Description
identify the purposes of the statement of cash flows, distinguish among operating, investing and financing activities, prepare a statement of cash flows by the direct method, use the financial statements to compute the cash effects of a wide variety of business transactions and prepare a statement of cash flows by the indirect method
Preparing and Using the Statement of Cash Flows
Click to edit Master subtitle style
2/1/13
W.T. Grant Company
? W.T.
Grant Company was once one of the leading retailers in the United States.
2/1/13
W.T. Grant Company
? W.T.
Grant’s income statement reported rising profits as the company slid into bankruptcy.
2/1/13
W.T. Grant Company
? What
went wrong? ? Grant’s operations simply did not generate enough cash to pay the bills. ? If anyone had analyzed Grant’s cash flows, the cash shortage would have been apparent.
2/1/13
W.T. Grant Company
? Cash
receipts from customers were not as high as cash payments to suppliers. ? Prior to W. T. Grant’s bankruptcy, companies were not required to include a statement of cash flows in the annual report.
2/1/13
Chapter Objectives
1 2 3
Identify the purposes of the statement of cash flows. Distinguish among operating, investing and financing activities. Prepare a statement of cash flows by the direct method.
2/1/13
Chapter Objectives
4
5
Use the financial statements to compute the cash effects of a wide variety of business transactions. Prepare a statement of cash flows by the indirect method.
2/1/13
Purpose of The Statement of Cash Flows: Basic Concepts of cash flows reports the ? The statement
entity’s cash flows (cash receipts and cash payments) during the period.
2/1/13
Purpose of The Statement of Cash Flows: Basic Concepts statement identifies what a ? The cash flow
company invested in during the period. ? It shows how the investment was financed. ? It displays how cash can be generated internally from profitable operations or from external sources.
2/1/13
Objective 1
Identify the purposes of the statement of cash flows.
2/1/13
Purposes of the Statement of Cash Flows
? The – – – –
statement of cash flows is designed to fulfill the following: predict future cash flows evaluate management decisions determine the ability to pay dividends plus interest and principal show the relationship of net income to changes in the firm’s cash
2/1/13
Cash Balance Includes...
– – –
cash on hand. cash in the bank. cash equivalents.
2/1/13
Cash Equivalents Are....
– – –
short-term, highly liquid investments convertible into cash with little delay. money market accounts. U.S. Government Treasury bills.
2/1/13
Objective 2
Distinguish among operating, investing and financing activities.
2/1/13
Basic Organization of the Statement of Cash Flows
?A 1 2 3
business may be evaluated in terms of three types of business activities: Operating activities Investing activities Financing activities
2/1/13
Operating Activities Are...
day to day business transactions, such as: l receiving cash from customers l paying cash to suppliers ? Operating activities are related to the transactions that make up net income.
–
2/1/13
Operating Activities
? Interest
and dividends received are related to investing activities. ? However, the FASB has decided to classify the cash received from these items as operating activities. ? The FASB feels that interest expense is a cost of doing business.
2/1/13
Investing Activities...
are those that support operations. ? Investing activities increase and decrease the assets that are available to the business.
–
2/1/13
Investing Activities...
–
are related to the Long-Term Asset accounts.
2/1/13
Financing Activities Involve...
–
l
l
l
external financing, such as: obtaining resources from the owners or returning resources to them. providing owners with a return on their investment. obtaining resources from creditors and repaying the amounts borrowed.
2/1/13
Format of the Statement of Cash Flows
? FASB
1 2
Statement 95 approved two methods for reporting cash flows from operating activities. Direct method Indirect method
2/1/13
Format of the Statement of Cash Flows
? The
direct method lists cash receipts from specific operating activities and cash payments for each major operating activity. ? The indirect method is a short-cut method for accrual systems.
2/1/13
Objective 3
Prepare a statement of cash flows by the direct method.
2/1/13
The Direct Method...
