are central to the dayto-day operation of the business. The Cash Inflows and Outflows from the Revenues and Expenses that are reported on an accrual basis on the Income Statement will be reported in Operating section of the Cash Flows Statement.
Cash Inflows from Operating Activities include: 1. Cash from customers from the sale of products. 2. Interest and Dividends received on investments Cash Outflows from Operating Activities include: 1. Cash paid to suppliers for purchases of inventory. 2. Cash paid to employees for wages and salaries 3. Cash paid to governments for taxes 4. Cash paid to creditors for interest on loans (but not for repayment of principal)
Operating Activities on the Cash Flow Statement include Normal Operating Activities + dividends received and both interest received and interest paid.
15
Decision Tree to determine Reporting on the Cash Flow Statement

Operating changes to all current & operating accounts
Net Income (accrual basis) 1. Adjustments to go from Accrual to Cash a. Changes to all Current & Operating Assets b. Changes to all Current & Operating Liabilities c. Non Cash Expenses 2. Adjustments for non-operating gains and losses Net Cash Provided (Used) by Operations

non-operating Liabilities & Stockholders Equity accts 16
The changes to Current Operating Assets & Liabilities are needed to Convert Accrual Accounting Income to Cash from Operations
Sales $98,000 Cost of Goods Sold 72,000 Gross Profit 26,000 Operating Expenses 14,000 Income before Taxes $12,000 Income Tax Expense 4,000 Net Income $ 8,000 Adjustments (to convert Accrual Net income) + Cash From Operations Accounts Receivable
End of Year
$20,000
Beg of the Year
$10,000
How did the increase in A/R affect Cash from Operations? Did you receive more or less cash than is reflected in Sales?
Cash Flow Statement starts with Net Income 17 & adjusts it to CFO
Sales $98,000 Cost of Goods Sold 72,000 Gross Profit 26,000 Operating Expenses 14,000 Income before Taxes $12,000 Income Tax Expense 4,000 Net Income $ 8,000 Adjustments (to convert Accrual Net income) + Cash From Operations
End of Year
Inventory
$8,000
$ 9,000
Beg of the Year
How did the decrease in Inventory affect Cash from Operations?
Did you use more or less cash than is reflected in Cost G Sold?
End of Year
Accounts Payable $ 17,000
$7,000
Beg of the Year
How did the decrease in Accounts Payable affect Cash from Operations?
Did you spend more or less cash than is reflected in income tax expense?
End of Year
Taxes Payable $ 3,000
$5,000
Beg of the Year
How did the increase in Taxes Payable affect Cash from Operations? Did you spend more or less cash than is reflected in income tax expense?
Cash Flow Statement starts with Net Income & adjusts it to CFO 20
Changes in Current & Operating
accounts & their affect on CFO

Net Income
1. Adjustments to go from Accrual to Cash caused by changes to operating assets and liabilities:
A. Subtract changes in current operating assets and current operating liabilities that USE up CASH: Deduct for cash spent to increase inventory & other current op. assets Deduct for cash used to Decrease Current Operating Liabilities B. Add changes in current operating assets and current operating liabilities that Provide CASH: Add cash collected from decrease in receivables or other current op. assets Add cash saved by not paying operating liabilities accounts payable increased or more money was received as unearned revenue from customers making advance payments
Net Cash Provided (Used) by Operations

21
Changes to all Balance Sheet Accounts are on the Cash Flow Statement
Net Income (accrual basis) 1. Adjustments to go from Accrual to Cash 2. Adjustments for non-operating gains and losses Net Cash Provided (Used) by Operations

non-operating Liabilities & Stockholders Equity accts

22
Where do we find the Information for the Statement of Cash Flows: Indirect Method
Info from Accrual Based Stmts.
Income Statement:
(Non Cash Exp. & Non-Op Gains &Losses)
Used on Cash Flow Statement

