Prepare a statement of cash flow

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ACG2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 1 of 8

Purpose of the Statement of Cash Flows
• Reports a firm’s major cash inflows and outflows for a period.
• Provides useful information about a firm’s ability to generate cash from operations,

maintain and expand its operating capacity, meet financial obligations, and pay
dividends.

• One of the basic financial statements.
o Income Statement
o Statement of Retained Earnings
o Statement of Cash Flows

Importance of Cash Flows

• We look more favorably at a company that is financing its expenditures with cash from
operations than one that does it by selling its assets

• Whether company has enough cash to pays its existing debts as they mature.

Classifications:

:

Cash Flows from

Operating Activities

Include those transactions and events that determine net income.

• Cash inflows include
o Cash from sales
o Cash from credit collections
o Cash from interest income

• Cash outflows include
o Cash to pay bills

Operating Activities

Investing Activities

Financing Activities

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 2 of 8

o Cash to pay for merchandise
o Cash to pay taxes

Cash Flows from Investing Activities

Generally include those transactions and events that affect long-term assets.
• Purchase and sale of short-term investments
• Lending and collecting money for notes receivable
• Cash inflows

o From selling securities
o From selling notes
o From collecting principal on loans
o From selling assets

• Cash outflows
o To make loans to others
o To purchase securities
o To purchase assets

Cash Flows from Financing Activities

Include those transactions and events that affect long-term liabilities and equity
• Obtaining cash from issuing debts and repaying the amounts borrowed
• Receiving cash from or distributing cash to owners
• Cash inflows

o Received monies from loans issued
o Received monies from stock sold
o Received monies from bonds issued

• Cash outflows
o Paid on principal of loans
o Purchased treasury stock
o Redeemed bonds

Noncash Investing and Financing

When important investing and financing activities do not affect cash receipts or
payments, they are still disclosed.

• Exchange of stocks for bonds

The sum of these three sections is the difference in cash between last year and this year.

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 3 of 8

Format of the Statement of Cash Flows
Company Name

Statement of Cash Flows
For period ended

Cash flows from operating activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities $$
Cash flows from investing activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities $$
Cash flows from financing activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities $$
Net increase (decrease) in cash $$
Cash balance at beg of period $$
Cash balance at end of period $$

Two methods of Preparing the Statement

• Direct Method – requires an analysis of the cash account
• Indirect Method – requires analysis of the financial statements

Indirect Method:
• Steps

o Find the differences in the Balance Sheet account balances for last year and this
year

Jason Enterprises
Comparative Balance Sheet

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 4 of 8

For year ended 2011 and 2010

2011 2010 Difference
CASH $140,350 $95,900 $44,450
TRADE RECEIVABLES $95,300 $102,300 -$7,000
INVENTORIES $165,200 $157,900 $7,300
PREPAID EXP $6,240 $5,860 $380
INVESTMENTS $35,700 $84,700 -$49,000
LAND $75,000 $90,000 -$15,000
BUILDING $375,000 $260,000 $115,000
ACCUM DEP -$71,300 -$58,300 -$13,000
MACHINERY $428,300 $428,300 $0
ACCUM DEP -$148,500 -$138,000 -$10,500
PATENTS $58,000 $65,000 -$7,000
TOTAL $1,159,290 $1,093,660 $65,630
ACCOUNTS PAY $43,500 $46,700 -$3,200
ACCRUED EXP $14,000 $12,500 $1,500
INCOME TAX PAY $7,900 $8,400 -$500
DIV PAYABLE $14,000 $10,000 $4,000
MORTGAGE $40,000 $0 $40,000
BOND $150,000 $250,000 -$100,000
COMMON STOCK $450,000 $375,000 $75,000
PAID IN CAPITAL $66,250 $41,250 $25,000
RETAINED EARNINGS $373,640 $349,810 $23,830
$1,159,290 $1,093,660 $65,630

Jason Enterprises
Income Statement
For year ended 2011

SALES $1,180,000
COST OF MERCHANDISE $790,000
GROSS PROFIT $390,000
OPERATING EXPENSES
DEPRECIATION $23,500
PATENT AMORTIZATION $7,000
OTHER OPERATING $196,000
TOTAL $223,500
INCOME FROM OPERATIONS $163,500
OTHER INCOME
GAIN ON SALE OF INVESTMENTS $11,000
OTHER EXPENSES

