Managerial accounting 6e jams jambalvo chapter 13

CHAPTER 13
Statement of Cash Flows

Slide 13-2


Need for a Statement of Cash Flows
 Stakeholders want to know how a
company generates and spends cash
 Can the company
 Generate enough cash to pay its wages
and bills, including debt payments
 Generate cash in order to earn a
reasonable return and pay dividends
 Generate enough cash to avoid bankruptcy

Slide 13-3

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Need for a Statement of Cash Flows
 Cash flow is not the same as net income
 Under GAAP, income is calculated using
the accrual method

 The income statement does little to
inform managers and other company

stakeholders of the sources and uses of
cash

Slide 13-4

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Need for a Statement of Cash Flows
 For the purposes of the cash flow
statement, cash includes both cash and
cash equivalents
 Cash equivalents are short term
investments that can be readily converted
into cash
 Examples include 90 day US Treasury
Bills and money market funds

Slide 13-5

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Types of Business Activities
 Operating activities
 Cash flows related to production and

delivery of goods and services
 Reflect the day to day profit oriented
activities of a business
 Principal cash inflows are cash sales and
collection of accounts receivable
 Major sources of cash outflows include
payments to suppliers, employees and
taxing authorities
Slide 13-6

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Examples of Operating Activities

Slide 13-7

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Types of Business Activities
 Investing activities
 Cash flows related to buying and selling of
long-term assets
 Examples include collections from long
term loans, collections from the sale of

equipment no longer in use, payments to
buy securities of other companies, buying a
building and buying a business

Slide 13-8

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Examples of Investing Activities

Slide 13-9

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Types of Business Activities
 Financing activities

 Cash inflows related to issuing stock
and issuing long-term debt
 Cash outflows related to repurchasing
stock, paying off loans and making
dividend payments

Slide 13-10

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Examples of Financing Activities

Slide 13-11

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Test Your Knowledge 1
Which of the following would be a cash
outflow from operating activities?
a.
b.
c.
d.

Acquisition of operating equipment
Retirement of bonds
Collection of accounts receivable
Payments to suppliers for raw materials

Answer: d
Payments to suppliers for raw materials

Slide 13-12

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Test Your Knowledge 2
Which of the following would be a cash
outflow from investing activities?
a.
b.
c.
d.

Payments to suppliers
Payments to employees
Purchase of land
Payment of dividends

Answer: c
Purchase of land
Slide 13-13

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Test Your Knowledge 3

Which of the following would be a cash
outflow from financing activities?
a.
b.
c.
d.

Payment of dividends
Payments to taxing authorities
Purchase of land
Cash sales

Answer: a
Payment of dividends
Slide 13-14

Learning objective 1: Explain the need for the statement of
cash flows and identify the three types of business
activities presented in a statement of cash flows.


Statement of Cash Flows General
Format

Slide 13-15

Learning objective 2: Prepare a statement of cash
flows using the direct method.

Preparing the Statement of Cash
Flows
 Two acceptable methods
 Direct method
 Like an income statement prepared using
the cash basis

 Indirect method
 Reconciles net income to cash flow from
operations
 Preferable under GAAP
 Most used in financial statements

Slide 13-16

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Preparing the Statement of Cash
Flows
 Cash flows from operating activities
 Cash collected on sale of merchandise
 Cash received (paid) related to interest
income (expense)
 Cash received related to dividend income
 Cash paid to purchase merchandise
 Cash paid for general and administrative
expenses
 Cash paid for income taxes

Slide 13-17

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Preparing the Statement of Cash
Flows
 Cash flows from investing activities
 Cash received on the sale of a machine no
longer in use
 Cash paid to buy a machine
 Cash paid to buy a building
 Cash received from selling a building
 Cash paid to buy a business

Slide 13-18

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Preparing the Statement of Cash
Flows
 Cash flows from financing activities







Slide 13-19

Cash received from selling bonds
Cash received from using a line of credit
Cash received from issuing common stock
Cash paid to retire long term debt
Cash dividends paid

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Preparing the Statement of Cash
Flows
 Direct method
 Lists specific cash inflows and outflows
from operating activities
 Similar to cash-basis income statement
within the operating activities section
 FASB requires separate schedule to
reconcile cash flows from operating
activities and net income

Slide 13-20

Learning objective 2: Prepare a statement of cash
flows using the direct method.

Cash Flows from Operating
Activities (Direct Method)
 To determine cash flows using the direct
method
 Analyze all balance sheet accounts, other
than cash, to determine how their changes
were affected by cash flows
 This analysis will involve information from
the income statement

Slide 13-21

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability
accounts
 The first account is cash received from
customers
 Solving the following equation yields cash
receipts of $10,004,825
Beginning balance receivables
Plus sales
Less cash collected
Equals ending balance
receivables

Slide 13-22

$879,053
10,548,640
?
$1,422,868
Learning objective 2: Prepare a statement of cash
flows using the direct method.


Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability
accounts
 The next item is cost of merchandise sold
 The following formula yields purchases of
$8,286,993
Beginning inventory
Plus purchases
Less cost of goods sold
Equals ending balance inventory
Slide 13-23

$988,935
?
7,911,480
$1,364,448
Learning objective 2: Prepare a statement of cash
flows using the direct method.

Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability accounts
 Purchases of $8,286,993 are used in the next
calculation, which solves for cash payments
for purchases of inventory of $8,202,703
Beginning balance accounts payable

$575,000

Plus purchases

8,286,993

Less cash paid for inventory
purchases
Equals ending balance accounts
payable

Slide 13-24

?
$659,290

Learning objective 2: Prepare a statement of cash
flows using the direct method.


Cash Flows from Operating

Activities (Direct Method)
 Analyze other current asset and liability
accounts
 Use prepaid insurance and insurance
expense to solve for cash payments for
insurance
 Use accrued wages and salaries and
wages and salaries expense to solve for
cash payments for wages and salaries
 Use income taxes payable and income tax
expense to solve for cash payments for
income taxes
Slide 13-25

Learning objective 2: Prepare a statement of cash
flows using the direct method.