Statement of Cash Flows

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Financial Accounting, Seventh Edition
Chapter 13

• Statement of Cash Flows

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Usefulness and Format
Usefulness of the Statement of Cash Flows

• Provides information to help assess
• Entitys ability to generate future cash flows.
• Entitys ability to pay dividends and
  obligations.
• Reasons for difference between net income and net
  cash provided (used) by operating activities.
• Cash investing and financing transactions during
  the period.

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APPLE, Inc Consolidated Statement of Cash Flows
As of September 29,2012
Net Income 41,733 millions

Net Cash Flow from Operating activities 50,856 millions
Why are these numbers different?
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Meaning of Cash and Cash Equivalents
Cash
Deposits in Bank Accounts (Checking/Savings)
Currency
Cash Equivalents

• Short-term, highly liquid investments.
• Readily convertible into cash.
• So near maturity that market value is unaffected
  by interest rate changes (typically, less than 3
  months)

How much Cash and Cash Equivalents did APPLE
Company have on Sep 29, 2012?
10,746 MILLIONS
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Usefulness and Format
Classification of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Income Statement Items
Generally Long-Term Asset Items
Generally Long-Term Liability and Equity
Items
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Operating Activities

• Operating activities include cash received and
  paid related to selling goods and rendering
  services and are directly related to the
  companys primary day-to-day business activities.

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Investing Activities
Cash Flows Involving

• 1. Acquisition and disposing of property, plant,
  and equipment and intangible assets
• 2. Purchase and sale of other companys stocks,
  bonds, and other non cash-equivalent securities.
  Does NOT include purchase and sale of Treasury
  Stock.
• 3. Lending and subsequent collection of money
  (only principal).

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Financing Activities
Cash Flows Involving.

• 1. Obtaining capital from owners / stockholders
• 2. Paying dividends to owners/stockholders
• 3. Borrowing from creditors
• 4. Repaying amounts borrowed from creditors
  (only principal)
• 5. Purchase and reissue of Treasury Stock.

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Format of the Statement of Cash Flows
Significant Noncash Activities
1. Issuance of common stock to purchase
assets. 2. Conversion of bonds into common
stock. 3. Issuance of debt to purchase assets. 4.
Exchanges of plant assets.
Companies report these activities in either a
separate schedule at the bottom of the statement
of cash flows or in a separate note or
supplementary schedule to the financial
statements.
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Knowledge CheckThe declaration of dividends by
the board of directors would be reported on a
statement of cash flows as a(an)

1. cash inflow under the financing activities
2. cash outflow under the financing activities
3. cash outflow under the investing activities
4. activity that would not be reported on a
   statement of cash flows

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Usefulness and Format
Format of the Statement of Cash Flows

• Order of Presentation
• Operating activities.
• Investing activities.
• Financing activities.
• The cash flows from operating activities section
  always appears first, followed by the investing
  and financing sections.

Direct Method
Indirect Method
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Format of the Statement of Cash Flows
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Example of a Statement of Cash Flows
1. Borrowed 100,000 from a bank by signing a
10, one-year note. 2. Paid 50,000 to purchase
land 3. Earned 150,000 of revenue, of which
55,000 was charged to store credit cards. 4.
Paid 40,000 of wages 5. Sold Available for Sale
Securities for 25,000 6. Paid a 5,000 cash
dividend 7. Paid back the bank loan from
transaction (1) plus 10,000 of interest.
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Knowledge CheckGloria Company reported the
following transactions for 20111. Sold
equipment for 22,000.2. Received 2,000 in
dividends on investments3. Acquired a building
with a market value of 250,000 by issuing
20,000 shares of common stock.4. Made a loan
of 2,000 to a customer.5. Paid back Notes
payable for 5,000, and paid interest of
1,000.6. Reacquired 300 shares of its own
common stock at 20 per share7. Purchased
equipment costing 30,000, by making a cash down
payment of 20,000 and signing a note for the
remaining 10,000.The net cash flow from
investing activities in the Statement of Cash
Flows is

1. 2,000
2. 0
3. (12,000)
4. (10,000)