– –
determines the amount of cash inflows and cash outflows. identifies the activities that increase or decrease cash.
2/1/13
Cash Flows from Operating Activities
? Cash
collections from customers ? Cash receipts of interest ? Cash receipts of dividends
2/1/13
Cash Flows from Operating Activities
? Payments
to suppliers ? Payments to employees ? Payment for interest expense ? Payment for tax expense
2/1/13
Cash Flows from Investing Activities
? Proceeds
from the sale of plant assets ? Proceeds from the sale of investments ? Collections of loans
2/1/13
Cash Flows from Investing Activities
? Cash
payments to acquire plant assets ? Cash payments to acquire investments ? Loans to other companies
2/1/13
Cash Flows from Financing Activities
? Increases
in common stock, additional paidin capital and long-term liabilities are sources of cash. ? Decreases in common stock, paid-in capital and long-term liabilities are uses of cash. ? Paying dividends is a use of cash.
2/1/13
Objective 4
Use the financial statements to compute the cash effects of a wide variety of business transactions.
2/1/13
Computing Cash Collections from Customers
? Collections
can be computed by converting sales revenue to the cash basis. ? Beginning Accounts Receivable balance + Sales on account - Collections = Ending Accounts Receivable balance
2/1/13
Computing Cash Collections from Customers Store income statement ? Lloyd’s Sporting
reports sales on account of $884,000 for the year. ? Accounts Receivable increased from $80,000 at the beginning of the year to $93,000 at year end. ? How much cash did Lloyd collect ? ? $871,000
2/1/13
Computing Cash Collections from Customers ? $80,000 + $884,000 - x = $93,000
?x
= $80,000 + $884,000 - $93,000 ? x = $871,000 ? Accounts Receivable Beginning balance 80,000 Sales 884,000 Collections 871,000 Ending balance 93,000
2/1/13
Computing Cash Collections from Customers ? Another explanation:
? Because
Accounts Receivable increased by $13,000, Lloyd’s Sporting Store received $13,000 less cash than its sales revenue for the period.
2/1/13
Computing Cash Collections from Customers
? All
collections of receivables are computed following the pattern illustrated for collections from customers.
2/1/13
Computing Payments to Suppliers
? This
computation includes two parts, payments for inventory and payments for expenses other than interest and income tax.
2/1/13
Payments for Inventory...
are computed by converting cost of goods sold to the cash basis. ? This is accomplished by analyzing the Inventory and Accounts Payable accounts.
–
2/1/13
Payments for Inventory
? Lloyd's
Sporting Store had the following account balances: ? Beginning inventory: $138,000 ? Ending inventory: $135,000 ? Accounts Payable: – Beginning balance: $57,000 – Ending balance: $91,000
2/1/13
Payments for Inventory
? Cost
of Goods Sold was $603,000. ? How much were the purchases? ? $600,000 ? How much did Lloyd pay for his purchases? ? $566,000 ? How did we get these numbers?
2/1/13
Purchases
? $138,000
+ x - $603,000 = $135,000 ? x = $135,000 - $138,000 + $603,000 ? x = $600,000 ? Inventory Beg. inventory 138,000 Cost of goods sold 603,000 Purchases 600,000 End. inventory 135,000
2/1/13
Payments for Inventory
? $57,000
+ $600,000 - x = $91,000 ? x = $57,000 + $600,000 - $91,000 ? x = $566,000 ? Accounts Payable Beg. bal. 57,000 Payments 566,000 Purchases 600,000 End. bal. 91,000
2/1/13
Payments for Operating Expenses...
–
can be computed as plug-in figures by analyzing Prepaid Expenses and Accrued Liabilities.
2/1/13
Payments for Operating Expenses
? Increases
in prepaid expenses require cash payments, and decreases indicate that payments were less than expenses. ? Decreases in accrued liabilities can occur only from cash payments, and increases mean that cash was not paid.
