CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting

Study Objectives 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish

Statement of Cash Flows The Statement of Cash Flows: Usefulness and Format Preparing the

Usefulness of the Statement of Cash Flows Provides information to help assess: 1. Entity’s

Classification of Cash Flows Operating Activities Income Statement Items Chapter 13 -5 Investing Activities

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Operating

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Investing

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Financing

Classification of Cash Flows Significant Noncash Activities 1. Issuance of common stock to purchase

Format of the Statement of Cash Flows Order of Presentation: 1. Operating activities. 2.

Format of the Statement of Cash Flows Illustration 13 -2 Chapter 13 -11 LO

Preparing the Statement of Cash Flows Three Sources of Information: 1. Comparative balance sheets

Preparing the Statement of Cash Flows Indirect and Direct Methods Companies favor the indirect

Note from Dr. Mc. Dermott l l l Chapter 13 -14 I have never

Step 1: Set up a worksheet like this, memorize the column headings! Statement of

Step 2: Subtract the figures in the 2007 row from the figures in the

Step 3: Now determine if each transaction is a source or use of cash

Step 4: In column 3, make all sources of cash positive and all uses

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Change

Step 6: Add columns 3 and 4 to get the total adjusted affect Statement

Step 7: Classify each transaction on where it will appear on the statement Statement

Step 8: Take the information from the worksheet and begin the Cash Flow Statement

Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, 000.

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net

Simple – Right? l l l So how do I get an “A” on

E 13 -9 l l We will work in class on the board. Download

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CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting, Fourth Edition Chapter 13 -1 Wiley & Richard Mc. Dermott

Study Objectives 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Prepare a statement of cash flows using the indirect method. 4. Analyze the statement of cash flows. Chapter 13 -2

Statement of Cash Flows The Statement of Cash Flows: Usefulness and Format Preparing the Statement of Cash Flows— Indirect Method Usefulness Classifications Significant noncash activities Format Step 1: Operating activities Step 2: Investing and financing activities Step 3: Net change in cash Preparation Indirect and direct methods Chapter 13 -3 Using Cash Flows to Evaluate a Company Free cash flow

Usefulness of the Statement of Cash Flows Provides information to help assess: 1. Entity’s ability to generate future cash flows. 2. Entity’s ability to pay dividends and obligations. 3. Reasons for difference between net income and net cash provided (used) by operating activities. 4. Cash investing and financing transactions during the period. Chapter 13 -4 LO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows Operating Activities Income Statement Items Chapter 13 -5 Investing Activities Generally Investments and Long-Term Assets Financing Activities Generally Long. Term Liability and Stockholders’ Equity LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Operating activities - Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. Note: Current asset To employees for services. To government for taxes. To lenders for interest. Note: Not financing To others for expenses. Chapter 13 -6 LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Investing activities - Changes in investments and longterm assets Cash inflows: From sale of property, plant, and equipment. From sale of in debt or equity securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities. Chapter 13 -7 LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13 -1 Financing activities - Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock). Chapter 13 -8 LO 2 Distinguish among operating, investing, and financing activities.

Classification 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. Chapter 13 -9 LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Order of Presentation: 1. Operating activities. 2. Investing activities. 3. Financing activities. Direct Method Indirect Method We won’t learn direct method in this class The cash flows from operating activities section always appears first, followed by the investing and financing sections. Chapter 13 -10 LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Illustration 13 -2 Chapter 13 -11 LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows Three Sources of Information: 1. Comparative balance sheets 2. Current income statement 3. Additional information Chapter 13 -12

Preparing the Statement of Cash Flows Indirect and Direct Methods Companies favor the indirect method for two reasons: 1. It is easier and less costly to prepare, and 2. It focuses on the differences between net income and net cash flow from operating activities. Chapter 13 -13 LO 3 Prepare a statement of cash flows using the indirect method.

Note from Dr. Mc. Dermott l l l Chapter 13 -14 I have never seen the method for preparing cash flow statements used by the author. I have looked at probably a dozen textbooks. It is hard enough to teach cash flow statements with traditional methods. For a beginner, the author’s method is more difficult. I will teach the traditional method.

Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 Contra Assets, Liabilities and Stockholder Equity Retained earnings Net Income Change (2) (3) Source Cash Flow or Use Effect (4) Adjustmts Chapter 13 -15 (6) Adjusted Classi- Effect fication There are several important things to notice: 1. We did not list a row for cash equivalents. 2. We listed accounts that are increased with a debit balance in the top section (Assets Except Cash and Cash Equivalents) and accounts that are increased with credits on the bottom (Contra Assets, Liabilities and Stockholder Equity. 3. Since Accumulated Depreciation is increased with a credit, it goes in the second section. Dividends Additional Entries (5) We will get to this section later.

Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 Change (2) (3) Source Cash Flow or Use Effect (4) Adjustmts (5) Adjusted Classi- Effect fication Contra Assets, Liabilities and Stockholder Equity Retained earnings Net Income Dividends Additional Entries Chapter 13 -16 (6) One more important thing to mention, we will break retained earnings into net income and dividends on this worksheet.

Step 2: Subtract the figures in the 2007 row from the figures in the 2008 row to get the change Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 Change (2) (3) Source Cash Flow or Use Effect (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ 9, 000. 00 $ (19, 000. 00) $ (25, 000. 00) $ 60, 000. 00 Contra Assets, Liabilities and Stockholder Equity $ 34, 000. 00 $ (8, 000. 00) $ (50, 000. 00) $ 42, 000. 00 Retained earnings Net Income Dividends Additional Entries Chapter 13 -17 $ 103, 000. 00 $ (45, 000. 00) This a good time to put in the net income and dividends paid during the year in lieu of retained earnings.

Step 3: Now determine if each transaction is a source or use of cash Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (19, 000. 00) Source $ (25, 000. 00) Source $ 60, 000. 00 Use $ 34, 000. 00 Source (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ (8, 000. 00) Use $ (50, 000. 00) Use $ 42, 000. 00 Source $ 103, 000. 00 Source $ (45, 000. 00) Use Retained earnings Net Income Dividends Additional Entries Chapter 13 -18 Rule: positive numbers using this format are uses of cash in the Cash Equivalents Section, negative numbers are sources of cash. The opposite is true in the Contra Asset … section.

Step 4: In column 3, make all sources of cash positive and all uses negative Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -19 Shortcut, change the sign of the numbers in column 1 in the Assets. . . section and leave them as is in the Contra Assets. . . section

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -20 Now we are going to focus on the adjustments column. The easiest was to make these and get the sign (positive or negative) straight is to create an “Additional Entries” section at the bottom of the form.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -21 In the adjustments column, debits to the accounts being adjusted from 2007 to 2008 will be shown as positive numbers and credits will be shown as negative numbers. What does this mean? Let’s wait until the next slide to find out!

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -22 Where do we get the information for the adjustments? From the “Additional Information” given in the problem.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -23 The easiest way to enter this data is to pretend you are making a journal entry.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -24 If the account is shown above, debit or credit that account the same as you would in a journal entry for that transaction.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -25 If it is not shown, it probably relates to cash and is listed here.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Change (2) (3) Source Cash Flow or Use Effect Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 $ 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Chapter 13 -26 (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Remember, we did not list a row for cash using this methodology.

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) $ The first adjustment given is that bonds amounting to $50, 000 were redeemed for cash of $50, 000. The journal entry would be to credit cash (that is the first entry under the Additional Entries section). Retained earnings Net Income Dividends Additional Entries Cash used to redeem bonds Chapter 13 -27 ($50, 000)

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ 103, 000. 00 $ (45, 000. 00) Use $ (45, 000. 00) Assets Except Cash & $ (4) Remember when we redeem a bond we debit the account. Contra Assets, Liabilities and Stockholder Equity $ $50, 000 Retained earnings Net Income Dividends Additional Entries Cash used to redeem bonds Chapter 13 -28 (5) Where does Adjusted Classithe debit go? Adjustmts Effect fication To bonds payable. ($50, 000) (6)

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 42, 000. 00 Source $ 42, 000. 00 $ 103, 000. 00 Source $ (45, 000. 00) Use (4) Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ $50, 000 Retained earnings Net Income Dividends Debit & Credit Additional Entries Cash used to redeem bonds Chapter 13 -29 ($50, 000)

Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) (4) Source Cash Flow Change or Use Effect 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $50, 000 $ 42, 000. 00 Source $ 42, 000. 00 ($42, 000) $ 103, 000. 00 Source $ (45, 000. 00) Use Adjustmts (5) (6) Adjusted Classi- Effect fication Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends The next adjustment is common stock being sold for $42, 000 in cash. Additional Entries Cash used to redeem bonds Common stock issued Chapter 13 -30 ($50, 000) $42, 000

Step 6: Add columns 3 and 4 to get the total adjusted affect Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- Change or Use Effect fication 9, 000. 00 Use $ (9, 000. 00) $ (19, 000. 00) Source $ 19, 000. 00 $ (25, 000. 00) Source $ 25, 000. 00 $ 60, 000. 00 Use $ (60, 000. 00) $ 34, 000. 00 Source $ 34, 000. 00 (8, 000. 00) Use $ (8, 000. 00) $ (50, 000. 00) Use $ (50, 000. 00) $ 50, 000. 00 $ - $ 42, 000. 00 Source $ 42, 000. 00 $ (42, 000. 00) $ - $ 103, 000. 00 Source $ (45, 000. 00) Use Adjustmts Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Cash used to redeem bonds $ (50, 000. 00) Common stock issued $ 42, 000. 00 Chapter 13 -31

Step 7: Classify each transaction on where it will appear on the statement Statement of Cash Flow Worksheet (3+4) (1) 2007 2008 Cash Equivalents Accounts Receivable $ 76, 000. 00 $ 85, 000. 00 Inventories $ 189, 000. 00 $ 170, 000. 00 Land $ 100, 000. 00 $ 75, 000. 00 Equipment $ 200, 000. 00 $ 260, 000. 00 Accumulated depreciation $ 32, 000. 00 $ 66, 000. 00 Accounts payable $ 47, 000. 00 $ 39, 000. 00 Bonds payable $ 200, 000. 00 $ 150, 000. 00 Common stock $ 174, 000. 00 $ 216, 000. 00 (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- Change or Use Effect fication 9, 000. 00 Use $ (9, 000. 00) Operating $ (19, 000. 00) Source $ 19, 000. 00 Operating $ (25, 000. 00) Source $ 25, 000. 00 Investing $ 60, 000. 00 Use $ (60, 000. 00) Investing $ 34, 000. 00 Source $ 34, 000. 00 Operating (8, 000. 00) Use $ (8, 000. 00) Operating $ (50, 000. 00) Use $ (50, 000. 00) $ 50, 000. 00 $ - Financing $ 42, 000. 00 Source $ 42, 000. 00 $ (42, 000. 00) $ - Financing $ 103, 000. 00 Source Operating $ (45, 000. 00) Use Financing Adjustmts Assets Except Cash & $ Contra Assets, Liabilities and Stockholder Equity $ Retained earnings Net Income Dividends Additional Entries Cash used to redeem bonds $ (50, 000. 00) Financing Common stock issued $ 42, 000. 00 Financing Chapter 13 -32

Step 8: Take the information from the worksheet and begin the Cash Flow Statement Chapter 13 -33

Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, 000. 00 Remember there are three sections to the Statement of Cash Flows. We start with Cash flow from Operating Activities. The first entry should be net income. Chapter 13 -34

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation $ 103, 000. 00 $ 34, 000. 00 We want to adjust income to cash flow. The first adjustment most authors like to see is to add back deprecation. Remember depreciation is a non-cash expense. Add it to income to get cash flow. Let’s follow this format in this class. Now we go to our worksheet, and start from the top, selecting each item listed as an “Operating” item. Chapter 13 -35

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR $ 103, 000. 00 $ 34, 000. 00 $ (9, 000. 00) The first item on the worksheet is Accounts Receivables. We have already: • Classified it as operating • Shown that it was an increase in amount. • Figured out that an increase in this accounts is a use rather than source of cash. See! All of our thinking has already been done. We concentrate on one thing at a time, less chance to make stupid mistakes on an exam. Chapter 13 -36