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Knowledge CheckGloria Company reported the
following transactions for 20111. Sold
equipment for 22,000.2. Received 2,000 in
dividends on investments3. Acquired a building
with a market value of 250,000 by issuing 20,000
shares of common stock.4. Made a loan of 2,000
to a customer.5. Paid back Notes payable for
5,000, and paid interest of 1,000.6.
Reacquired 300 shares of its own common stock at
20 per share7. Purchased equipment costing
30,000, by making a cash down payment of 20,000
and signing a note for the remaining 10,000.The
net cash flow from financing activities in the
Statement of Cash Flows is

1. (9,000)
2. (13,000)
3. (11,000)
4. (12,000)

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Knowledge CheckUpon Reviewing Lisa Companys
Statement of cash Flows, the following was
notedCash Flows from Operating Activities
75,000Cash Flows from Investing
Activities (135,000)Cash Flows from
Financing Activities 125,000 From
this information, the most likely explanation is
that Lisa is

1. Using Cash from operations and selling long term
   assets to pay back debt
2. Using Cash from operations and borrowing to
   purchase long term assets
3. Using profits for expansion and growth
4. Using cash from investors to provide for
   operations

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Usefulness and Format
Preparing the Statement of Cash Flows

• Three Sources of Information
• Comparative balance sheets
• Current income statement
• Additional information

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Usefulness and Format
Indirect and Direct Methods

• Companies favor the indirect method for two
  reasons
• It is easier and less costly to prepare, and
• It focuses on the differences between net income
  and net cash flow from operating activities.

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Preparing the Statement of Cash Flows
Indirect Method
Operating Activities
Determine net cash provided/used by operating
activities by converting net income from an
accrual basis to a cash basis.

• Common adjustments to Net Income (Loss)
• Add back non-cash expenses.
• Deduct gains and add losses.
• Changes in noncash current assets and current
  liabilities.

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Adjustments to Net Income
Step 1 Add back noncash expenses
Non Cash Expenses (such as Depreciation,
Depletion, Amortization Expense, Bad Debts
Expense) reduces Net Income, but does NOT reduce
Cash. So these expenses must be added back to Net
Income to determine Cash Flow from Operating
Activities.
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Adjustments to Net Income
Step 2 Make adjustments for Losses / Gains

• Because companies report as a source of cash in
  the investing / financing activities section the
  actual amount of cash received from the sale
• Any loss on sale is added to net income in the
  operating section.
• Any gain on sale is deducted from net income in
  the operating section.

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Adjustments to Net Income
Step 3 Make adjustments for Changes in Noncash
Assets and Liabilities
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Preparing the Statement of Cash Flows
Summary of Conversion from Net Income to Net Cash
Provided by Operating Activities using the
Indirect Method
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Juicy Juice Companys Financial Statements
Use the following information to prepare the
Statement of Cash Flows for Juicy Juice Company.
Juicy Juice Company Juicy Juice Company Juicy Juice Company
Balance Sheet Balance Sheet Balance Sheet
As of December 31 As of December 31 As of December 31
Assets 2012 2011
Cash 40,600 36,700
Accounts receivable 32,800 37,000
Interest receivable 100 0
Inventory 65,400 52,300
Prepaid insurance 2,900 3,200
Equipment 113,500 127,500
Accumulated depreciation (22,000) (14,000)
Total assets 233,300 242,700

Liabilities
Accounts payable 27,900 42,400
Wages payable 16,500 15,000
Interest payable 2,600 4,200
Income tax payable 8,100 5,400
Unearned revenue 15,100 18,300
Long-term loan payable 60,000 73,000
Equities
Common stock 59,100 47,000
Retained earnings 44,000 37,400
Total liabilities and equity 233,300 242,700
Juicy Juice Company Juicy Juice Company
Income Statement Income Statement
For the Year Ended December 31, 2012 For the Year Ended December 31, 2012
Sales revenue 546,000
Cost of goods sold 291,300
Gross profit 254,700
Operating expenses
Rent expense 5,900
Wages expense 67,800
Advertising expense 3,000
Depreciation expense 11,400
Insurance expense 19,000
Total operating expenses 107,100
Operating income 147,600
Interest income 100
Loss on sale of equipment (2,000)
Interest expense (8,900)
Income before taxes 136,800
Income tax expense 39,800
Net income 97,000

• Additional Data for 2012
• Sold equipment costing 14,000 for ?
• Paid back Long Term Loan Payable ?
• Issued Common Stock for cash ?
• Paid Cash dividends, ?