2/1/13
Payments to Employees
? Lloyd’s
Sporting Store had a Salary and Wage Payable balance of $20,000 at the beginning of the year and $15,000 at year end. ? During the year Lloyd had Salary and Wages expense of $60,000. ? How much did Lloyd pay? ? $65,000
2/1/13
Payments to Employees
? $20,000
+ $60,000 - $15,000 = $65,000 ? Lloyd’s Sporting Store paid for the $60,000 expense plus the $5,000 decrease in liability.
2/1/13
Acquisition and Sales of Plant Assets
? Lloyd’s
Sporting Store had plant assets net of depreciation of $300,000 at the beginning of the year and $500,000 at year end. ? Further, the acquisition of plant assets amounted to $306,000 during the year.
2/1/13
Acquisition and Sales of Plant Assets
? The
income statement shows depreciation expense of $18,000 and a $10,000 gain on sale of plant assets. ? What is the book value of the assets sold? ? $88,000
2/1/13
Acquisition and Sales of Plant Assets
? Beginning
net balance + Acquisitions Depreciation - Book value of assets sold = Ending balance ? $300,000 + $306,000 - $18,000 - x = $500,000 ? x = $300,000 + $306,000 -$18,000 $500,000 ? x = $88,000 (book value)
2/1/13
Acquisition and Sales of Plant Assets
?
Plant Assets (net) Beg. balance 300,000 Depreciation 18,000 Acquisitions 306,000 Book value of assets sold 88,000 End. balance 500,000
2/1/13
Acquisition and Sales of Plant Assets
? How
much are the proceeds from the sale of plant assets? ? Book value + Gain - Loss = Proceeds ? $88,000 + $10,000 - 0 = $98,000
2/1/13
Acquisition and Sales of Plant Assets
? To
determine the amounts paid for the acquisition of plant assets one must solve for acquisitions first. ? Beginning net balance + Acquisitions Depreciation - Book value of assets sold = Ending balance
2/1/13
Computing the Cash Amounts of Financing Activities ? Financing activities affect liability and
– – – – – –
stockholders’ equity accounts. Notes Payable Bonds Payable Long-Term Debt Common Stock Paid-in Capital Retained Earnings
2/1/13
Issuance and Payments of Long-Term Notes Payable
? Debt
payment is computed by analyzing the Long-Term Notes Payable account.
2/1/13
Issuance and Payments of Long-Term Notes Payable
? Assume
that the beginning balance was $77,000. ? New debt amounting to $94,000 was incurred during the year. ? The ending balance for the Long-Term Notes Payable account was $160,000. ? How much was the payment? ? $11,000
2/1/13
Issuance and Payments of Long-Term Notes Payable
?
Long-Term Notes Payable Beg. balance 77,000 Paid 11,000 Issued 94,000 Balance 160,000
2/1/13
Issuance and Retirement of Stock
? The
cash effect of these activities is determined by analyzing the stock account. ? Common Stock Beginning balance Retirement + Issuance of new stock = Ending balance
2/1/13
Purchases and Sales of Treasury Stock
?
balance Purchases of treasury stock Ending balance
Treasury Stock
Beginning + - Cost of treasury stock sold
2/1/13
Computing Dividend Payments
? Dividend
payments are computed by analyzing the Dividends Payable account. ? Beginning balance + Dividends declared Dividend payments = Ending balance
2/1/13
Noncash Investing and Financing Activities...
are not reported in the statement of cash flows. ? The FASB requires that significant non-cash investing and financing activities be shown in a separate schedule at the bottom of the statement.
–
2/1/13
Reconciling Net Income to Net Cash Flow
? The
FASB requires companies that format operating activities by the direct method to report a reconciliation from net income to net cash inflow (or outflow).
2/1/13
Objective 5
Prepare a statement of cash flows by the indirect method.
2/1/13
The Indirect Method...
begins with accrual based net income. ? Adjustments are made to income for revenues that did not generate cash and expenses that did not use cash.
