Chapter 12 Powerpoint

Learning Objective
1. Identify the purposes of the statement of cash

flows
12-1
Copyright 2015 Pearson Education Inc. All rights reserved.
IDENTIFY THE PURPOSES OF THE

STATEMENT OF CASH FLOWS
Statement of cash flows
12-2
Reports cash flows
Cash receipts
Cash payments
Covers a span of time (month, quarter, year)
Includes cash equivalents
LO 1
IDENTIFY THE PURPOSES OF THE

STATEMENT OF CASH FLOWS
Serves these purposes:
12-3
Predicts future cash

flows
Evaluates
management
decisions
Determines ability to
pay dividends and
interest
Shows relationship
of net income to
cash flows
LO 1
Timing of the Financial Statements
12-4
Exhibit 12-1
LO 1
Learning Objective
2. Distinguish among operating, investing, and
financing activities
12-5
DISTINGUISH AMONG OPERATING,

INVESTING, AND FINANCING ACTIVITIES
Three types of business activities:
12-6
Operating
Create revenue, expenses, gains and

lossesnet income
Investing
Cash flows related to long-term assets
Financing
Cash flows related to long-term

liabilities and owners equity
LO 2
DISTINGUISH AMONG OPERATING,

INVESTING, AND FINANCING ACTIVITIES
Exhibit 12-2 | How Operating, Investing, and Financing Activities Affect the Balance Sheet
12-7
LO 2
Two Formats for Operating Activities

Indirect
Direct
12-8
Reconciles from net income to net

cash provided by operating activities
Reports all cash receipts and cash
payments from operating activities
LO 2
Learning Objective
3. Prepare a statement of cash flows by the indirect
method
12-9
Exhibit 12-3 | Part 1
PREPARE A
STATEMENT OF
CASH FLOWS
BY THE INDIRECT
METHOD
LO 3
12-10
INDIRECT METHOD
Operating Activities
Positive Items
12-11
Negative Items
Net income
Net loss
Depreciation and
amortization
Gain on sale of long-term

assets
Loss on sale of long-term

assets
Increase in current assets

other than cash
Decreases in current assets

other than cash
Decrease in current
liabilities
Increase in current liabilities

LO 3
INDIRECT METHOD
Investing Activities
Positive Items
12-12
Negative Items
Sale of plant assets
Acquisition of plant assets
Sale of investments that are

not cash equivalents
Collections of loans
receivable
Purchase of investments
that are not cash
equivalents
Making loans to others
LO 3
INDIRECT METHOD
Financing Activities
Positive Items
12-13
Negative Items
Issuing stock
Payment of dividends
Selling treasury stock
Purchase of treasury stock
Borrowing money
Payment of principal
amounts of debts
LO 3
PREPARE A STATEMENT OF CASH FLOWS

BY THE INDIRECT METHOD
To illustrate the statement of cash flows, we use The
Roadster Factory, Inc. (TRF), a dealer in auto parts for sports
cars. Using the comparative balance sheets for 2014 and
2013 and the income statement for 2014, prepare the
statement of cash flows using the indirect method.
12-14
LO 3
Exhibit 12-4
12-15
LO 3
Exhibit 12-5
12-16
LO 3
Cash Flows from Operating Activities
Transactions that make up net income
From the income statement
12-17
Net income
Depreciation, depletion and amortization expense
Gains and losses on sales of long-term asset
From the comparative balance sheets
Increase or decrease in each current asset (other

than cash)
Increase or decrease in each current liability

LO 3
Cash Flows Template: Operating

Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
12-18
Depreciation/depletion/amortization expense
Loss on sale of long-term assets
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current assets other than cash
Increases in current liabilities
Decreases in current liabilities
Net cash provided by (used for) operating activities

LO 3
The Roadster Factory, Inc. (TRF)

Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Net income
$50,000
Adjustments to reconcile net income to net cash

provided by operating activities:
From the Income Statement
12-19
LO 3
Depreciation, Depletion, and Amortization
Added back to net income to convert net income to cash

flow
No effect on cash, decreases net income
Add-back cancels the deduction on the income

statement
The Roadster Factory, Inc. (TRF) reports Depreciation

Expense of $18,000 on their 2014 income statement
(Exhibit 12-5)
12-20
LO 3

Net income
$50,000

Depreciation expense
18,000
12-21

Net cash provided
by (used for) operating activities
LO 3
Gains and Losses on Sale of Long-Term

Assets
12-22
Gain or loss is an adjustment to net income
The Roadster Factory sold equipment for $62,000. The

book value was $54,000, so there was a gain of $8,000.
Net income also includes the gain
Must subtract gain from operating activities as it is

included in $62,000 reported in investing section
($54,000 + $8,000 = $62,000)
LO 3

