Chapter5 The Statement of Cash Flows

1、5 The Statement of Cash Flows Accounting School Zhongnan University of Economics & LawI 中級(jí)會(huì)計(jì)學(xué)1. Conceptual overview and uses of the Statement of Cash FlowsIntermediate Accounting 5 The Statement of Cash Flows A statement of cash flows is a financial statement of a company that shows the cash inf

2、lows, cash outflows, and net change in cash from its operating, investing, and financing activities during an accounting period, in a manner that reconciles the companys beginning and ending cash balances. Intermediate Accounting 5 The Statement of Cash Flows The statement of cash flows helps users

3、to assess-The companys ability to generate positive future cash flows.The companys ability to meet its obligations and pay dividends.The companys need for external financing.The reasons for differences between the companys net income and associated cash receipts and payments.Both the cash and noncas

4、h aspects of the companys investing and financing transactions. 2. Structure of the Statement of Cash Flows Three categories of cash flows (1) Cash flows from operating activities.(2) Cash flows from investing activities.(3) Cash flows from financing activities.Intermediate Accounting 5 The Statemen

5、t of Cash Flows Cash Flows from Operating ActivitiesOperating activities include all transactions and other events that are not investing and financing activities. Operating activities include transactions involving acquiring, selling, and delivering goods for sale, as well as providing services.Cas

6、h receipts from the sale of goods or services and collections of accounts receivable are typical cash inflows from operating activities.Cash payments to suppliers for inventory and on account, for wages, and for taxes are examples of cash outflows from operating activities.Intermediate Accounting 5

7、The Statement of Cash Flows Cash Flows from Investing ActivitiesThe Cash Flows From Investing Activities section includes all the cash inflows and outflows involved in investing activities transactions of the company. Common cash flows from investing activities are-Intermediate Accounting 5 The Stat

8、ement of Cash Flows Receipts from selling investments in stocks and debt securities. Receipts from selling property, plant, and equipment. Payments for investments in stocks and debt securities. Payments for purchases of property, plant, and equipment. Cash Flows from Financing ActivitiesIntermediat

9、e Accounting 5 The Statement of Cash Flows The Cash Flows From Financing Activities section includes all the cash inflows and outflows involved in the financing activities transactions of the company. Common financing activities are- Receipts from the issuance of debt securities. Receipts from the i

10、ssuance of stocks. Payment of dividends. Payments to retire debt securities. Payments to reacquire stock. Non-cash investing and financing activities affect an entitys financial position but not the entitys cash flow during a period should be disclosed in supplemental part to cash flow statement.Int

11、ermediate Accounting 5 The Statement of Cash Flows Operating cycleA companys operating cycle is the average time taken to spend cash for inventory, process and sell the inventory, collect the accounts receivable, and convert them back into cash. Net income and the net cash flow within the operating

12、cycle are unlikely to be the same because of differences between the timing of the cash flows and the recognition of revenues and expenses. Intermediate Accounting 5 The Statement of Cash Flows FASB allows two methods for calculating and reporting a companys net cash flow from operating activities:

13、Direct method Indirect methodIntermediate Accounting 5 The Statement of Cash Flows Direct MethodIntermediate Accounting 5 The Statement of Cash Flows This method reports directly the major classes of operating cash receipts and payments of an entity during a period.Accrual-basis revenues and expense

14、s must be converted to equivalent cash receipts and payments.The amount of cash actually collected or paid is determined. Direct Method Example: Cash ReceiptsIntermediate Accounting 5 The Statement of Cash Flows Sales and Cash Collected from Customers: Beginning accounts receivable$ 50+ Sales 160= C

15、ash available for collection$210-Ending accounts receivable 70= Cash collected from customers $140 Direct Method Example: Cash PaidIntermediate Accounting 5 The Statement of Cash Flows Cost of Goods Sold and Cash Paid for Inventory:Ending inventory$ 90+ Cost of goods sold 120= Required inventory$215

16、-Beginning inventory100= Cash paid for inventory this year$ 115 Direct Method ExampleIntermediate Accounting 5 The Statement of Cash Flows Sales revenue (cash and A/R)$70,000 Less:Cost of goods sold (cash and A/P) $(29,000)Salaries expense (cash and S/P)(13,000)Depreciation expense (8,000)(50,000)In

17、come before income taxes$20,000Income tax expense (cash) (6,000)Net income$14,000Yummy Corporations Income Statement is as follows:Direct Method ExampleCash flows From Operating Activities:Cash Inflows:Cash received from customers$72,600 Cash inflows from operating activities$72,600 Cash Outflows:Ca

