STATEMENT OF CASH FLOWS

Transcription

1 Chapter 16 STATEMENT OF CASH FLOWS PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CA Copyright 2015 by McGraw-Hill Education (Asia). All rights reserved

2 C1 PURPOSE OF THE STATEMENT OF CASH FLOWS 16-2 How does a company obtain its its cash? Where does a company spend its its cash? What explains the change in in the cash balance?

3 16-3 C1 IMPORTANCE OF CASH FLOWS How did the business fund its its operations? Does the business have sufficient cash to to pay its its debts as as they mature? Did the business make any dividend payments? Did the business borrow any funds or or repay any loans?

4 16-4 MEASUREMENT OF CASH FLOWS Cash Equivalents Cash Currency Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is unaffected by interest rate changes.

5 16-5 C1 CLASSIFICATION OF CASH FLOWS The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities

6 16-6 C1 OPERATING ACTIVITIES The principal revenue-producing activities of of the entity and other activities that are not investing or or financing activities. These generally include those transactions and events that determine net profit. Examples of of inflows are: cash receipts from the sale of of goods and the rendering of of services. cash receipts from royalties, fees, commissions, and other revenue.

7 16-7 C1 OPERATING ACTIVITIES The principal revenue-producing activities of of the entity and other activities that are not investing or or financing activities. These generally include those transactions and events that determine net profit or or net profit. Examples of outflows are: cash payments to suppliers for goods and services. cash payments to and on behalf of employees.

8 16-8 C1 INVESTING ACTIVITIES The acquisition and disposal of of long-term assets and other investments not included in in cash equivalents. Examples of of inflows are: cash receipts from sales of of PPE, intangibles and other long-term assets. cash receipts from sales of of equity or or debt instruments of of other entities. cash receipts from the repayment of of advances and loans made to to other parties.

9 16-9 C1 INVESTING ACTIVITIES The acquisition and disposal of of long-term assets and other investments not included in in cash equivalents. Examples of outflows are: cash payments to acquire PPE, intangibles and other long-term assets. cash payments to acquire equity or debt instruments of other entities. cash advances and loans made to other parties.

10 16-10 C1 FINANCING ACTIVITIES Activities that result in in changes in in the size and composition of of the contributed equity and borrowings of of the entity. Examples of of inflows are: cash proceeds from issuing shares or or other equity instruments. cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short-term or or long-term borrowings.

11 16-11 C1 FINANCING ACTIVITIES Activities that result in in changes in in the size and composition of of the contributed equity and borrowings of of the entity. Examples of outflows are: cash payments to owners to acquire or redeem the entity s shares. cash repayments of amounts borrowed.

12 16-12 C1 CLASSIFICATION OF CASH FLOW ITEMS Reporting entities have choices in classifying interest and dividends Operating Investing Financing Interest received Yes Yes Dividends received Yes Yes Interest paid Yes Yes Dividends paid Yes Yes

13 16-13 C1 NONCASH INVESTING AND FINANCING Items requiring separate disclosure include: Retirement of of debt by issuing equity securities. Conversion of of preference shares to to ordinary shares.

14 16-14 C1 FORMAT OF THE STATEMENT OF CASH FLOWS

15 16-15 P1 PREPARING THE STATEMENT OF CASH FLOWS

16 16-16 P1 ANALYZING THE CASH ACCOUNT The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities.

17 P1 ANALYZING THE CASH ACCOUNT Cash from Operating Cash from Investing Cash from Financing Cash Proved *Can also be classified as investing. **Can also be classified as financing. ***Can also be classified as operating.

18 16-18 P1 ANALYZING NONCASH ACCOUNT A second approach to preparing the statement of cash flows is analyzing noncash accounts.