–
2/1/13
The Indirect Method
? Depreciation,
depletion and amortization expenses must be added back to the net income figure. ? Gains and losses on the sale of assets are also adjustments to income.
2/1/13
The Indirect Method
? Remember
when Lloyd’s Sporting Store sold assets for $98,000 that had a book value of $88,000, realizing a gain of $10,000?
2/1/13
The Indirect Method
? The
$10,000 gain is reported on the income statement and is included in net income. ? The cash received from the sale is $98,000, which includes the gain. ? To avoid counting the gain twice, it is subtracted from net income.
2/1/13
The Indirect Method
?A
loss on the sale of plant assets is also an adjustment to net income on the statement of cash flows. ? A loss is added back to income to compute cash flow from operations. ? The proceeds from selling the plant assets are reported under investing activities.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current asset other than ? An increase in
cash is subtracted from net income. ? Suppose a company makes a sale of $100,000. ? Income is increased by the sale amount. ? What if $20,000 were not collected? ? Collections of less than the full amount increases Accounts Receivable.
2/1/13
Changes in the Current Asset and Current Liability Accounts
? The
$20,000 increase in Accounts Receivable must be subtracted from net income. ? Why? ? $20,000 was included in net income but was not collected.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current asset other than ? A decrease in
cash is added to net income. ? Cash collections cause the Accounts Receivable balance to decrease.
2/1/13
Changes in the Current Asset and Current Liability Accounts
?A
decrease in a current liability is subtracted from net income. ? The payment of a current liability causes both cash and the current liability to decrease.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current liability is added to ? An increase in
net income. ? The Accounts Payable account increases only if cash is not spent to pay the liability. ? This means that cash payments are less than the related expense.
2/1/13
Computers and the Indirect Method
? Computers
can easily generate the statement of cash flows. ? After the income statement is prepared, the computer picks up net income, depreciation and other noncash expenses.
2/1/13
doc_410647303.pptx
identify the purposes of the statement of cash flows, distinguish among operating, investing and financing activities, prepare a statement of cash flows by the direct method, use the financial statements to compute the cash effects of a wide variety of business transactions and prepare a statement of cash flows by the indirect method
Preparing and Using the Statement of Cash Flows
Click to edit Master subtitle style
2/1/13
W.T. Grant Company
? W.T.
Grant Company was once one of the leading retailers in the United States.
2/1/13
W.T. Grant Company
? W.T.
Grant’s income statement reported rising profits as the company slid into bankruptcy.
2/1/13
W.T. Grant Company
? What
went wrong? ? Grant’s operations simply did not generate enough cash to pay the bills. ? If anyone had analyzed Grant’s cash flows, the cash shortage would have been apparent.
2/1/13
W.T. Grant Company
? Cash
receipts from customers were not as high as cash payments to suppliers. ? Prior to W. T. Grant’s bankruptcy, companies were not required to include a statement of cash flows in the annual report.
2/1/13
Chapter Objectives
1 2 3
Identify the purposes of the statement of cash flows. Distinguish among operating, investing and financing activities. Prepare a statement of cash flows by the direct method.
2/1/13
Chapter Objectives
4
5
Use the financial statements to compute the cash effects of a wide variety of business transactions. Prepare a statement of cash flows by the indirect method.
2/1/13
Purpose of The Statement of Cash Flows: Basic Concepts of cash flows reports the ? The statement
entity’s cash flows (cash receipts and cash payments) during the period.
2/1/13
Purpose of The Statement of Cash Flows: Basic Concepts statement identifies what a ? The cash flow
company invested in during the period. ? It shows how the investment was financed. ? It displays how cash can be generated internally from profitable operations or from external sources.
2/1/13
Objective 1
Identify the purposes of the statement of cash flows.
2/1/13
Purposes of the Statement of Cash Flows
? The – – – –
statement of cash flows is designed to fulfill the following: predict future cash flows evaluate management decisions determine the ability to pay dividends plus interest and principal show the relationship of net income to changes in the firm’s cash
2/1/13
Cash Balance Includes...
