Kế toán tài chính 2 - Chapter 17: Statement of cash flows

Statement of Cash FlowsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 17Learning ObjectivesState the principal purposes and uses of the statement of cash flows, and identify its components.Analyze the statement of cash flows.Use the indirect method to determine cash flows from operating activities.2Copyright © Houghton Mifflin Company. All rights reserved. Learning Objectives (cont’d)Determine cash flows from investing activities.Determine cash flows from financing activities.3Copyright © Houghton Mifflin Company. All rights reserved.Overview of the Statement of Cash FlowsObjective 1State the principal purposes and uses of the statement of cash flows, and identify its components4Copyright © Houghton Mifflin Company. All rights reserved.The Statement of Cash Flows shows how a company’s operating, investing, and financing activities affected cash during an accounting periodExplains the net increase (or decrease) in cash during the accounting period5Copyright © Houghton Mifflin Company. All rights reserved.Cash and Cash EquivalentsCash includes cash and cash equivalentsCashMoney on handDeposits in company checking accountsCash equivalentsShort-term, highly liquid investments includingMoney market accountsCommercial paperU.S. Treasury billsCombined with the Cash account on the statement of cash flows6Copyright © Houghton Mifflin Company. All rights reserved.Purpose of the Statement of Cash Flows is to provide information about a company’s cash receipts and cash payments during an accounting periodOther financial statements may also provide some of this information7Copyright © Houghton Mifflin Company. All rights reserved.Internal Uses of the Statement of Cash FlowsManagement uses the statement of cash flows toAssess liquidityDetermine if short-term financing is necessaryDetermine dividend policyDecide whether to raise or lower dividendsEvaluate the effects of investment and financing decisionsPlan for investing and financing needs8Copyright © Houghton Mifflin Company. All rights reserved.External Uses of the Statement of Cash FlowsInvestors and creditors use the statement of cash flows to assess a company’s ability toManage cash flowsGenerate positive future cash flowsPay its liabilitiesPay dividends and interestAnticipate its need for additional financing9Copyright © Houghton Mifflin Company. All rights reserved.Classification of Cash FlowsThe statement of cash flows classifies cash receipts and cash payments into categoriesOperating activitiesInvesting activitiesFinancing activities10Copyright © Houghton Mifflin Company. All rights reserved.Operating Activities include the cash effects of transactions and other events that affect the income statementIn effect, items on the income statement are changed from an accrual to a cash basis11Copyright © Houghton Mifflin Company. All rights reserved.Operating Activities (cont’d)Cash inflowsCash receipts from customers for goods and servicesInterest and dividends received on loans and investmentsSales of trading securitiesCash outflows Cash payments for Wages Goods and services Expenses InterestTaxes Purchases of trading securities12Copyright © Houghton Mifflin Company. All rights reserved.Investing Activities include the cash effects of transactions that affect long-term assetsAcquiring and selling long-term assetsAcquiring and selling marketable securities other than trading securities or cash equivalents Making and collecting loans13Copyright © Houghton Mifflin Company. All rights reserved.Investing Activities (cont’d)Cash inflowsCash receipts from selling long-term assets and marketable securitiesCollecting loansCash outflowsCash expended for purchases of long-term assets and marketable securitiesCash loaned to borrowers14Copyright © Houghton Mifflin Company. All rights reserved.Financing Activities include the cash effects of transactions that affect long-term liabilities and stockholders’ equityObtaining resources from stockholdersReturning resources to stockholders and providing them with a return on their investmentObtaining resources from creditorsRepaying amounts borrowed from creditors or otherwise settling obligationsRepayments of accounts payable or accrued liabilities are classified under operating