chap14-2

Cash Flow Statement A Statement of Cash Flows explains how changes in balance sheet accounts and income statement accounts cause the change in cash from the beginning of the period to the end of the period. Recall that revenues and expenses are reported on the on an accrual basis. Consequently, some of the cash for the revenue earned may not have been as of the statement date. Conversely, some of the cash for the expenses reported may not have been as of the statement date. This void caused by accrual accounting is filled by the statement of cash flows by explaining the sources from which a company has acquired cash (inflows) and how the company has used its cash (outflows). A statement of cash flows helps the reader of the financial statements: assess a companys ability to produce future cash flows judge a companys ability to meet obligations and pay dividends estimate the companys need for external financing Cash inflows and outflows come from three categories: operating activities, financing activities and investing activities. Determine whether the activities described in the following table are operating, investing, or financing activities that affect cash flow. Company purchased a factory Inventory decreased from previous year Company issued long-term bonds Company paid common dividends Accounts Receivable balance increased from previous year In addition to recognizing what type of activity transactions are describing, it is important to recognize whether a transaction is an increase in cash or a decrease in cash. Determine whether the activity described results in an increase in cash or a decrease in cash. Company purchased a factory Inventory decreased from previous year Company issued long-term bonds Company paid common dividends Accounts Receivable balance increased from previous year There are two methods of reporting the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows. Selected information from Rowe Publishing Company's Income Statement Selected information from Rowe Publishing Company's Balance Sheets Direct method: Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2013 Cash flow operating activities: Cash collected from customer $ 1,042,000 Cash paid to suppliers (586,000) Cash payments to employees (347,000) Cash payments for interest (16,000) Paid income taxes (29,000) Net cash provided by operating activities $ 64,000 Cash flows from investing activities: Equipment purchase $ 25,000 Net cash used for investing activities (25,000) Cash flows from investing activities: Repayment of notes payable $ (35,000) Proceeds from issuance of bonds payable 50,000 Payment of dividends (35,000) Net cash used for financing activities (20,000) Net increase (decrease) in cash $ 19,000 Cash, 12/31/2012 66,000 Cash, 12/31/2013 $ 85,000 Indirect method: Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2013 Cash flows from operating activities: Net income $69,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense $ 15,000 Increase in accounts receivable (9,000) Increase in inventory (20,000) Increase in accounts payable 12,000 Increase in salaries payable 4,000 Decrease in income taxes payable (7,000) (5,000) Net cash provided by operating activities $ 64,000 Cash flows from investing activities: Equipment purchase ($ 25,000) Net cash used for investing activities (25,000) Cash flows from financing activities: Repayment of notes payable ($ 35,000) Proceeds from issuance of bonds payable 50,000 Payment of dividends (35,000) Net cash used for financing activities (20,000) Net increase (decrease) in cash $ 19,000 Cash, January 1, 2013 66,000 Cash, December 31, 2013 $ 85,000 Notice that the difference between the two methods is the activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adds back non-cash items and increases and decreases in the balances in current assets. The balance sheets for Byron Manufacturing at December 31, 2012 and 2013 are shown: Byron Manufacturing Balance Sheets As of December 31, 2013 and 2012 Assets 2013 2012 Current assets: Cash 5,360 9,390 Accounts receivable 10,630 9,090 Inventory 19,610 18,630 Total current assets 35,600 37,110 Property, plant, and equipment Building 493,000 493,000 Equipment 278,000 270,800 771,000 763,800 Accumulated depreciation (148,200) (120,150) Net property, plant, and equipment 622,800 643,650 Total assets 658,400 680,760 Liabilities and Equity Current liabilities: Accounts payable 55,410 36,040 Salaries payable 9,330 11,790 Income taxes payable 1,100 9,860 Total current liabilities 65,840 57,690 Long-term liabilities: Bonds payable 350,000 395,000 Equity: Common stock 184,000 149,000 Retained earnings 58,560 79,070 Total equity 242,560 228,070 Total liabilities and equity 658,400 680,760 Additional Information needed to prepare the Statement of Cash Flows: Net income was $2,910 Byron paid $23,420 in cash dividends Byron issued $47,440 in bonds payable for cash Byron retired $92,440 in bonds with cash No fixed assets were sold or disposed of during the period Fill in the table below to prepare the Statement of Cash Flows for Byron Manufacturing. The beginning balance column is taken from the 2012 Balance Sheet and the ending balance column is taken from the 2013 Balance Sheet. The Increase/Decrease columns represent the change in the accounts and will be debits or credits depending on the normal balance in the accounts. Most accounts will have either a debit or a credit. Accounts used in the non-operating sections of the Statement of Cash Flows are analyzed in more detail. Bonds Payable will show an increase and a decrease for the bond issue and retirement and Retained Earnings will increase with net income and decrease for cash dividends paid. The increases and decreases in the balance sheet accounts are increases and decreases in cash depending on the nature of the account. Follow the letters to see how the increase or decrease affects cash on the statement of cash flows. Click here for help with how changes in balance sheet accounts affect cash. If an amount box does not require an entry, leave it blank or enter "0". Byron Manufacturing Spreadsheet to Prepare the Statement of Cash Flows For the Year Ended December 31, 2013 Beginning Increase/Decrease Ending Balance Sheet Accounts Balance Debit Credit Balance Cash (m) Accounts receivable 9,090 (h) 1,540 10,630 Inventory 18,630 (i) 19,610 Building 493,000 493,000 Equipment 270,800 (b) 278,000 Accumulated depreciation 120,150 (c) 148,200 Accounts payable 36,040 19,370 (j) 55,410 Salaries payable 11,790 (k) 9,330 Income taxes payable 9,860 (l) 8,760 1,100 Bonds payable 395,000 (e) (d) 350,000 Common stock 149,000 35,000 (f) 184,000 Retained earnings 79,070 (g) (a) 58,560 Increase/Decrease in Cash Statement of Cash Flows Debit Credit Cash flow from operating activities Net income (a) Adjustments to reconcile net income to net cash flow from operating activities Depreciation expense (c) Increase in accounts receivable 1,540 (h) Increase in inventory (i) Increase in accounts payable (j) 19,370 Decrease in salaries payable (k) Decrease in income taxes payable 8,760 (l) Cash flows from investing activities Purchase equipment (b) Cash flows from financing activities Issued bonds payable (d) Retired bonds payable (e) Issued common stock (f) 35,000 Paid dividend (g) Net increase (decrease) in cash (m) 273,600 273,600 Now you can prepare the Statement of Cash Flows using the indirect method. Fill in the Statement based on the spreadsheet. Select Increase or Decrease and enter the amounts. Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 2013 Cash flows from operating activities: Net income $ Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense $ in accounts receivable (1,540) in inventory in accounts payable 19,370 in salaries payable in income taxes payable (8,760) 33,680 Net cash provided by operating activities $ 36,590 Cash flows from investing activities: Purchase of equipment $ (7,200) Net cash used for investing activities (7,200) Cash flows from financing activities: Proceeds from issuance of bonds payable $ Retired bonds payable (92,440) Issued common stock Payment of dividends (23,420) Net cash used for financing activities (33,420) Net increase (decrease) in cash $ Cash, 1/1/2013 Cash, 12/31/2013 $ The major causes of differences between Byron Manufacturings net income and net cash from operating activities are the non cash , the (showing that the company paid for fewer expenses than were expensed on the income statement), and the (showing the company paid more taxes than it expensed in the year. This would be the case if the prior year taxes were higher than the current year tax expense.)