Operating activities: Adjust net income to CFO
Adjustment to go from accrual to cash & eliminate Non-Op items
Balance Sheet:
(changes in Current & Op .Assets and Current Operating Liabilities)
Balance Sheet: Changes in Non-Current and Non-operating Assets Balance Sheet: Changes in Non-Current and Non-operating Liabilities
Investing activities: Inflows and Outflows from sales and purchases of Non-operating and Non-current assets Financing activities: Inflows and outflows from debt and equity Transactions excluding income
And Equity
SCF: Indirect Preparation Guide

1. Calculate changes in balance sheet accounts (they will all need to be reflected on the Statement of Cash Flows to balance back to the change in cash, which is your reconciling number). 2. Use the Decision Tree to determine which section of the Cash Flow Statement should be used to reflect the change in each Balance Sheet account. 3. Calculate and Prepare the Cash from Operations by: A. Start with Net Income (which is based on accrual accounting) B. Adjust it to Cash from Operations by: 1. Adding back Non-cash Expenses (depreciation, amortization) 2. Eliminating non-operating gains and losses (excluding Dividend Income, Interest Income, and Interest Expense) 3. Adjust it for changes in Current & Operating Assets 4. Adjust if for changes in Current & Operating Liabilities Steps 4-6 continued on the next slide
SCF: Indirect Preparation Guide

4. Prepare the Investing Section: A. Allocate the change in PP&E between current year depreciation, purchases of PP&E and sales of PP&E, recording the cash received and paid for PP&E separately B. Account for the changes in all non-current and non-operating assets 5. Prepare the Financing Section A. Allocate change in RE between dividends and Net Income B. Allocate change in debt between new borrowings and repayments, recording cash received and paid separately C. Account for changes in all non-current & non operating (interest bearing) liabilities & equity 6. Reconcile the net change in cash from all three sections to the change in cash on the balance sheet
Prepare Statement of Cash Flows (Indirect using Ch 5 problem 6)

Lansbury Inc. Balance Sheet December 31, 2010 increase (decrease) $ 12,000 20,400 (11,600) Assets Cash Accounts Receivable Investments $ 2010 32,000 41,600 20,400 $ 2009 20,000 21,200 32,000
Plant Assets (net)

Land total assets $
70,000
88,000 252,000
81,000
40,000 $ 194,200 $
(11,000)
48,000 57,800
Liabilities and Stockholders's Equity Accounts payable Notes Payable Bonds Payable Common Stock Retained Earnings $ $ 30,000 25,000 30,000 120,000 47,000 252,000 100,000 23,200 $ 194,200 $ $ 30,000 41,000 $ (16,000) 30,000 20,000 23,800 57,800
Prepare Statement of Cash Flows (Indirect using Ch 5 problem 6)

1. Net Income for 2010 was $32,000, after depreciation of $11,000. 2. Lansbury sold part of its investment portfolio for $15,000 resulting in a gain of $3,400. 3. A tract of land was purchased for $18,000 cash. 4. Land was purchased through the issuance of $30,000 bonds. 5. Long-term notes payable in the amount of $16,000 were retired before maturity by paying $16,000 cash. 6. An additional $20,000 in common stock was issued at par. 7. Dividends totaling $8,200 were declared and paid to stockholders.
Computing Cash from Operations

Start with Net Income and Adjust it to get Cash from Operations.
Net Income (accrual basis)
$_______
1. Adjustments to go from Accrual to Cash: A. Add back non-cash expenses (Expenses that reduce net income but do not use up any cash) _____________________________ $______ _____________________________ $______ B. Changes in Operating Assets & Liabilities _____________________________ _____________________________ $______ $______
2. Adjustments for non-operating gains and losses:

We want only operating cash so add back non-operating losses which have reduced net income and subtract out gains from non-operating activities Loss on disposition of assets
_____________________________
$______
________
Net Cash Provided by Operations
$ ______ 28
Computing Cash from Operations Computing Cash from Operations Start with Net Income and Adjust it to get Cash from Operations.
$32,000
1. Adjustments to go from Accrual to Cash: A. Add back non-cash expenses (Expenses that reduce net income but do not use up any cash) Depreciation Expense $ 11,000 _____________________________ $______ B. Changes in Operating Assets & Liabilities Increase in Accounts Receivable _____________________________
(20,400) $______

Gain on sale of Investments
( 3,400)
$ 19,200
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Finding Investing Activity - Changes to what accounts?