– – –
cash on hand. cash in the bank. cash equivalents.
2/1/13
Cash Equivalents Are....
– – –
short-term, highly liquid investments convertible into cash with little delay. money market accounts. U.S. Government Treasury bills.
2/1/13
Objective 2
Distinguish among operating, investing and financing activities.
2/1/13
Basic Organization of the Statement of Cash Flows
?A 1 2 3
business may be evaluated in terms of three types of business activities: Operating activities Investing activities Financing activities
2/1/13
Operating Activities Are...
day to day business transactions, such as: l receiving cash from customers l paying cash to suppliers ? Operating activities are related to the transactions that make up net income.
–
2/1/13
Operating Activities
? Interest
and dividends received are related to investing activities. ? However, the FASB has decided to classify the cash received from these items as operating activities. ? The FASB feels that interest expense is a cost of doing business.
2/1/13
Investing Activities...
are those that support operations. ? Investing activities increase and decrease the assets that are available to the business.
–
2/1/13
Investing Activities...
–
are related to the Long-Term Asset accounts.
2/1/13
Financing Activities Involve...
–
l
l
l
external financing, such as: obtaining resources from the owners or returning resources to them. providing owners with a return on their investment. obtaining resources from creditors and repaying the amounts borrowed.
2/1/13
Format of the Statement of Cash Flows
? FASB
1 2
Statement 95 approved two methods for reporting cash flows from operating activities. Direct method Indirect method
2/1/13
Format of the Statement of Cash Flows
? The
direct method lists cash receipts from specific operating activities and cash payments for each major operating activity. ? The indirect method is a short-cut method for accrual systems.
2/1/13
Objective 3
Prepare a statement of cash flows by the direct method.
2/1/13
The Direct Method...
– –
determines the amount of cash inflows and cash outflows. identifies the activities that increase or decrease cash.
2/1/13
Cash Flows from Operating Activities
? Cash
collections from customers ? Cash receipts of interest ? Cash receipts of dividends
2/1/13
Cash Flows from Operating Activities
? Payments
to suppliers ? Payments to employees ? Payment for interest expense ? Payment for tax expense
2/1/13
Cash Flows from Investing Activities
? Proceeds
from the sale of plant assets ? Proceeds from the sale of investments ? Collections of loans
2/1/13
Cash Flows from Investing Activities
? Cash
payments to acquire plant assets ? Cash payments to acquire investments ? Loans to other companies
2/1/13
Cash Flows from Financing Activities
? Increases
in common stock, additional paidin capital and long-term liabilities are sources of cash. ? Decreases in common stock, paid-in capital and long-term liabilities are uses of cash. ? Paying dividends is a use of cash.
2/1/13
Objective 4
Use the financial statements to compute the cash effects of a wide variety of business transactions.
2/1/13
Computing Cash Collections from Customers
? Collections
can be computed by converting sales revenue to the cash basis. ? Beginning Accounts Receivable balance + Sales on account - Collections = Ending Accounts Receivable balance
2/1/13
Computing Cash Collections from Customers Store income statement ? Lloyd’s Sporting
reports sales on account of $884,000 for the year. ? Accounts Receivable increased from $80,000 at the beginning of the year to $93,000 at year end. ? How much cash did Lloyd collect ? ? $871,000
2/1/13
Computing Cash Collections from Customers ? $80,000 + $884,000 - x = $93,000
?x
= $80,000 + $884,000 - $93,000 ? x = $871,000 ? Accounts Receivable Beginning balance 80,000 Sales 884,000 Collections 871,000 Ending balance 93,000
2/1/13
Computing Cash Collections from Customers ? Another explanation:
? Because
Accounts Receivable increased by $13,000, Lloyd’s Sporting Store received $13,000 less cash than its sales revenue for the period.
