Chapter 16 How does a company obtain its cash Where does a company spend its cash What explains the change in the cash balance Purpose of the Statement of Cash Flows C1 How did the business fund its operations ID: 570032
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Slide1
Statement of Cash Flows
Chapter 16Slide2
How does a company obtain its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
Purpose of the
Statement
of Cash Flows
C1Slide3
How did the business fund its operations?
Did the business borrow any funds or repay any loans?
Does the business have sufficient cash to pay its debts as they mature?
Did the business make any dividend payments?
Importance of Cash Flows
C1Slide4
Cash
Currency
Cash Equivalents
Short-term, highly liquid investments.
Readily convertible into cash.
Sufficiently close to maturity so that market value is unaffected by interest rate changes.
Measurement of Cash FlowsSlide5
Classification of Cash Flows
The Statement of Cash Flows includes the following three sections:
Operating Activities
Investing ActivitiesFinancing Activities
C1Slide6
Examples
of inflows are:
cash receipts from the sale of goods and the rendering of services.
cash receipts from royalties, fees, commissions, and other revenue.
The principal revenue-producing activities of the entity and other activities that are not investing or financing activities. These generally include those transactions and events that determine net
profit.Operating Activities
C1Slide7
The
principal revenue-producing activities of the entity and other activities that are not investing or financing activities. These generally include those transactions and events that determine net profit or net
profit.
Operating Activities
C1
Examples of outflows are:
cash payments to suppliers for goods and services.
cash payments to and on behalf of employees.Slide8
Examples of inflows are:
cash receipts from sales of PPE, intangibles and other long-term assets.
cash receipts from sales of equity or debt instruments of other entities.
cash receipts from the repayment of advances and loans made to other parties.
The acquisition and
disposal of long-term assets and other investments not included in cash equivalents.
Investing ActivitiesC1Slide9
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.
T
he
acquisition and
disposal of long-term assets
and
other investments not
included
in cash
equivalents.
Investing Activities
C1Slide10
Examples of inflows are:
cash proceeds from issuing shares or other equity instruments.
cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short-term or long-term borrowings.
A
ctivities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Financing Activities
C1Slide11
A
ctivities
that result in changes in the size and composition of the contributed equity and borrowings of the entity.
Financing Activities
C1
Examples of outflows are:
cash payments to owners to acquire or redeem the entity’s shares.
cash repayments of amounts borrowed.Slide12
Classification of Cash Flow Items
Operating
Investing
Financing
Interest received
Yes
Yes
Dividends received
Yes
Yes
Interest paid
Yes
Yes
Dividends paid
Yes
Yes
Reporting entities have choices in classifying interest and dividends
C1Slide13
Noncash Investing and Financing
Items requiring separate disclosure include:
Retirement of debt by issuing equity securities.
Conversion of preference shares to ordinary shares.
C1Slide14
Format of the Statement
of
Cash Flows
C1Slide15
Preparing the Statementof
Cash Flows
P1Slide16
Analyzing the Cash Account
P1
The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities.
Cash
Balance, Dec. 31,
2014
12,000
Payments for
merchandise
319,000
Receipts from
customers
570,000
Payments for wages and operating
expenses
218,000
Receipts from asset
sales
12,000
Payments for
interest
8,000
Receipts from share
issuanc
e
15,000
Payments for
taxes
5,000
Receipts from
dividends
16,000
Payments for
assets
10,000
Payments for notes
retirement
34,000
Payments for
dividends 14,000
Balance, Dec. 31,
2015
33,000
Slide17
Analyzing the Cash Account
P1
Cash from Operating
Cash from Investing
Cash from Financing
Cash Proved
GENESIS
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . .
$570,000
Cash paid for merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(319,000)
Cash paid for wages and other operating expenses . . . . . . . . .
(218,000)
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,000)
Cash received from dividends
*
……………………………………..
16,000
Cash paid for interest*
*
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,000)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . .