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Operating Activities Section of Juicy Juice
Companys Statement of Cash Flows
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Knowledge Check QuestionA company's income
statement showed the following net income,
124,000 depreciation expense, 30,000 and gain
on sale of plant assets, 14,000. An examination
of the company's current assets and current
liabilities showed the following changes as a
result of operating activities accounts
receivable decreased 9,400 merchandise
inventory increased 18,000 prepaid expenses
decreased 6,200 accounts payable increased
3,400. Calculate the net cash provided by
operating activities.

1. 139,000.
2. 141,000.
3. 145,800.
4. 155,000.

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Investing Activities for Juicy Juice Company
The Additional Data section notes that Juicy
Juice Company sold some equipment. Determine the
cash proceeds from the sale.
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Financing Activities for Juicy Juice Company
The Additional Data section notes that the
company paid back some of its Long Term Loan
Payable. Determine the cash payment.
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Financing Activities for Juicy Juice Company
The additional data section notes that the
company issued some new shares for cash.
Determine the cash proceeds.
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Financing Activities for Juicy Juice Company
The Additional Data section reported that the
company paid cash dividends. Determine the cash
paid for dividends.
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Knowledge CheckEquipment costing 100,000 with
accumulated depreciation of 40,000 is sold at a
loss of 10,000. What amount would be reported
under Cash Flows from Investing Activities?

1. 40,000
2. 50,000
3. 60,000
4. 70,000

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Knowledge CheckLance Companys financial
statements showed that the Retained Earnings
account had a balance of 30,100 on December 31,
2010, and a balance of 41,500 on December 31,
2011. The net income for the year 2011 was
25,800. If the only change affecting retained
earnings are net income and cash dividends paid,
calculate the cash dividends paid during 2011.

1. 10,100
2. 45,800
3. 14,400
4. 15,700

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APPLE, Inc.Consolidated Statement of Cash Flows
As of September 29, 2012 (all amounts in millions)
Operating Activities
Net Income 41,733
Adjustments
Depreciation and Amortization 3,277
Share based compensation expense 1,740
Deferred Income Tax expense 4,405
Changes in Operating Assets and Liabilities
Accounts Receivable (5,551)
Inventories (15)
Vendor non trade receivables (1,414)
Other current and noncurrent assets (3,162)
Accounts Payable 4,467
Deferred Revenue 2,824
Other current and noncurrent liabilities 2,552
Cash generated by operating activities 50,856
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APPLE, Inc.Consolidated Statement of Cash Flows
(as of September 29, 2012)
Investing Activities
Purchasing of Marketable Securities (151,232)
Proceeds from maturities of marketable securities 13,035
Proceeds from sale of marketable securities 99,770
Payments made in connection with business acquisitions (350)
Payments for acquisition of property, plant and equipment (8,295)
Payments for acquisition of intangible assets (1,107)
Other (48)
Cash used in investing activities (48,227)

Financing Activities
Proceeds from issuance of common stock 665
Excess tax benefits from equity awards 1,351
Dividends and dividend equivalent rights paid (2,488)
Taxes paid related to net share settlement of equity awards (1,226)
Cash used in financing activities (1,698)
Increase in Cash and Cash Equivalents 931
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Using Cash Flows to Evaluate a Company
Free Cash Flow
Free cash flow describes the cash remaining from
operations after adjustment for capital
expenditures and dividends.
What was Apples Free Cash Flow in 2012?
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Why is Accounting Important??

BERNARD J. EBBERS Former chairman and chief executive of WorldCom
Mr. Ebbers was accused of securities fraud, conspiracy and causing the company to make false filings with the Securities Exchange Commission (SEC). For example, WORLDCOM deliberately misclassified operating cash flows (payments for leased telecommunications lines) as investing cash flows.
Guilty on all counts. Sentenced to 25 years to life. (He was 68 years old when he was sentenced).
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End of Chapter 13
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