19 16-19 P1 INFORMATION TO PREPARE THE STATEMENT Information to prepare the statement of cash flows usually comes from three sources: Comparative Statements of Financial Position Current Income Statement Additional Information

20 P2 APPLICATION OF THE INDIRECT METHOD OF REPORTING 16-20

21 16-21 P2 APPLICATION OF THE INDIRECT METHOD OF REPORTING Additional information on Genesis Inc. s 2015 transactions: a) The accounts payable balances result from merchandise inventory purchases. b) Purchased $70,000 in PPE by paying $10,000 cash and issuing $60,000 of notes payable. c) Sold PPE with an original cost of $30,000 and accumulated depreciation of $12,000 for $12,000 cash, yielding a $6,000 loss. d) Received $15,000 cash from issuing 3,000 shares of no-par ordinary shares. e) Paid $34,000 cash to retire notes with a $34,000 carrying amount. f) Declared and paid cash dividends of $14,000. g) Received all its dividend income on financial assets in cash of $16,000.

22 P2 WHY START WITH PROFIT BEFORE TAX? International Financial Reporting Standards (IFRS) Cash flows arising from taxes on profit should be separately disclosed and should be classified as cash flows from operating activities Profit before tax tax Cash Flows from Operating Activities

23 P2 ADJUSTMENTS FOR OPERATING ITEMS NOT PROVIDING OR USING CASH 16-23

24 16-24 P2 ADJUSTMENTS FOR NONOPERATING ITEMS

25 P2 ADJUSTMENTS FOR CHANGES IN NONCASH CURRENT ASSETS AND CURRENT LIABILITIES 16-25

26 P2 ADJUSTMENTS FOR CHANGES IN NONCASH CURRENT ASSETS AND CURRENT LIABILITIES Change in Account Balance During Year Noncash Current Assets Current Liabilities Increase Subtract from profit Add to profit Decrease Add to profit Subtract from profit Use this table when adjusting profit before taxes to operating cash flows

27 P2 INTEREST REVENUES, DIVIDEND REVENUES, INTEREST EXPENSES AND INCOME TAXES Under IFRS, interest and dividends received, interest paid and income taxes must be separately shown. Since interest and dividend revenues are added to derive profit amount, adjustments involve deducting these amounts from profit. Interest expenses are added to profit to cancel the earlier deduction.

28 16-28 P2 COMPLETING THE OPERATING SECTION

29 16-29 P2 SUMMARY OF ADJUSTMENTS FOR INDIRECT METHOD Common adjustments to profit when computing net cash from or used in operating activities under the indirect method:

30 16-30 P3 CASH FLOWS FROM INVESTING A three-stage process to determine cash from or used in investing activities: Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects

31 16-31 P3 CASH FLOWS FROM INVESTING This analysis reveals a $40,000 increase in property, plant and equipment from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000.

32 16-32 P3 CASH FLOWS FROM INVESTING Item b: Genesis purchased property, plant and equipment of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash. Item c: Genesis sold property, plant and equipment costing $30,000 (with $12,000 of accumulated depreciation) for $12,000 cash, resulting in a $6,000 loss. We also reconstruct the entry for Depreciation Expense using information from the income statement.

33 16-33 P3 CASH FLOWS FROM INVESTING

34 16-34 P3 CASH FLOWS FROM FINANCING A three-stage process to determine cash from or used in financing activities: Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects

35 16-35 P3 CASH FLOWS FROM FINANCING This analysis reveals: 1.an increase in notes payable from $64,000 to $90,000, 2.an increase in share capital from $80,000 to $95,000, and 3.an increase in retained earnings from $88,000 to $112,000.

36 16-36 P3 CASH FLOWS FROM FINANCING Item b: Genesis purchased property, plant and equipment of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash.

37 16-37 P3 CASH FLOWS FROM FINANCING Item d: Issued 3,000 no-par ordinary shares for $5 per share. Item f: Cash dividends of $14,000 are paid.

38 P

39 P

40 16-40 A1 ANALYZING CASH SOURCES AND USES Most managers stress the importance of understanding and predicting cash flows for business decisions.