activities15Copyright © Houghton Mifflin Company. All rights reserved.Financing Activities (cont’d)Cash inflowsProceeds from issues of stockProceeds from short-term and long-term borrowingCash outflowsRepayment of loansPayments to owners (cash dividends)Treasury stock transactions16Copyright © Houghton Mifflin Company. All rights reserved.Classification of Cash Inflows and Cash OutflowsNoncash Investing and Financing TransactionsCompanies may engage in significant noncash investing and financing activities involving only long-term assets, long-term liabilities, or stockholders’ equity Not reflected on the statement of cash flows because they do not involve either cash inflows or cash outflowsThese transactions will affect future cash flowsShould be disclosed in a separate schedule as part of the statement of cash flows18Copyright © Houghton Mifflin Company. All rights reserved.Format of the Statement of Cash FlowsDivided into three sectionsCash flows from operating activitiesCash flows from investing activitiesCash flows from financing activitiesA reconciliation of beginning and ending cash balances appears near the bottom of the statement19Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy are money market accounts, commercial paper (short-term notes), and U.S. Treasury bills considered cash equivalents?Because they are highly liquid, temporary (90 days or less) holding places for cash that is not currently needed to operate the business. They can be converted quickly into cash if needed20Copyright © Houghton Mifflin Company. All rights reserved.Discussion (cont’d)If noncash investing and financing transactions do not produce cash flows, why must they be disclosed?Because they involve activities that might be important to the reader. Also, many noncash transactions involve a simultaneous inflow and outflow of cash and will require cash flows in the future21Copyright © Houghton Mifflin Company. All rights reserved.Discussion (cont’d)What are the purposes of the statement of cash flows?Primary purposeTo provide information about a company’s cash receipts and cash payments during an accounting period Secondary purposeTo provide information about a company’s operating, investing, and financing activities during the period22Copyright © Houghton Mifflin Company. All rights reserved.Analyzing the Statement of Cash FlowsObjective 2Analyze the statement of cash flows23Copyright © Houghton Mifflin Company. All rights reserved.Analyzing the Statement of Cash FlowsStatement of cash flows can be analyzed to show significant relationshipsAnalysts examineCash-generating efficiencyFree cash flow24Copyright © Houghton Mifflin Company. All rights reserved.Cash-Generating Efficiency (CGE)shows the company’s ability to generate cash from its current or continuing operationsThree measures of CGECash flow yieldCash flows to salesCash flows to assets25Copyright © Houghton Mifflin Company. All rights reserved.This means that Marriott's operating activities generated 20 percent more cash flow than net incomeCash Flow Yield is the ratio of net cash flows from operating activities to net incomeFor 2002, Marriott International’s cash flows from operating activities was $516 million and its net income was $448 million*If special items on the income statement are material, use income from continuing operations26Copyright © Houghton Mifflin Company. All rights reserved.This means that Marriott generated 6.1 percent of its net cash from salesCash Flows to Sales is the ratio of net cash flows from operating activities to salesFor 2002, Marriott International’s cash flows from operating activities was $516 million and sales totaled $8,441 million27Copyright © Houghton Mifflin Company. All rights reserved.This means that each dollar of assets generated 5.9 cents in operating cash flows during 2002Cash Flows to Assets is the ratio of net cash flows from operating activities to average total assetsFor 2002, Marriott International’s cash flows from operating activities was $516 million. Total assets were $9,107 million and $8,296 million for 2001 and 2002, respectively28Copyright © Houghton Mifflin Company. All rights reserved.Free Cash Flow (FCF) is the amount of cash that remains after paying for continuing operations at the current level, interest, income