Investing non-current &/or non-operating ASSETS

cash inflows and outflows from : 1) the sale or purchase of property, plant & equipment, 2) investment in other companies (marketable securities) 3) loans to other individuals or companies.
Financing non-current &/or non-operating
Liabilities & Stockholders Equity Accounts

30
Investing Activities
Investing activities come in two basic forms: 1) Investments in your own company, including the purchase of long-term productive assets such as property, plant and equipment 2) Investments in others by purchasing stocks and bonds of another corporation, or a partnership interest, or making loans to another entity Cash Inflows result from the Sale of: 1. Property, Plant & Equipment 2. Investments in other companies 3. Collecting money loaned to other companies Cash Outflows result from the Purchase of: 1. Property, Plant & Equipment 2. Investment in other companies 3. Loaning money to other companies
31
Computing Cash Investing & Financing

Net Cash Provided by Operations Cash from Investing:
$_______
(cash received or paid from changes in non-current & non-operating assets, including the affect of gains & losses) _____________________________ $______ _____________________________ $______ _____________________________ $______ $______
(cash received or paid from changes in non-current & non-operating Liabilities & Stockholders Equity, excluding income) _____________________________ $______ _____________________________ $______ _____________________________ $______ $______ $ ______
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Cash from Financing:
Net Increase in Cash

$ 19,200
(cash received or paid from changes in non-current & non-operating assets, including the affect of gains & losses) Sale of Investments $15,000 Purchase of Land (18,000) (3,000) (cash received or paid from changes in non-current & non-operating Liabilities & Stockholders Equity, excluding income) _____________________________ $______ _____________________________ $______ _____________________________ $______ $______
$ ______
33
Finding Financing Activity - Changes to what accounts?


non-operating accounts Investing non-current &/or non-operating ASSETS
cash inflows and outflows from :
Financing non-current &/or non-operating Liabilities & Stockholders Equity Accounts

1) the sale or re-purchase of the companies own stock,
2) borrowing or repaying interest bearing debt, and 3) paying dividends
34
Financing Activities
This section focuses on the external financing activities of the company which come in two basic forms: 1) Equity financing includes the use of both Common & Preferred Stock. 2) Debt financing includes the use of notes (loans) and bonds.
Cash Inflows result from: 1. Selling shares of our own stock 2. Borrowing, bank loans, issuing bonds or other debt Cash Outflows result from: 1. Dividend payments to stockholders 2. Reacquiring shares of the companys own stock (Treasury stock) 3. Repaying principal on loans, bonds or other debt
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$ 19,200
(cash received or paid from changes in non-current & non-operating assets, including the affect of gains & losses) Sale of Investments $15,000 Purchase of Land (18,000) (3,000) (cash received or paid from changes in non-current & non-operating Liabilities & Stockholders Equity, excluding income) Issuance of Common Stock $ 20,000 Repayment of notes payable (16,000) Payment of cash dividends ( 8,200) (4,200)
$ 12,000
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SCF Comments
Non-cash transactions are not shown on the face of the SCF but material non-cash transactions must be disclosed (usually in the notes)
E.g. the firm trades $1M of common stock for a warehouse
Dividends are shown under financing activities, but these are dividends paid, not necessarily dividends declared
So if you see dividends on the R/E Statement, and dividends payable on the B/S, you must determine what was actually paid during the year
How to Read a SCFs

Know where a company is in lifecycle Focus on subtotals Dig into larger items Consider if is healthy/unhealthy given lifecycle
Typical Company Cash Flow Life Cycle
LO 2 Identify the major classifications of cash flows.
Using The Cash Flow Statement