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR Decrease in Inventory Decrease in AP Total change Net Cash Provided Op Activities $ 103, 000. 00 $ $ 34, 000. 00 (9, 000. 00) 19, 000. 00 (8, 000. 00) $ 36, 000. 00 $ 139, 000. 00 We will continue down the worksheet, doing essentially the same thing. Selecting Operating items and looking to see if they are uses or sources of cash. We will then sum all changes ($36, 000) and add that to income to get Net Cash Provided by Operating Activities. Chapter 13 -37

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR Decrease in Inventory Decrease in AP Total change Net Cash Provided Op Activities $ 103, 000. 00 $ $ 34, 000. 00 (9, 000. 00) 19, 000. 00 (8, 000. 00) $ 36, 000. 00 $ 139, 000. 00 Cash Flow Investing Sale of land Purchase of Equipment Cash Used Investing $ 25, 000. 00 $ (60, 000. 00) $ (35, 000. 00) Cash Flow Financing Purchase of Bonds Issuance of Stock Payment of Dividends Cash Used Financing $ (50, 000. 00) $ 42, 000. 00 $ (45, 000. 00) $ (53, 000. 00) Lets use the worksheet to identify items for Investing and Financing. Total cash source or use from each section. Chapter 13 -38

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR Decrease in Inventory Decrease in AP Total change Net Cash Provided Op Activities Cash Flow Investing Sale of land Purchase of Equipment Cash Used Investing Cash Flow Financing The last ofthing Purchase Bondswe do Issuance ofin. Stock Increase Cash” Payment of Dividends Cash Used Financing Net Increase in Cash Chapter 13 -39 $ 103, 000. 00 $ $ 34, 000. 00 (9, 000. 00) 19, 000. 00 (8, 000. 00) $ 36, 000. 00 $ 139, 000. 00 $ 25, 000. 00 $ (60, 000. 00) $ (35, 000. 00) is total the three sections to get “Net $ (50, 000. 00) $ 42, 000. 00 $ (45, 000. 00) $ (53, 000. 00) $ 51, 000. 00

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR Decrease in Inventory Decrease in AP Total change Net Cash Provided Op Activities Cash Flow Investing Sale of land Purchase of Equipment Cash Used Investing $ 103, 000. 00 $ $ 34, 000. 00 (9, 000. 00) 19, 000. 00 (8, 000. 00) $ 36, 000. 00 $ 139, 000. 00 $ 25, 000. 00 $ (60, 000. 00) $ (35, 000. 00) To the increase in cash add the beginning cash $ (50, 000. 00) balance taken for the balance sheet (2007). $ 42, 000. 00 Cash Flow Financing Purchase of Bonds Issuance of Stock Payment of Dividends Cash Used Financing Net Increase in Cash at beginning of period Chapter 13 -40 $ (45, 000. 00) $ (53, 000. 00) $ 51, 000. 00 $ 22, 000. 00

Statement of Cash Flows Cash flow from Operating Activities Net Income Adjustments to Net Income Depreciation Increase in AR Decrease in Inventory Decrease in AP Total change Net Cash Provided Op Activities Cash Flow Investing Sale of land Purchase of Equipment Cash Used Investing $ 103, 000. 00 $ $ 34, 000. 00 (9, 000. 00) 19, 000. 00 (8, 000. 00) $ 36, 000. 00 $ 139, 000. 00 $ 25, 000. 00 $ (60, 000. 00) $ (35, 000. 00) Add Increase in Cash to Cash at Beginning of$ (50, 000. 00) Period and it should given you Cash at End of$ 42, 000. 00 Period taken from the 2008 balance sheet. $$ (45, 000. 00) (53, 000. 00) Cash Flow Financing Purchase of Bonds Issuance of Stock Payment of Dividends Cash Used Financing Net Increase in Cash at beginning of period Cash at end of period Chapter 13 -41 $ 51, 000. 00 $ 22, 000. 00 $ 73, 000. 00

Simple – Right? l l l So how do I get an “A” on the exam? Memorize the columns in the worksheet. Enter numbers one column at a time. l l l Chapter 13 -42 Concentrate on one concept at a time. Use the worksheet as the format for the Statement of Cash Flows which you will also have memorized. Recheck your work!

E 13 -9 l l We will work in class on the board. Download Excel file from hyperlink on Acc 2020 Web Page (http: //faculty. weber. edu/rmcdermott) The End! Chapter 13 -43