taxes, dividends, and net capital expendituresShows how much cash a company has available to reduce debt or expand29Copyright © Houghton Mifflin Company. All rights reserved.Free Cash Flow (cont’d)If free cash flow is positive, the companyHas met all of its planned cash commitments Has cash available to reduce debt or expandIf free cash flow is negative, the company will have to Sell investmentsBorrow money Issue stock in the short term to continue at its planned level of operation30Copyright © Houghton Mifflin Company. All rights reserved.Free Cash Flow (cont’d)For 2002, Marriott International had net cash flows from operations of $516 million, paid $65 million in dividends, purchased $292 million in plant assets, and sold $729 million in plant assetsThis means the company has met all its planned cash commitments and has $888 million in cash available to reduce debt or to expandIt is best to look at trends in cash flow measures over several yearsCash flows vary from year to yearMarriott's cash flow yield decreased from 2001 to 2002Watch in 200331Copyright © Houghton Mifflin Company. All rights reserved.DiscussionDefine cash-generating efficiency and identify three ratios that measure cash-generating efficiency.Cash-generating efficiency is the ability of a company to generate cash from its current or continuing operations. Three ratios that measure cash-generating efficiency are cash flow yield, cash flows to sales, and cash flows to assets32Copyright © Houghton Mifflin Company. All rights reserved.Preparing the Statement of Cash Flows: Operating ActivitiesObjective 3Use the indirect method to determine cash flows from operating activities33Copyright © Houghton Mifflin Company. All rights reserved.Determining Cash Flows from Operating ActivitiesThere are two methods of converting the income statement from an accrual basis to a cash basisThe direct methodAdjusts each item in the income statement to its cash equivalentMore easily understood by the average readerThe indirect methodLists only necessary adjustments to convert net income to net cash flowsSuperior from an analyst’s perspectiveUsed by most companiesBoth methods result in the same net figure34Copyright © Houghton Mifflin Company. All rights reserved.Indirect Method of Determining Net Cash Flows from Operating Activities35Copyright © Houghton Mifflin Company. All rights reserved.DepreciationDepreciation, amortization, and depletion expense are allocations of expense and do not involve cash flowsAn adjustment is needed to increase net income by the amount recorded36Copyright © Houghton Mifflin Company. All rights reserved.Depreciation ExpenseAccumulated DepreciationCash37,00037,000Adjustments to DepreciationRyan Corporation reported $37,000 depreciation expense on its income statement$37,000 reductionNo effectAdd $37,000 to net income Cash flow out is $37,000 less because depreciation expense has no cash effect Affects net incomeAffects cash flows37Copyright © Houghton Mifflin Company. All rights reserved.Depreciation ExpenseAccumulated DepreciationCash37,00037,000Adjustments to DepreciationRyan Corporation reported $37,000 depreciation expense on its income statementAffects net incomeAffects cash flows38Copyright © Houghton Mifflin Company. All rights reserved.Gains and LossesGains and losses do not affect cash flows from operating activities and need to be removed from this sectionThe cash receipts that resulted in the gains or losses are shown with investing activities39Copyright © Houghton Mifflin Company. All rights reserved.Gain on Sale - InvestmentsInvestmentsCash90,000-0-90,00012,000102,000Adjustments to Gains and LossesRyan Corporation reported on its income statement a gain of $12,000 on the sale of an investment. The investment had an original cost of $90,000 and sold for $102,000$12,000 increase$102,000 increase(shown under investing activities)Deduct $12,000 from net income Gains do not affect cash flows from operating activities and need to be removed from this section Affects net incomeAffects cash flows40Copyright © Houghton Mifflin Company. All rights reserved.Gain on Sale - InvestmentsInvestmentsCash90,000Adjustments to Gains and LossesRyan Corporation reported on its income statement a gain of $12,000 on the sale of an investment. The investment had