Objectives:
1. 2. 3. 4. 5. Use the Cash Flow Statement to assess the companys ability to generate Cash from Operations Evaluate the companys quality of earnings by comparing net income to cash Determine whether a company is expanding or contracting using the Investing section of the Cash Flow Statement. Investing internally or externally? Evaluate the companys financing activity are they relying on internal or external financing, and debt
or equity financing?
Assess a companys need for external financing and its
ability to pay its debts and dividends
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Net cash flow from operating activities Net cash provided (used) in investing activities Net cash provided (used) in financing activities Net increase or decrease in cash for the year Cash balance beginning of year Ending Cash Balance Co. A Co. B Co. C $ (300) $ (400) $ 300 (900) 500 (90) 1,200 (10) (240) 150 150 150
1. 2. 3. 4. 5. 6.
Calculate each companys cash balance at the end of the year. Would you prefer to own company A, B or C? Why? Which company would you least like to own? Why? Which companies have net income and which have a net loss? Explain what might cause company Cs net cash from financing activities to be negative. Explain what might cause company As net cash from financing activities to be positive.
41

Net Income (Loss) Adjustments to convert Net Income to Cash from Operations Co. X $ 200 Co. Y Co. Z $ (400) $ 100
Net cash flow from operating activities
$ (300) $ 300
$ 200
1.
Would you prefer to own company X, Y or Z ? Why?
2.
3. 4. 5.
Which company would you least like to own? Why?

What could cause Co Xs net income to differ from its cash from operations? What could cause Co Ys net income to differ from its cash from operations? What could cause Co Zs net income to differ from its cash from operations?
42
Summary story from the Cash Flow Statement

2010 2009 2008
Cash provided by Operations
Cash (required) by Investing Activity Net effect on Cash from issuing (retiring) debt
3,919
7,000
3,670
(14,031) (4,600) (3,650) (6,154) (2,339) 2,876
Net effect on Cash from issuing (retiring) stock

Effect of exchange rate changes on cash Net increase (decrease) in Cash What is Companys major source of cash?
23,082
(4) $6,812
141
14
639
-
$216 $3,535
Is the company relying upon internal or external financing? Is the Company generating enough cash to pay its debt obligations?
43

Objectives:
1. Use the Cash Flow Statement to assess the companys ability to generate Cash from
Operations
2. Evaluate the companys quality of earnings by comparing net income to cash Determine whether Cash From Operations (CFO) is positive and growing. For Quality Earnings CFO should be greater than Net Income
44
Objectives:
3. Determine whether a company is expanding or contracting using the Investing section of the Cash Flow Statement
Compare the amount a company is spending on long-term assets to the amount they are expensing to determine whether they are growing.
45
Objectives:
4. Evaluate the companys financing activity are they relying on internal or external financing, and debt or
equity financing?
Compare Cash From Operations to the amount of Cash received from new debt and/or from the sale of additional shares of stock. If CFO is greater the company is relying on internal financing.
46

Objectives:
5. Assess a companys need for external financing and its ability to pay its debts and
dividends.
Compute the amount of cash available to pay debts and dividends by deducting the cash needed for fixed asset purchases from the Cash from Operations. Is the remaining Cash From Operations sufficient to cover debt and dividend payments?
47
SCF: Interest, Dividends and Taxes Classification

Interest Paid:
US GAAP: operating activity (cash from the associated debt is financing activity) IFRS: operating or financing activities
Interest Received:
US GAAP: operating activity (cash from the related asset is investing activity) IFRS: operating or as investing activities
Dividends Paid:
US GAAP: financing activity, consistent with the placement of proceeds from selling stock. IFRS: financing or operating
Dividends Received:
US GAAP: operating activities (cash from related outflows was investing activity) IFRS: financing or operating
Tax payments/refunds:
US GAAP: operating activity, regardless of whether underlying taxable income relates to operations or not (e.g. if a firm has a taxable capital gain on the sale of equipment) IFRS: operating unless specifically associated with financing or investing activities
Format of the Statement of Cash Flows
Computing Cash from Operations

Start with Net Income and Adjust it to get Cash from Operations.
$_______
1. Adjustments to go from Accrual to Cash: A. Add back non-cash expenses (Expenses that reduce net income but do not use up any cash) _____________________________ $______ _____________________________ $______ B. Changes in Operating Assets & Liabilities _____________________________ _____________________________ $______ $______

