Chapter 21 The Statement of Cash Flows Part 2 The Mechanics of the T-Account Approach Intermediate Accounting II Dr. Chula King Spreadsheet versus T-Account Spreadsheet Approach Columns Balance Sheet: Beginning balance, Debit and Credit changes in account balances, Ending balance Categories of Cash Flow: Debit and credit impact from analysis of Balance Sheet changes T-Account Approach Cash Flow Operating Activities; Cash Flow Investing Activities; Cash Flow Financing Activities Non-cash Accounts Beginning and Ending Balances Relates changes in non-cash accounts to one of the categories of cash flow My View of Spreadsheet versus T- Account Approach Spreadsheet Approach Cumbersome and difficult to envision the impact of changes T-Account Approach More visually appealing Easier to envision all changes to non-cash accounts and their impact on the cash flow categories Easier to ensure that for every debit, there is a credit Your preference 1
Cash Flow Categories Cash is an asset Increases with debit; decreases with credit Cash flow operating activities, cash flow investing activities, cash flow financing activities subsets of the account cash Debit indicates an inflow of cash Credit indicates an outflow of cash Noncash Accounts Relate to one of the three categories of cash flow Operations: If the account has a direct relationship to the income statement Current assets except for investment in securities Current liabilities except for non-trade notes payable Accumulated depreciation and intangibles from depreciation expense and amortization expense Retained earnings change from closing of net income Noncash Accounts (continued) Investing: All assets that do not relate to operations Never includes changes in liabilities or equity Examples: Purchase and sale of PPE, purchase and sale of securities; purchase and sale of intangibles 2
Noncash Accounts (continued) Financing: All liabilities and equity that do not relate to operations Never includes changes in assets Examples: Issuance and retirement of long-term debt; issuance and retirement of stock, including treasury stock; payment of dividends The Mechanics Determine the answer Change in cash Draw T-Accounts for Cash Flow Operating Activities, Cash Flow Investing Activities, Cash Flow Financing Activities Draw T-Accounts for all non-cash balance sheet accounts with beginning and ending balances Either explicitly or implicitly relate the specific accounts to one of the three cash flow categories The Mechanics (continued) Post the specific information provided, i.e., debit and credit specific accounts Any loss debit cash flow operating activities Any gain credit cash flow operating activities Once the specific information has been posted, plug the remaining accounts to explain account balance changes Any debit plug to a non-cash account is accompanied by a credit to one of the categories of cash flow Any credit plug to a non-cash account is accompanied by a debit to one of the categories of cash flow 3
The Mechanics (continued) Once the balance changes in all non-cash accounts have been explained, balance the three cash flow accounts The combination of the balances in the three cash flow accounts should equal the change in cash that was determined up front Use the debit and credit postings to the three cash flow accounts to prepare the statement of cash flows For Example The comparative balance sheet for Apex, Inc., is presented below: $ in millions) 2013 2012 Cash $73 $22 Accounts receivable 82 66 Inventories 180 189 Property, plant and equipment 331 310 Accumulated depreciation (69) (42) Total $597 $545 Accounts payable $34 $47 Bonds payable 150 200 Common stock 214 164 Retained earnings 199 134 Total $597 $545 For Example (continued) Additional information: a. Net income for 2013 was $125 b.cash dividends of $60 were declared and paid c. Depreciation expense totaled $27 c. Bonds payable amounting to $50 were retired through the issuance of common stock The answer = Change in cash = $73 - $22 = Increase of $51 4
Cash Ops Cash Invest Cash Fin (1) NI 125 16 A/R (6) 21 PPE (8) (4) C/S 50 60 Div (2) (3) Dep n 27 13 A/P (9) 50 B/P (5) (7) Inventory 9 132 21 60 A/R-Ops Inventory-Ops PPE - Invest Acc Dep n - Ops 66 189 9 (7) 310 42 (6) 16 (8) 21 27 (3) 82 180 331 69 A/P-Ops (9) 13 47 34 B/P-Fin C/S- Fin 200 164 (5) 50 50 (4) 150 214 R/E-Ops & Fin 134 (2) 60 125 (1) 199 Cash flow operations $132 Cash flow investing (21) Cash flow financing (60) Change in cash $ 51 Apex Inc. Statement of Cash Flows For the year ended December 31, 2013 Cash flow from Operating Activities Net income $125 Add: Depreciation expense 27 Decrease in inventory 9 Deduct: Increase in accounts receivable (16) Decrease in accounts payable (13) $132 Cash flow from Investing Activities Purchase PPE (21) Cash flow from Financing Activities Paid dividends $(60) Issued common stock 50 Retired bonds (50) (60) Increase in cash $51 Add: Cash balance, January 1 22 Cash balance, December 31 $73 The Next Step Exercises 1, 3, 14, 17, 22, 24 Problems 16, 17, 18 5