an original cost of $90,000 and sold for $102,000Affects net incomeAffects cash flows90,00012,000102,000-0-41Copyright © Houghton Mifflin Company. All rights reserved.Loss on Sale of Plant Assets10,000-0-10,0003,0002,000Accum. Dep.Plant AssetsPlant AssetsCash-0-2,0005,000Adjustments to Gains and LossesRyan Corporation reported on its income statement a loss of $3,000 on the sale of plant assets. The assets had an original cost of $10,000 and sold for $5,000$3,000 decrease$5,000 increase(shown under investing activities)Add $3,000 to net income Losses do not affect cash flows from operating activities and need to be removed from this section Affects net incomeAffects cash flows42Copyright © Houghton Mifflin Company. All rights reserved.Loss on Sale of Plant Assets-0-10,000Accum. Dep.Plant AssetsPlant AssetsCash-0-2,000Adjustments to Gains and LossesRyan Corporation reported on its income statement a loss of $3,000 on the sale of plant assets. The assets had an original cost of $10,000 and sold for $5,000Affects net incomeAffects cash flows10,0003,0002,0005,00043Copyright © Houghton Mifflin Company. All rights reserved.Changes in Current AssetsDecreases are added to net incomeIncreases are deducted from net income44Copyright © Houghton Mifflin Company. All rights reserved.Adjustments to Changes in Current AssetsAdd $8,000 to net income because cash received from sales was $8,000 more than sales ($706,000 - $698,000) Accounts ReceivableBeg. Bal. 55,000End. Bal. 47,000706,000698,000Example Accounts Receivable balance decreased by $8,000 ($47,000 - $55,000)Cash Receipts from Customers Sales toCustomers45Copyright © Houghton Mifflin Company. All rights reserved. SalesAccounts ReceivableCash706,00047,00055,000698,000706,000698,000Adjustments to Changes in Current Assets$698,000 increase$706,000 increaseAdd $8,000 to net income Cash flow in is $8,000 more than sales because the Accounts Receivable account decreased $8,000 Affects net incomeAffects cash flows46Copyright © Houghton Mifflin Company. All rights reserved. SalesAccounts ReceivableCash55,000Adjustments to Changes in Current AssetsAffects net incomeAffects cash flows706,000698,000706,00047,000698,00047Copyright © Houghton Mifflin Company. All rights reserved. InventoryCash144,000110,00034,00034,000Adjustments to Changes in Current AssetsNone$34,000 decreaseDeduct $34,000 from net income Cash flow out is $34,000 more because the Inventory account increased $34,000 Affects cash flows48Copyright © Houghton Mifflin Company. All rights reserved.InventoryCash144,000110,00034,000Adjustments to Changes in Current Assets 34,00049Copyright © Houghton Mifflin Company. All rights reserved. Insurance ExpensePrepaid ExpensesCash2,0001,0005,0006,0002,0006,000Adjustments to Changes in Current Assets$6,000 decrease$2,000 decreaseAdd $4,000 to net income Cash flow out is $4,000 less than expenses because the Prepaid Expenses account decreased $4,000 Affects net incomeAffects cash flows50Copyright © Houghton Mifflin Company. All rights reserved. Insurance ExpensePrepaid ExpensesCash5,000Adjustments to Changes in Current AssetsAffects net incomeAffects cash flows6,0002,0006,0001,0002,00051Copyright © Houghton Mifflin Company. All rights reserved.Changes in Current LiabilitiesIncreases are added to net incomeDecreases are deducted from net income52Copyright © Houghton Mifflin Company. All rights reserved.Adjustments to Changes in Current LiabilitiesAdd $7,000 to net income because cash paid for purchases was $7,000 less than what appears on the income statement ($554,000 - $547,000) Accounts PayableBeg. Bal. 43,000End. Bal. 50,000554,000547,000Example Accounts Payable balance increased by $7,000 ($50,000 - $43,000)PurchasesCash Paid to Suppliers53Copyright © Houghton Mifflin Company. All rights reserved. Adjustments to Changes in Current LiabilitiesAccounts PayableCash50,00043,000513,000513,000Cost of Goods Sold520,000520,000$520,000 decrease$513,000 decreaseAdd $7,000 to net income Cash flow out is $7,000 less because the Accounts Payable account increased $7,000 Affects net incomeAffects cash flows54Copyright © Houghton Mifflin Company. All rights reserved. Adjustments to Changes in Current LiabilitiesAccounts PayableCash43,000Cost of Goods SoldAffects net incomeAffects cash