_____________________________
$______
________
$ ______ 50

$_______
(cash received or paid from changes in non-current & non-operating assets, including the affect of gains & losses) _____________________________ $______ _____________________________ $______ _____________________________ $______ $______
(cash received or paid from changes in non-current & non-operating Liabilities & Stockholders Equity, excluding income) _____________________________ $______ _____________________________ $______ _____________________________ $______ $______ $ ______
51
Operating Activities Indirect Method

E23-6: KRC Companys financial statements for the year ended December 31, 2010, contained the following condensed information.
Revenues from fees Operating expenses Depreciation expense Loss on sale of equipment Income before income tax Income tax Net income Accounts receivable Accounts payable Income taxes payable 2010 $ 840,000 624,000 60,000 26,000 130,000 40,000 $ 90,000 $ 37,000 46,000 4,000 $ 59,000 31,000 8,500 $(22,000) 15,000 (4,500) 2009 Change

E23-6: Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2).
Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities
$ 90,000
60,000 26,000 17,000 10,000 (4,500) 198,500

E23-6: Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2).
Cash flows from operating activities Net income Net Income Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense Depreciation Expense on of sale of equipment LossLoss on Sale Equip Decrease in accounts receivable Accounts Receivable Decreased Increase in accounts payable A/P increased Decrease in income taxes payable Taxes Pay. Decreased Net cash provided by operating activities Cash from Operations
$ 90,000 $90,000
60,000 $60,000 26,000 26,000 17,000 22,000 10,000 15,000 (4,500) (4,500) 198,500 $208,500
Practice Determining Net Cash Flow from Investing and Financing Activities
(a): Plant assets that had cost $25,000 6 years before and were being
depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300. (b): During the year, 10,000 shares of common stock with a stated value of
$10 a share were issued for $33 a share.

(d): The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash. (h): During the year, treasury stock costing $47,000 was purchased

Statement of Cash Flows Cash flow from operating activities Net income (loss) Adjustment to reconcile net income to cash: Loss on sale Depreciation expense Gain on sale Cash from operations Cash flow from investing activities Sale of plant assets Sale of land Cash from investing activities Cash flow from financing activities Sale of common stock Purchase of company stock Cash from financing activities Net Change in Cash 330,000 (47,000) 283,000 $ 293,000 $ (50,000) 2,700 22,000 (9,000) (34,300) 5,300 39,000 44,300
I F
E23-2 (a): Plant assets that had cost $25,000 6 years before
and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300.
Plant assets (cost) Accumulated depreciation ([$25,000 / 10] x 6) Book value at date of sale Sale proceeds Loss on sale
$ 25,000 15,000 10,000 (5,300) $ 2,700
E23-2 (b): During the year, 10,000 shares of common
stock with a stated value of $10 a share were issued for $33 a share.
Shares sold Market value per share Value of shares $ 10,000 33 $ 330,000
LO 5
Determine net cash flows from investing and financing activities.

Statement of Cash Flows Cash flow from operating activities Net income (loss) Adjustment to reconcile net income to cash: Loss on sale Depreciation expense Gain on sale Cash from operations Cash flow from investing activities Sale of plant assets Sale of land Cash from investing activities Cash flow from financing activities Sale of common stock Purchase of company stock Cash from financing activities Net Change in Cash 330,000 (47,000) 283,000 $ 293,000 5,300 39,000 44,300 $ (50,000) 2,700 22,000 (9,000) (34,300)
I F
Direct Versus Indirect Controversy

In Favor of the Indirect Method
Focuses on the differences between net income and

net cash flow from operating activities. Provides link between the statement of cash flows and the income statement and balance sheet.
Special Rules Applying to Indirect Methods

Disclose Interest paid. Disclose Income taxes paid.
LO 7 Identify sources of information for a statement of cash flows.
Direct Versus Indirect Controversy

In Favor of the Direct Method
Shows operating cash receipts and payments.