Net income
$50,000

18,000
Gain on sale of plant assets
(8,000)
12-23
Net cash provided

by2015
(used
operating
activities
Copyright
Pearsonfor)
Education
Inc. All rights reserved.
LO 3
Changes in Current Assets and Current

Liabilities, Excluding Cash
1. An increase in a noncash current asset decreases cash
.
12-24
Accounts receivable increased $15,000
Sales revenue includes $15,000 not collected in cash
Subtract from net income in operating section
Prepaid expenses increased by $1,000, cash

decreases
Paid cash of $1,000 not deducted from net income
LO 3

Net income
$50,000

18,000
(8,000)
Increase in accounts receivable

Increase in prepaid expense
12-25

(15,000)
(1,000)
LO 3

2. An decrease in a noncash current asset increases cash
.
12-26
Inventory decreased $3,000
Decrease causes increase in Cost of Goods Sold,

decrease in net income, but no corresponding decrease
in cash
Add to net income in operating section
LO 3

Net income
$50,000

18,000
(8,000)
(15,000)
(1,000)
Decrease in inventory
3,000

12-27
LO 3

3. An increase in a current liability increases cash
.
12-28
Accounts payable increased $34,000
Cash was not spent to pay this debt
Cash payments are therefore less than expenses, and

TRF has more cash on hand
Increases in current liabilities increase cash
Add to net income in operating section
LO 3

Net income
$50,000

18,000
(8,000)
(15,000)
(1,000)
3,000
Increase in accounts payable
34,000

12-29
LO 3

4. An decrease in a current liability decreases cash
.
12-30
Salary and wages payable decreased $2,000 and

Accrued liabilities decreased by $2,000
Payment of a current liability decreases cash but does

not affect net income
LO 3

Net income
$50,000

18,000
(8,000)

(1,000)
3,000
34,000
Decrease in salary and wages payable
(2,000)
Decrease in accrued liabilities
(2,000)
Net cash provided by operating activities

12-31
(15,000)
$77,000
LO 3
Cash Flows from Investing Activities
Transactions that affect long-term assets
Increases in these accounts represent purchase
Decreases to cash
Decreases to these accounts represent sales
12-32
Plant Assets, Investments, and Notes Receivable
Increases to cash
LO 3
Cash Flows Template: Investing

Cash Flows From Investing Activities
12-33
Sale of long-term assets
Purchases of long-term assets
Collections of note receivable
Loans to others
Net cash provided by (used for) investing activities
LO 3
Purchases and Sales of Plant Assets

For computing cash flows, it is helpful to combine all the plant
assets into a single summary account
Plant Assets, Net

Beginning
219,000
18,000
Acquisitions
196,000
54,000
Book value of assets sold
Ending balance
343,000
Calculating the proceeds from the sale of plant assets

Book value
$54,000
12-34
Gain
+ $8,000
loss
Proceeds
$0
$62,000
LO 3
Purchases and Sales of Investments and

Loans
Investments
Beginning
100,000
Purchases
50,000
Ending balance
10,000
Book value invest. sold
140,000
Notes Receivable
Beginning
New loans made
21,000
Ending balance
21,000
12-35
Collections
LO 3
Cash Flows from Financing Activities
Transactions affecting liabilities and stockholders

equity
12-36
Notes Payable, Bonds Payable, Long-Term Debt,

Common Stock, Paid-in Capital in Excess of Par, and
Retained Earnings
Most of the data comes from the balance sheet
Increases are offset by increases in cash
Decreases are offset by decreases in cash
LO 3
Cash Flows Template: Financing

Cash Flows From Financing Activities
12-37
Issuance of stock
Purchases of treasury stock
Borrowing
Payment of notes and bonds payable
Net cash provided by (used for) financing activities
LO 3
Issuance and Payments of Long-Term

Debt
Long-Term Debt
Payments
11,000
77,000
Beginning balance
94,000
Issuance of new debt
160,000
Ending balance
If either new issuances or payments are known, the other

amount can be computed.
12-38
LO 3
Issuance of Stock and Purchases of

Treasury Stock
Common Stock
158,000
Beginning balance
4,000
Issuance of new stock
162,000
Ending balance
Treasury Stock
Beginning balance
16,000
Purchase treasury stock

Ending balance
12-39
3,000
19,000
LO 3
Dividend Declarations and Payments

Retained Earnings
Dividend declarations
and payments 17,000
12-40
86,000
Beginning balance
50,000
Net income
119,000
Ending balance
LO 3
Classify each of the following as an operating activity, an investing activity, or a

financing activity as reported on the statement of cash flows prepared by the
indirect method.
a.
b.
c.
d.
e.
f.
Issuance of stock
Borrowing long-term
Sales revenue
Purchase of land with cash
Purchase of treasury stock
g.
h.
i.
j.
k.
l.
Paying bonds payable