flows513,000513,000520,00050,000520,00055Copyright © Houghton Mifflin Company. All rights reserved. Cost of Goods Sold520,000144,000110,000520,000554,000Accounts PayableInventoryCash50,00043,000547,000554,000547,000Relationship of Inventory and Accounts Payable Accounts$520,000 decrease$547,000 decreaseAlready deducted $27,000 from net income$34,000 deducted from net income for increase in Inventory($144,000 - $110,000) $7,000 added to net income for increase in Accounts Payable ($50,000 - $43,000) Affects net incomeAffects cash flows56Copyright © Houghton Mifflin Company. All rights reserved. Cost of Goods SoldAccounts PayableInventoryCashRelationship of Inventory and Accounts Payable AccountsAffects net incomeAffects cash flows520,000110,000520,000554,00043,000547,000554,000547,000144,00050,00057Copyright © Houghton Mifflin Company. All rights reserved. Accrued ExpensesAccrued Liabilities12,0009,0003,0003,000Adjustments to Changes in Current Liabilities$3,000 decreaseNoneAdd $3,000 to net income Cash flow out is $3,000 less than expensesAffects net income58Copyright © Houghton Mifflin Company. All rights reserved. Accrued ExpensesAccrued Liabilities12,0009,0003,000Adjustments to Changes in Current Liabilities3,00059Copyright © Houghton Mifflin Company. All rights reserved. Income Taxes PayableCash3,0005,0002,0002,000Current LiabilitiesNone$2,000 decreaseDeduct $2,000 from net income Cash flow out is $2,000 more because the Income Taxes Payable account decreased $2,000 Affects cash flows60Copyright © Houghton Mifflin Company. All rights reserved. Income Taxes PayableCash5,000Current Liabilities2,0002,0003,00061Copyright © Houghton Mifflin Company. All rights reserved.Schedule of Cash Flows from Operating Activities: Indirect Method62Copyright © Houghton Mifflin Company. All rights reserved.Effects of Items on the Income Statement That Do Not Affect Cash Flows63Copyright © Houghton Mifflin Company. All rights reserved.Adjustments for Increases and Decreases in Current Assets64Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow is depreciation expense treated on the statement of cash flows?Depreciation expense is a deduction on the income statement that does not affect the Cash account. Therefore, it is added back to net income on the statement of cash flows under cash flows from operating activities65Copyright © Houghton Mifflin Company. All rights reserved.Preparing the Statement of Cash Flows: Investing ActivitiesObjective 4Determine cash flows from investing activities66Copyright © Houghton Mifflin Company. All rights reserved.Cash Flows from Investing ActivitiesAnalyze increases and decreases in the Investments account to determine effects on Cash accountObjectiveExplain the change in each account balance from one year to the nextFocus Long-term assets (balance sheet)Short-term investments (current asset section of the balance sheet)Investment gains and losses (income statement)67Copyright © Houghton Mifflin Company. All rights reserved. Accounting for InvestmentsGain on Sale - InvestmentsInvestmentsCash78,000115,000127,00090,000102,00078,00012,000Purchase of investment, $78,000 decreaseSale of investment, $102,000 increase68Copyright © Houghton Mifflin Company. All rights reserved.Plant AssetsExplain changes in both the asset and related accumulated depreciation accountsPurchases increase plant assetsSales decrease plant assetsAccumulated depreciation isIncreased by the amount of depreciation expense Decreased by the removal of accumulated depreciation associated with plant assets that are sold69Copyright © Houghton Mifflin Company. All rights reserved. Accounting for Plant Assets715,000505,000Accum. Dep.Plant AssetsPlant Assets103,00068,00037,000Recall that Ryan Corporation recorded $37,000 of depreciation expense for the year70Copyright © Houghton Mifflin Company. All rights reserved. Accounting for Plant AssetsLoss on SalePlant Assets120,000120,00010,000Cash2,0005,0008,000Purchase of plant assets, $120,000 decreaseSale of plant assets, $5,000 increase715,000505,000Plant AssetsAccum. Dep.Plant Assets103,00068,00037,00071Copyright © Houghton Mifflin Company. All rights reserved. Accounting for Plant AssetsLoss on SalePlant AssetsAccum. Dep.Plant AssetsPlant AssetsCashAll items affecting the Plant Assets account have not been