Information about cash receipts and payments is more revealing of a companys ability
1. to generate sufficient cash from operating activities to pay its debts, 2. to reinvest in its operations, and 3. to make distributions to its owners.
LO 7 Identify sources of information for a statement of cash flows.
Special Problems in Statement Preparation

1. Adjustments similar to depreciation Amortization of limited-life intangible assets.
Amortization of deferred costs.

Amortization of bond discount or premium. Changes in deferred income taxes. Change related to an investment when recording income or loss under the equity method.
LO 8 Discuss special problems in preparing a statement of cash flows.
Special Problems in Statement Preparation

2. Accounts receivable, net 3. Other working capital changes 4. Net losses 5. Gains 6. Stock options 7. Postretirement benefits
8. Extraordinary items
9. Significant noncash transactions
LO 8 Discuss special problems in preparing a statement of cash flows.
What can the Investing Section of the Cash Flow Statement tell us about the company?
How much did the company invest in itself (how much cash was used on capital expenditures PP&E)? $__________ Two questions to ask to determine if the Co. expanded or contracted? 1) Did they invest more in property, plant and equipment than they reported as depreciation & amortization expense? Depreciation & Amortization expense $__________
2) How much cash did the company receive from selling property, plant and equipment? $__________
Did Beta expand or contract? (Did the invest more than the sum of 1 & 2?) ___________ Why is the purchase of Marketable Securities in the Investing section? Is the Investing activity generating or using up cash? __________
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Intermediate Accounting October 21st,2010

Review Quiz #3 Chapters 4, 17 & 22

5. Assignments for Tuesday, October 26th:

Cash Flow Statement Learning Objectives

Assess a companys need for external financing and its ability to

pay its debts and dividends

The Cash Flow Statement

Inflows and outflows are reported for:

GAAPs Objective is to provide Financial Information that is:

Principles Historical Cost Revenue Recognition Matching Full Disclosure

Highlighting Balance Sheet Changes

(see the House of GAAP Prior slide and first class)

Which Financial Statement should you use?

Which Financial Statement should you use?

Using the Statement of Cash Flows

The Cash Flow Statement

Beginning Operating Cash

Investing - cash inflows and outflows from the sale

Financing - cash inflows and outflows from the sale

Non-Operating changes to all non-current and/or

non-operating Liabilities & Stockholders Equity accts

Classification of Cash Flows

Preparing a Statement of Cash Flows

Decision Tree to determine Reporting on the Cash Flow Statement

Non-Operating changes to all non-current and/or

non-operating Liabilities & Stockholders Equity accts 16

Beg of the Year

Beg of the Year

How did the decrease in Inventory affect Cash from Operations?

Accounts Payable $ 17,000

Beg of the Year

Taxes Payable $ 3,000

Beg of the Year

Changes in Current & Operating

accounts & their affect on CFO

Net Cash Provided (Used) by Operations

Non-Operating changes to all non-current and/or

non-operating Liabilities & Stockholders Equity accts

Used on Cash Flow Statement

SCF: Indirect Preparation Guide

SCF: Indirect Preparation Guide

Prepare Statement of Cash Flows (Indirect using Ch 5 problem 6)

Plant Assets (net)

Prepare Statement of Cash Flows (Indirect using Ch 5 problem 6)

Computing Cash from Operations

Net Income (accrual basis)

2. Adjustments for non-operating gains and losses:

Net Cash Provided by Operations

2. Adjustments for non-operating gains and losses:

Gain on sale of Investments

Net Cash Provided by Operations

Finding Investing Activity - Changes to what accounts?

Non-Operating changes to all non-current and/or

Investing non-current &/or non-operating ASSETS

Financing non-current &/or non-operating

Liabilities & Stockholders Equity Accounts

Computing Cash Investing & Financing

Cash from Financing:

Net Increase in Cash

Computing Cash Investing & Financing

Cash from Financing:

Net Increase in Cash

Finding Financing Activity - Changes to what accounts?

Non-Operating changes to all non-current and/or

Marley's Cash Flow

Marley's Cash Flow