$36,000
Cash flows from investing activities
Cash received from sale of property, plant and equipment . . .
12,000
Cash paid for purchase of property, plant and equipment . . . .
(10,000)
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . .
2,000
Cash flows from financing activities
Cash received from issuing shares . . . . . . . . . . . . . . . . . . . . . . .
15,000
Cash paid to retire notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(34,000
)
Cash paid for dividends**
*
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,000)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . .
(33,000
)
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,000
Cash balance at prior year-end . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,000 Cash balance at current year-end . . . . . . . . . . . . . . . . . . . . . . . . . $17,000
*Can also be classified as investing.
**Can also be classified as financing.
**
*
Can also be classified as operating.Slide18
Analyzing Noncash Account
P1
A second approach to preparing the statement of cash flows is analyzing noncash accounts. Slide19
Information to Prepare the Statement
P1
Comparative
Statements of Financial Position
Current
Income Statement
Additional
Information
Information to prepare the statement of cash flows usually comes from three sources: Slide20
Application of the
Indirect Method of Reporting
P2Slide21
Application of the Indirect Method of Reporting
P2
Additional information on Genesis Inc.
’
s 2015 transactions:
The accounts payable balances result from merchandise inventory purchases. Purchased $70,000 in PPE by paying $10,000 cash and issuing $60,000 of notes payable.
Sold PPE with an original cost of $30,000 and accumulated depreciation of $12,000 for $12,000 cash, yielding a $6,000 loss. Received $15,000 cash from issuing 3,000 shares of no-par ordinary shares.
Paid
$34,000
cash to retire notes with a $34,000 carrying
amount.
Declared and paid cash dividends of $14,000
.
Received all its dividend income on financial assets in cash of $16,000
.Slide22
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.
P2
Profit
before tax
Cash Flows from Operating ActivitiesSlide23
P2
Adjustments for Operating Items
Not Providing or Using CashSlide24
P2
Adjustments for Nonoperating ItemsSlide25
P2
Adjustments for Changes in
NonCash Current Assets and
Current LiabilitiesSlide26
Use this table when adjusting
profit
before taxes to operating cash flows
Change in Account Balance During Year
Increase
Decrease
Noncash
Current Assets
Subtract from
profit
Add to
profit
Current
Liabilities
Add to
profit
Subtract from
profit
P2
Adjustments for Changes in
Noncash Current Assets and Current LiabilitiesSlide27
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.
P2Slide28
P2
COMPLETING THE OPERATING SECTIONSlide29
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:Slide30
P3
Cash Flows from Investing
Identify changes in investing-related accounts
Explain these changes using reconstruction analysis
Report their cash flow effects
A three-stage process to determine cash
from or used in
investing activities:Slide31
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.Slide32
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. Slide33
P3
Cash Flows from InvestingSlide34
P3
Cash Flows from Financing
Identify changes in financing-related accounts
Explain these changes using reconstruction analysis
Report their cash flow effects
A three-stage process to determine cash
from or used in
financing activities:Slide35
P3
Cash Flows from Financing
This analysis reveals:
an increase in notes payable from $64,000 to $90,000,
an increase in share capital from $80,000 to $95,000, and
an increase in retained earnings from $88,000 to $112,000.Slide36
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. Slide37
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. Slide38
P3Slide39
P3Slide40
Analyzing Cash Sources and Uses
A1
Most managers stress the importance of understanding and predicting cash flows for business decisions. Slide41
Used, along with
profit-based
ratios, to assess company performance.
Cash flow on
total assets
=
Net cash flow from
o
perating activities
Average total assets
Cash Flow on Total Assets
A1Slide42
Appendix 16A: Direct Method of Reporting Operating Cash Flows
P4
Adjust
income
statement accounts related to operating activities for changes in their related
statement of financial position accounts:Slide43
Appendix 16A: Direct Method of Reporting Operating Cash Flows
P4Slide44
End of Chapter 16