accounted for ???120,000715,000505,000120,00010,000103,00068,0002,0005,0008,00037,00072Copyright © Houghton Mifflin Company. All rights reserved. ???100,000715,000505,000120,00010,000100,000Bonds PayablePlant AssetsAccounting for Noncash Investing and Financing TransactionsNoneAll items affecting Plant Assets have now been accounted for73Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Cash Flows from Investing Activities74Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Noncash Investing and Financing Transactions75Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat types of transactions are considered investing activities?Investing activities center on the long-term assets shown on the balance sheet Also include transactions affecting short-term investments from the current assets section of the balance sheet and investment gains and losses from the income statement Examples include purchases and sales of investments and plant assets76Copyright © Houghton Mifflin Company. All rights reserved.Preparing the Statement of Cash Flows: Financing ActivitiesObjective 5Determine cash flows from financing activities77Copyright © Houghton Mifflin Company. All rights reserved.Cash Flows fromFinancing ActivitiesAnalysis similar to investing activities, including treatment of related gains or lossesFocusShort-term borrowingsLong-term liabilitiesStockholders’ equity accountsCash dividends from the statement of stockholders’ equity must also be considered78Copyright © Houghton Mifflin Company. All rights reserved. Income Taxes PayableCash295,000245,00050,00050,000100,000Accounting for Cash Flows from Financing ActivitiesRepayment of bonds, $50,000 decrease79Copyright © Houghton Mifflin Company. All rights reserved. Common StockPaid-in Capital - CommonCash189,000115,00099,000175,00076,000295,000245,000Accounting for Cash Flows from Financing ActivitiesIssue of common stock, $175,000 increase80Copyright © Houghton Mifflin Company. All rights reserved. Income SummaryRetained EarningsCash8,000140,000132,00016,0008,00016,000Accounting for Cash Flows from Financing ActivitiesPayment of dividends, $8,000 decrease81Copyright © Houghton Mifflin Company. All rights reserved. Treasury StockCash25,00025,000Accounting for Cash Flows from Financing ActivitiesPurchase of treasury stock, $25,000 decrease82Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Cash Flows from Financing Activities83Copyright © Houghton Mifflin Company. All rights reserved.Statement of Cash Flows: Indirect MethodDiscussionWhat is the proper treatment on the statement of cash flows for a transaction in which a building that cost $50,000 with accumulated depreciation of $32,000 is sold for a loss of $5,000?The sale of the building would result in a cash flow of $13,000 [Carrying value of $18,000 ($50,000 - $32,000) less a loss of $5,000]Cash Flows from Operating Activities Loss on Sale of Building +$5,000Cash Flows from Investing Activities Sale of Building +$13,00085Copyright © Houghton Mifflin Company. All rights reserved.Discussion (cont’d)As cash flows from operating activitiesAs cash flows from investing activitiesAs cash flows from financing activitiesIn the schedule of noncash investing and financing transactionsNot at allUsing the indirect method to prepare the statement of cash flows, tell whether each of the following items would appear86Copyright © Houghton Mifflin Company. All rights reserved.As cash flows from operating activitiesAs cash flows from investing activitiesAs cash flows from financing activitiesIn the schedule of noncash investing and financing transactionsNot at allDividends paidCash receipts from salesDecrease in accounts receivableSale of plant assetsGain on sale of investmentIssue of stock for plant assetsIssue of common stockNet incomeceabadcaDiscussion (cont’d)87Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewState the principal purposes and uses of the statement of cash flows and identify its componentsAnalyze the statement of cash flowsUse the indirect method to determine cash flows from operating activities88Copyright © Houghton Mifflin Company. All rights reserved. And FinallyDetermine cash flows from investing activitiesDetermine cash flows from financing activities89Copyright © Houghton Mifflin Company. All rights reserved.