2/1/13
Computing Cash Collections from Customers
? All
collections of receivables are computed following the pattern illustrated for collections from customers.
2/1/13
Computing Payments to Suppliers
? This
computation includes two parts, payments for inventory and payments for expenses other than interest and income tax.
2/1/13
Payments for Inventory...
are computed by converting cost of goods sold to the cash basis. ? This is accomplished by analyzing the Inventory and Accounts Payable accounts.
–
2/1/13
Payments for Inventory
? Lloyd's
Sporting Store had the following account balances: ? Beginning inventory: $138,000 ? Ending inventory: $135,000 ? Accounts Payable: – Beginning balance: $57,000 – Ending balance: $91,000
2/1/13
Payments for Inventory
? Cost
of Goods Sold was $603,000. ? How much were the purchases? ? $600,000 ? How much did Lloyd pay for his purchases? ? $566,000 ? How did we get these numbers?
2/1/13
Purchases
? $138,000
+ x - $603,000 = $135,000 ? x = $135,000 - $138,000 + $603,000 ? x = $600,000 ? Inventory Beg. inventory 138,000 Cost of goods sold 603,000 Purchases 600,000 End. inventory 135,000
2/1/13
Payments for Inventory
? $57,000
+ $600,000 - x = $91,000 ? x = $57,000 + $600,000 - $91,000 ? x = $566,000 ? Accounts Payable Beg. bal. 57,000 Payments 566,000 Purchases 600,000 End. bal. 91,000
2/1/13
Payments for Operating Expenses...
–
can be computed as plug-in figures by analyzing Prepaid Expenses and Accrued Liabilities.
2/1/13
Payments for Operating Expenses
? Increases
in prepaid expenses require cash payments, and decreases indicate that payments were less than expenses. ? Decreases in accrued liabilities can occur only from cash payments, and increases mean that cash was not paid.
2/1/13
Payments to Employees
? Lloyd’s
Sporting Store had a Salary and Wage Payable balance of $20,000 at the beginning of the year and $15,000 at year end. ? During the year Lloyd had Salary and Wages expense of $60,000. ? How much did Lloyd pay? ? $65,000
2/1/13
Payments to Employees
? $20,000
+ $60,000 - $15,000 = $65,000 ? Lloyd’s Sporting Store paid for the $60,000 expense plus the $5,000 decrease in liability.
2/1/13
Acquisition and Sales of Plant Assets
? Lloyd’s
Sporting Store had plant assets net of depreciation of $300,000 at the beginning of the year and $500,000 at year end. ? Further, the acquisition of plant assets amounted to $306,000 during the year.
2/1/13
Acquisition and Sales of Plant Assets
? The
income statement shows depreciation expense of $18,000 and a $10,000 gain on sale of plant assets. ? What is the book value of the assets sold? ? $88,000
2/1/13
Acquisition and Sales of Plant Assets
? Beginning
net balance + Acquisitions Depreciation - Book value of assets sold = Ending balance ? $300,000 + $306,000 - $18,000 - x = $500,000 ? x = $300,000 + $306,000 -$18,000 $500,000 ? x = $88,000 (book value)
2/1/13
Acquisition and Sales of Plant Assets
?
Plant Assets (net) Beg. balance 300,000 Depreciation 18,000 Acquisitions 306,000 Book value of assets sold 88,000 End. balance 500,000
2/1/13
Acquisition and Sales of Plant Assets
? How
much are the proceeds from the sale of plant assets? ? Book value + Gain - Loss = Proceeds ? $88,000 + $10,000 - 0 = $98,000
2/1/13
Acquisition and Sales of Plant Assets
? To
determine the amounts paid for the acquisition of plant assets one must solve for acquisitions first. ? Beginning net balance + Acquisitions Depreciation - Book value of assets sold = Ending balance
2/1/13
Computing the Cash Amounts of Financing Activities ? Financing activities affect liability and
– – – – – –
stockholders’ equity accounts. Notes Payable Bonds Payable Long-Term Debt Common Stock Paid-in Capital Retained Earnings
2/1/13
Issuance and Payments of Long-Term Notes Payable
? Debt
payment is computed by analyzing the Long-Term Notes Payable account.