18、sh paid to suppliers$(38,000)Cash paid to employees(12,200)Cash paid for income taxes (6,000)Cash outflows for operating activities(56,200)Net cash provided by operating activities$16,400 Intermediate Accounting 5 The Statement of Cash Flows Indirect MethodIntermediate Accounting 5 The Statement of

19、Cash Flows This is a method of reporting net cash flow from operations that involves reconciling net income to a cash basis. It shows how non-cash flows affect net income.This method makes the following adjustments: Adjustments for receivables and other current operating assets. Adjustments for paya

20、bles and other current liabilities. Adjustments for depreciation and other non-cash items. Adjustments for gains and losses.Changes in accounts receivable directly affect revenues recorded on an accrual basis.AccountAdjustment toAccountChange Net IncomeAccounts ReceivableAccounts ReceivableIntermedi

21、ate Accounting 5 The Statement of Cash Flows Adjustments for ReceivablesChanges in liabilities mean the reverse of changes in current operating asset accounts.AccountAdjustment toAccountChange Net IncomeAccounts PayableAccounts PayableIntermediate Accounting 5 The Statement of Cash Flows Adjustments

22、 for PayablesDepreciation and similar non-cash items do not affect cash and are not reported on the statement of cash flows.Any non-cash item that reduces net income should be added back to net income in the indirect method.Any non-cash item that increases net income should be subtracted from net in

23、come in the indirect method.Intermediate Accounting 5 The Statement of Cash Flows Non-cash AdjustmentsGains or losses do not represent the cash effect of the transaction.Adjustment toAccount Net IncomeLossesGainsThese adjustments are made to net income since the sale of an investment is an investing

24、 activity, not an operating activity.Intermediate Accounting 5 The Statement of Cash Flows Adjustments for Gains and LossesBusiness engages in operating activitiesCash is received and disbursedOperating cash flowNet incomeApply accrual accounting rules“Undo” accrual accounting to get back to cash fl

25、owIntermediate Accounting 5 The Statement of Cash Flows Relationship Between Net Income and Operating Cash FlowIndirect Method ExampleNet Cash flows From Operating Activities:Net income$14,000 Adjustments for differences between income flows and cash flows for operating activities:Add: Depreciation

26、expense8,000 Decrease in accounts receivable2,600 Increase in salaries payable800 Less: Increase in inventory(2,000)Decrease in accounts payable(7,000)Net cash provided by operating activities$16,400Intermediate Accounting 5 The Statement of Cash Flows 4. Preparing a complete Statement of Cash Flows

27、 Intermediate Accounting 5 The Statement of Cash Flows Prepare the heading for the statement of cash flows and list the three major sections.Calculate the net change in cash that occurred during the accounting period.Determine the net income and list this amount as the first item in the net cash flo

28、w from operating activities section.Process for preparing a statement of cash flows Continued Intermediate Accounting 5 The Statement of Cash Flows Calculate the increase or decrease that occurred during the accounting period in each balance sheet account (except cash).Determine whether the increase

29、 or decrease in each balance sheet account (except cash) caused an inflow or outflow of cash and, if so, whether the cash flow was related to an operating, investing, or financing activity.If no cash flow occurred in Step 5, determine whether the increase or decrease in each balance sheet account (e

30、xcept cash) was the result of a non-cash income statement item or a simultaneous investing and/or financing transaction.ContinuedProcess for preparing a statement of cash flows Process for preparing a statement of cash flowsIntermediate Accounting 5 The Statement of Cash Flows Complete the various s

31、ections of the statement of cash flows and check that the subtotals of the sections sum to the net change in cash and that the sum of the net change in cash and the beginning cash balance is equal to the ending cash balance reported on the balance sheet. Simple ExampleIntermediate Accounting 5 The S

32、tatement of Cash Flows LEYTON COMPANYStatement of Cash FlowsFor Year Ended December 31, 2005The statements heading Simple ExampleIntermediate Accounting 5 The Statement of Cash Flows Net Cash Flow From Operating ActivitiesNet income$ 7,000 Adjustments for differences between incomeand cash flows fro

33、m operating activities:Add: Depreciation expense2,300 Increase in accounts payable1,500 Less: Increase in accounts receivable (2,700)Net cash provided by operating activities$8,100 Cash Flows From Investing ActivitiesPayment for purchase of building$(12,000)Proceeds from sale of land, at cost 3,000 Net cash used for investing activities(9,000) Simple ExampleIntermediate Accounting 5 The Statement of Cash Flows Cash Flows From Financing ActivitiesProceeds from issuance of bonds$ 7,000 Payment of dividends (3,500)Net cash provided by financing activitie