Interest expense
Sale of equipment
Cost of goods sold
Purchase of another company with cash
Making a loan
g.
h.
i.
j.
k.
l.
Financing
Operating
Investing
Operating
Investing
Investing
Answers
a.
b.
c.
d.
e.
f.
12-42
Financing
Financing
Operating
Financing
Investing
Financing
LO 3
Noncash Investing and Financing

Activities
Exhibit 12-10 illustrates noncash investing and financing
activities (all amounts are assumed)
Thousands
Noncash investing and financing activities:
Acquisition of building by issuing common stock
Acquisition of land by issuing note payable
Payment of long-term debt by issuing common stock
Total noncash investing and financing activities
12-42
$ 300
70
100
$ 470
LO 3
Illustration
Income statement of Mueller Travel Products,

Inc., for the year ended December 21, 2014:
Income Statement
Revenues:
Service revenue
$237,000
Dividend income
8,700
$245,700
Expenses:
Cost of goods sold
Salary expense
59,000
28,000
Advertising expense
2,900
Interest expense
2,100
Income tax expense

12-43
100,000

Net income
14,000
206,000
$39,700
LO 3
Illustration
Additional data:
a. Acquisition of plant assets was $130,000. Of this amount,
$75,000 was paid in cash and $55,000 by signing a note
payable.
b. Proceeds from sale of land totaled $25,000.
c. Proceeds from issuance of common stock totaled $50,000.
d. Payment of long-term note payable was $16,000.
e. Payment of dividends was $11,000.
12-44
LO 3
Illustration
Balance sheet data of Mueller Travel Products, Inc., follow:
December 31,
2014
2013
Change
$125,000
$50,800
$74,200
Accounts receivable
41,000
57,000
(16,000)
Inventory
94,000
73,000
21,000
9,200
8,700
500
Accounts payable
32,000
18,000
14,000
Accrued liabilities
82,000
57,000
25,000
Current assets:
Cash
Prepaid expenses
Current liabilities:
12-45
LO 3
Mueller reported net income of $39,700.

Net income
$ 39,700

28,000
Decrease in accounts receivable
16,000
Increase in inventory
(21,000)

14,000
Increase in accrued liabilities
25,000
12-46
(500)
$101,200
LO 3
Mueller reported depreciation expense of $28,000.

Net income
$ 39,700

28,000
16,000
(21,000)

14,000
25,000
12-47
(500)
$101,200
LO 3
Mueller reports the change in all current assets and current

liabilities, other than cash, as follows:

Net income
$ 39,700

28,000
16,000
(21,000)

14,000
25,000
12-48
(500)
$101,200
LO 3
Proceeds from sale of land totaled $25,000.

Sale of land
$ 25,000
Purchases of plant assets

Net cash used for investing activities
(75,000)
($50,000)

Issuance of common stock
50,000
Payment of note payable
(16,000)
(11,000)
Net cash provided by financing activities
12-49
$23,000
LO 3
Acquisition of plant assets was $130,000. Of this amount, $75,000

was paid in cash and $55,000 by signing a note payable.

Sale of land
$ 25,000

(75,000)
($50,000)

50,000
(16,000)
(11,000)
12-50
$23,000
LO 3
Proceeds from issuance of common stock totaled $50,000.

Sale of land
$ 25,000

(75,000)
($50,000)

50,000
(16,000)
(11,000)
12-51
$23,000
LO 3
Payment of long-term note payable was $16,000.

Sale of land
$ 25,000

(75,000)
($50,000)

50,000
(16,000)
(11,000)
12-52
$23,000
LO 3
Payment of dividends was $11,000.

Sale of land
$ 25,000

(75,000)
($50,000)

50,000
(16,000)
(11,000)
12-53
$23,000
LO 3
Summary totals for the Statement of Cash Flows

12-54
$101,200
(50,000)
23,000
Net increase in cash
74,200
Cash balance, December 31, 2013
50,800
Cash balance, December 31, 2014
$125,000
LO 3
Learning Objective
4. Prepare a statement of cash flows by the direct
method
12-55
PREPARE A STATEMENT OF CASH FLOWS

BY THE DIRECT METHOD
FASB and IASB prefer the direct method of reporting

operating cash flows
Used by a small percentage of companies
12-56
Provides clearer information about sources and

uses of cash
Requires more computations than indirect method
Investing and financing cash flows are unaffected by

the method used
LO 4
DIRECT METHOD
Operating Activities
Positive Items
Negative Items
Collections from customers
Payments to suppliers
Receipts of interest and

dividends on investments
Payments to employees
Payments of interest and

income taxes
Other operating
payments
Other operating receipts
Investing and financing cash flows

are the same as the indirect method
12-57
LO 4
Exhibit 12-15 | Direct Method of Computing Cash Flows from Operating Activities
12-58
LO 4
Direct Method Template: Operating