INTEREST EXPENSE $26,000 -$15,000
INCOME BEFORE TAXES $148,500

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 5 of 8

INCOME TAX $50,000
NET INCOME $98,500

o Analyze the General Ledger accounts

Land costing $15,000 was sold for $15,000
A mortgage note was issued for $40,000
Building costing $115,000 constructed
2,500 shares of common stock were issued at 40 in exchange for bonds
payable
Cash dividends declared were $74,670

Operating Activities:
Begin with operating section by starting with net income

• Add any items that are included in net income that are not part of operations.
o Such as gains or losses on sale of investments, depreciation, and amortization.

• Follow by changes in current assets and current liabilities
o Decreases in current assets increases cash flows since assets are used instead of

purchasing new ones
o Increases in current liabilities increase cash flows since we incur debt instead of

paying
o Increases in current assets decrease cash flows since monies are used to buy

assets
o Decreases in current liabilities decrease cash flows since monies are used to pay

bills
o Current assets

 Accounts receivable
 Merchandise inventory
 Prepaid expenses

o Current liabilities
 Accounts payable
 Accrued expenses
 Salaries payable
 Income taxes payable

» STEPS:
1. Take the comparative balance sheet and computed the differences in the end of year balances

for all accounts.
2. Review the general ledger for any major transactions which affect cash
3. Review the income statement
4. Begin with net income
5. Add back items that cause a cash inflow
6. Deduct items that cause a cash outflow
7. Adjust for items on income statement that are not operating transactions.

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 6 of 8

Jones Company
Statement of Cash Flows
For period ended December 31, 2011

Net cash flows from operations:
Net income from operations $98,500.00
ADD: Depreciation $23,500.00
Patent amortization $7,000.00
Decrease in trade receivables $7,000.00
Increase in accrued expenses $1,500.00
$39,000.00
DEDUCT:
Increase in inventories $7,300.00
Increase in prepaid expenses $380.00
Decrease in accounts payable $3,200.00
Decrease in income tax payable $500.00
Gain on sale of investments $11,000.00
-$22,380.00
Net cash flows from operations $115,120.00

Note that the majority of the information came from the balance sheet or the income
statement.
Amounts from the balance sheet were the differences between years.

For the investing section:

• Review the income statement for sale of long-term assets which cause a cash inflow.
Report the total cash collected not the change in the balance sheet account.

• Review the long-term asset accounts in the balance sheet for changes in these accounts
• Purchase of long-term assets are cash outflows even if paid on account

To complete the financing section:

• Report issuance of mortgages and payment of principal

Net cash flows from investing
Cash inflows:
Sale of land $15,000.00
Sale of investments $60,000.00
$75,000.00
Cash outflows:
Construction of building $115,000.00
-$115,000.00
Net cash flows from investing -$40,000.00

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 7 of 8

• Report issuance of stock at the selling price
• Report the issuance of bonds at the selling price
• Report the payment of the company’s dividends

Dividends: computation

Beginning dividends payable as of Dec 31, 2005 $10,000

Cash dividends declared $74,670

Total dividends owed $84,670

Ending dividends payable as of Dec 31, 2006 $14,000

Dividends paid $70,670

Net cash flows from financing
Cash inflows:
Mortgage issued $40,000.00

Cash outflows:
Dividends paid $70,670.00 *
Net cash flows from financing -$30,670.00
Net increase in cash $44,450.00
Beginning cash balance $95,900.00
Ending cash balance $140,350.00

Jones Company
Statement of Cash Flows
For period ended December 31, 2011

Net cash flows from operations:
Net income from operations $98,500.00
ADD: depreciation $23,500.00
Patent amortization $7,000.00
Decrease in trade rec $7,000.00
Increase in accrued exp $1,500.00
$39,000.00
DEDUCT:
Increase in inventories $7,300.00
Increase in prepaid exp $380.00
Decrease in accts pay $3,200.00
Decrease in income tax $500.00
Gain on sale of investments. $11,000.00
-$22,380.00