2/1/13
Issuance and Payments of Long-Term Notes Payable
? Assume
that the beginning balance was $77,000. ? New debt amounting to $94,000 was incurred during the year. ? The ending balance for the Long-Term Notes Payable account was $160,000. ? How much was the payment? ? $11,000
2/1/13
Issuance and Payments of Long-Term Notes Payable
?
Long-Term Notes Payable Beg. balance 77,000 Paid 11,000 Issued 94,000 Balance 160,000
2/1/13
Issuance and Retirement of Stock
? The
cash effect of these activities is determined by analyzing the stock account. ? Common Stock Beginning balance Retirement + Issuance of new stock = Ending balance
2/1/13
Purchases and Sales of Treasury Stock
?
balance Purchases of treasury stock Ending balance
Treasury Stock
Beginning + - Cost of treasury stock sold
2/1/13
Computing Dividend Payments
? Dividend
payments are computed by analyzing the Dividends Payable account. ? Beginning balance + Dividends declared Dividend payments = Ending balance
2/1/13
Noncash Investing and Financing Activities...
are not reported in the statement of cash flows. ? The FASB requires that significant non-cash investing and financing activities be shown in a separate schedule at the bottom of the statement.
–
2/1/13
Reconciling Net Income to Net Cash Flow
? The
FASB requires companies that format operating activities by the direct method to report a reconciliation from net income to net cash inflow (or outflow).
2/1/13
Objective 5
Prepare a statement of cash flows by the indirect method.
2/1/13
The Indirect Method...
begins with accrual based net income. ? Adjustments are made to income for revenues that did not generate cash and expenses that did not use cash.
–
2/1/13
The Indirect Method
? Depreciation,
depletion and amortization expenses must be added back to the net income figure. ? Gains and losses on the sale of assets are also adjustments to income.
2/1/13
The Indirect Method
? Remember
when Lloyd’s Sporting Store sold assets for $98,000 that had a book value of $88,000, realizing a gain of $10,000?
2/1/13
The Indirect Method
? The
$10,000 gain is reported on the income statement and is included in net income. ? The cash received from the sale is $98,000, which includes the gain. ? To avoid counting the gain twice, it is subtracted from net income.
2/1/13
The Indirect Method
?A
loss on the sale of plant assets is also an adjustment to net income on the statement of cash flows. ? A loss is added back to income to compute cash flow from operations. ? The proceeds from selling the plant assets are reported under investing activities.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current asset other than ? An increase in
cash is subtracted from net income. ? Suppose a company makes a sale of $100,000. ? Income is increased by the sale amount. ? What if $20,000 were not collected? ? Collections of less than the full amount increases Accounts Receivable.
2/1/13
Changes in the Current Asset and Current Liability Accounts
? The
$20,000 increase in Accounts Receivable must be subtracted from net income. ? Why? ? $20,000 was included in net income but was not collected.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current asset other than ? A decrease in
cash is added to net income. ? Cash collections cause the Accounts Receivable balance to decrease.
2/1/13
Changes in the Current Asset and Current Liability Accounts
?A
decrease in a current liability is subtracted from net income. ? The payment of a current liability causes both cash and the current liability to decrease.
2/1/13
Changes in the Current Asset and Current Liability Accounts a current liability is added to ? An increase in
net income. ? The Accounts Payable account increases only if cash is not spent to pay the liability. ? This means that cash payments are less than the related expense.
2/1/13
Computers and the Indirect Method
? Computers
can easily generate the statement of cash flows. ? After the income statement is prepared, the computer picks up net income, depreciation and other noncash expenses.
2/1/13
doc_410647303.pptx