12-59
Collections from customers
Interest received
Payments to suppliers
Payments to employees
Payments for income tax
Payments for interest
LO 4
Using the direct method, classify each of the following as an

operating activity, an investing activity, or a financing activity.
a. Net income
a. Not reported
b. Payment of dividends
b. Financing
c.
c.
Borrowing long-term
Financing
d. Payment of cash to suppliers
d. Operating
e. Making a loan
e. Investing
f.
f.
Sale of treasury stock
Financing
g. Depreciation expense
g. Not reported
h. Purchase of equipment with cash
h. Investing
12-60
LO 4
Using the direct method, classify each of the following as an

operating activity, an investing activity, or a financing activity.
i.
Issuance of stock
i.
Financing
j.
Purchase of another company with cash
j.
Investing
k.
Payment of a long-term note payable
k.
Financing
l.
Payment of income taxes
l.
Operating
m. Collections from customers
m. Operating
n. Accrual of interest revenue
n. Not reported
o. Expiration of prepaid expense
o. Not reported
p. Receipt of cash dividends
p. Operating
12-61
LO 4
Cash Collections from Customers

Accounts Receivable
Beginning balance
Sales
81,000
303,000
Ending balance
288,000
Collections
96,000
$303,000 (Sales) - $15,000 ( A/R) = $288,000
12-62
LO 4
Payments for Inventory
$150,000 (COGS) - $3,000 ( Inventory) - $34,000 ( A/P) = $113,000
Inventory
Beginning balance
Purchases
Ending balance
38,000
147,000
150,000
Cost of goods sold
35,000
Accounts Payable
57,000
Payments
113,000
147,000
91,000
12-63
Beginning balance
Purchases
Ending balance
LO 4
Payments for Operating Expenses
$17,000 (Expense) + $1,000 ( Prepaids) + $2,000 (Liabilities) = $20,000

Prepaid Expenses
Beg. balance
Payments
7,000
Accrual
7,000 Expired costs
End.
8,000balance
8,000
Accrued Liabilities
3,000
Payments
1,000
Beg. balanceAccrual
3,000
1,000
12-64
Other Operating Expenses
End. balance
Expired costs
1,000
Payments
7,000
9,000balance
End.
17,000
LO 4
Payments to Employees
Salary and Wages Payable
Payments
58,000
6,000
Beginning balance
56,000
Expense
4,000
Ending balance
$56,000 (Expense) + $2,000 (Payable) = $58,000
12-65
Process is the same for determining cash

payments for interest and income taxes
LO 4
Measuring Cash Adequacy: Free Cash

Flow
Free
Cash
Flow
Net cash provided

by operating
=
activities
Cash payments
earmarked for investment
in plant assets
Amount of cash available from operations after

paying for planned investments in plant assets
12-66
LO 4
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Learning Objective

1. Identify the purposes of the statement of cash

Copyright 2015 Pearson Education Inc. All rights reserved.

IDENTIFY THE PURPOSES OF THE

Reports cash flows

Covers a span of time (month, quarter, year)

Includes cash equivalents

Copyright 2015 Pearson Education Inc. All rights reserved.

IDENTIFY THE PURPOSES OF THE

Predicts future cash

Copyright 2015 Pearson Education Inc. All rights reserved.

Timing of the Financial Statements

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

DISTINGUISH AMONG OPERATING,

Create revenue, expenses, gains and

Cash flows related to long-term assets

Cash flows related to long-term

Copyright 2015 Pearson Education Inc. All rights reserved.

DISTINGUISH AMONG OPERATING,

Copyright 2015 Pearson Education Inc. All rights reserved.

Two Formats for Operating Activities

Reconciles from net income to net

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

Exhibit 12-3 | Part 1

Gain on sale of long-term

Loss on sale of long-term

Increase in current assets

Decreases in current assets

Increase in current liabilities

Sale of plant assets

Acquisition of plant assets

Sale of investments that are

Making loans to others

Copyright 2015 Pearson Education Inc. All rights reserved.

Selling treasury stock

Purchase of treasury stock

Copyright 2015 Pearson Education Inc. All rights reserved.

PREPARE A STATEMENT OF CASH FLOWS

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

Cash Flows from Operating Activities

Transactions that make up net income

From the income statement

Depreciation, depletion and amortization expense

Gains and losses on sales of long-term asset

From the comparative balance sheets

Increase or decrease in each current asset (other

Increase or decrease in each current liability

Cash Flows Template: Operating

Loss on sale of long-term assets

Gain on sale of long-term assets

Increases in current assets other than cash

Decreases in current assets other than cash

Increases in current liabilities

Decreases in current liabilities

Net cash provided by (used for) operating activities

The Roadster Factory, Inc. (TRF)

Adjustments to reconcile net income to net cash

From the Income Statement

Copyright 2015 Pearson Education Inc. All rights reserved.

Depreciation, Depletion, and Amortization