ACG 2071 [CHAPTER 13: REPORTING OF CASH FLOWS

Created by: Prof M. Mari
Fall, 20011-2
Page 8 of 8

Schedule of Non Cash Activities:

• Listed on the bottom of statement of cash flows
• Shows exchanges

Net cash flows from operations $115,120.00

Net cash flows from investing
Cash inflows:
Sale of land $15,000.00
Sale of investments $60,000.00
$75,000.00
Cash outflows:
Construction of building $115,000.00
-$115,000.00
Net cash flows from investing -$40,000.00

Net cash flows from financing
Cash inflows:
Mortgage issued $40,000.00

Cash outflows:
Dividends paid $70,670.00
Net cash flows from financing -$30,670.00
Net increase in cash $44,450.00
Beginning cash balance $95,900.00
Ending cash balance $140,350.00

2

>Sheet

1

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2

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1

($$)
2

($$)
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($$)
4

($$) ($$)

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Statement of Cash Flows

Adjustments to Net Income – Indirect Method

Operating Activities Section

Net Income (Net Loss), per income statement

Add:

Depreciation of plant assets

Amortization of Intangible Assets & Discount on B/P

3

DECREASES IN CURRENT ASSETS

4

INCREASES IN CURRENT LIABILITIES

5

LOSSES (any) on disposal of assets & retirement of debt

Deduct:

Amortization of Premium on B/P

INCREASES IN CURRENT ASSETS

DECREASES IN CURRENT LIABILITIES

GAINS (any) on disposal of assets & retirement of debt

NET CASH FLOWS FROM OPERATING ACTIVITIES

Sheet2

Sheet3

ACG2071 Managerial Accounting

Reporting Cash Flows

Minicase

CASH FLOWS PROBLEM:

Kite Corporation, a merchandiser, recently completed its calendar-year 2011 operations. For the year,

(1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers,

(3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for

inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The

company’s balance sheets and income statement follow.

Prepare a statement of cash flows in good

form.

Joseph Corporation
Comparative Balance Sheet
December 31, 2011 and 2010

Assets

Cash $ 136,500.00 $ 71,550.00

Accounts Receivable $ 74,100.00 $ 90,750.00

Merchandise Inventory $ 454,500.00 $ 490,200.00

Prepaid Expenses $ 17,100.00 $ 19,200.00

Equipment $ 278,250.00 $ 216,000.00

Accumulated Depreciation $ (108,750.00) $ (93,000.00)

Total Assets $ 851,700.00 $ 794,700.00

Liabilities and Equity

Accounts Payable $ 117,450.00 $ 123,450.00

Short-term Notes Payable $ 17,250.00 $ 11,250.00

Long-term Notes Payable $ 112,500.00 $ 82,500.00

Common Stock, $5 par $ 465,000.00 $ 450,000.00

Paid in Capital in excess $ 18,000.00
Retained Earnings $ 121,500.00 $ 127,500.00

Total Liabilities & Equity $ 851,700.00 $ 794,700.00

ACG 2071 Managerial Accounting
Reporting Cash Flows
Minicase

Joseph Corporation
Income Statement
December 31, 2011

Sales

$ 1,083,000.00

Cost of goods sold

$ 585,000.00

Gross profit

$ 498,000.00

Operating Expenses
Depreciation expense $ 36,600.00

Rent Expense $ 150,000.00
Salaries Expense $ 175,000.00
Other Expenses $ 67,850.00

$ 429,450.00

$ 68,550.00

Other gains and losses
Loss on sale of equipment

$ 2,100.00

$ 66,450.00

Income tax expense

$ 9,450.00

Net Income

$ 57,000.00

Additional Information on Year 2011 Transactions

a. The loss on the cash sale of equipment was $2,100 (details in b).
b. Sold equipment costing $51,000, with accumulated depreciation of $20,850, for $28,050 cash.
c. Purchased equipment costing $113,250 by paying $38,250 cash and signing a long-term note

payable for the balance
d. Borrowed $6,000 cash by signing a short-term note payable.
e. Paid $45,000 cash to reduce the long-term notes payable.
f. Issued 3,000 shares of common stock for $11 cash per share.
g. Declared and paid cash dividends of $63,000.