Issuing of stock other then cash Asset Issuing

Issuing of stock other then cash (Asset) Issuing Stock at a Premium Issuing Stock at No-Par Issuing Stock with a Stated Value Factors affecting Market Price of Preferred Stock • Factors affecting market price of common stock • • • 1

• • Treasury Stock Splits Accounting for Cash Dividends Three important dates relating the dividends Accounting for Stock Dividends Reporting Stockholders’ Equity Financial Analysis and Interpretation 2

Chapter 13 STATEMENT OF CASH FLOWS 3

Purpose of the Statement of Cash Flows Provides information about the cash receipts and cash payments of a business entity during the accounting period. Helps investors with questions about the company’s: l Ability to generate positive cash flows. l Ability to meet its obligations and to pay dividends. l Need for external financing. l Investing and financing transactions for the period. 4

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Reporting Cash Flows The statement of cash flows reports cash flows by three types of activities: 1. Cash flows from operating activities – transactions that affect net income. 2. Cash flows from investing activities – transactions that affect noncurrent assets. 3. Cash flows from financing activities – transactions that affect equity and debt of the entity. 6

Reporting Cash Flows Increases in Cash Decreases in Cash Operating (receipts from revenues) Investing (receipts from sales of noncurrent assets) Financing (receipts from issuing equity and debt securities) (payments for expenses) Investing (payments for acquiring noncurrent assets) Financing (payments for treasury stock, dividends, and redemption of debt 7 securities)

Noncash Investing and Financing Activities q Issuing bonds to acquire land q Issuing common stock for convertible preferred stock q Issuing a long-term note to acquire equipment q Issuing a stock dividend 8

Operating Activities Inflows from: l l Sales to customers. Interest and dividends received. + Outflows to: l l Suppliers of merchandise and services. Employees. Lenders for interest. Governments for taxes. _ Cash Flows from Operating Activities 9

Investing Activities l l l Inflows from: Selling investments and plant assets. Collecting of principal on loans. Outflows to: Payments to acquire investments and plant assets. Purchase debt or equity investments. Make loans. + _ Cash Flows from Investing Activities 10

Financing Activities Inflows from: l l l Short-term and long-term borrowing. Owners (for example, from issuing stock). Outflows to: Repayments of borrowed funds. Owners for dividends. Purchase treasury stock. + _ Cash Flows from Financing Activities 11

Cash and Cash Equivalents l l l Cash Currency Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes. 12

The operating cash flows section can be prepared using either the direct method or the indirect method. Let’s look at the Direct Method for preparing the Statement of Cash Flows. 13

Direct Method Cash Received from Customers Accrual basis revenue includes sales that did not result in cash inflows. • Can be computed as: • + Decrease in receivables = Cash Received from Customers Net Sales – Increase in receivables = 14

Direct Method Cash Received from Customers The A/R balance was $80, 000 on 12/31/02 and $110, 000 on 12/31/03. If accrual sales revenue for 2003 was $900, 000, what was cash basis revenue? + Decrease in receivables = Net Sales $900, 000 Cash Received from Customers – Increase in receivables = 15

Direct Method Cash Received from Customers The A/R balance was $80, 000 on 12/31/02 and $110, 000 on 12/31/03. If accrual sales revenue for 2003 was $900, 000, what was cash basis revenue? Decrease in receivables Net Sales $900, 000 – $30, 000 Increase in receivables Cash Received from Customers = $870, 000 = 16

Now that we understand the process, let’s look at some simplified formulas for computing direct method cash flows. 17

Direct Method Interest and Dividends Received 18

Direct Method Cash Paid for Merchandise Step 1 Step 2 19

Direct Method Cash Paid for Merchandise How much did Lug Lite pay for inventory in 2003? Purchases for 2003 were $935, 000. a. b. c. d. $900, 000 $923, 000 $947, 000 $877, 000 Purchases = $900, 000 + $35, 000 Cash Paid for Merchandise in 2003 was $923, 000. Cash Paid = $935, 000 - $12, 000 20

Direct Method Cash Payments for Expenses After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. Cash Paid for Expenses = Expenses { + Increase in prepaid expenses - Decrease in prepaid expenses { + Decrease in accrued liabilities - Increase in accrued liabilities 21

Now, let’s prepare a direct method Statement of Cash Flows for Grate Big Company. 22

Direct Method - Example 23

Direct Method - Example 24

Direct Method - Example 25

Direct Method - Example Additional Information – Trading Securities were purchased during 2003 at a cost of $25, 000. – Equipment with a book value of $40, 000 was sold during the year for $43, 000. – Equipment with a book value of $30, 000 was destroyed during a freak flood in 2003. There was no insurance. – Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method. 26

Direct Method - Example Additional Information – Grate Big’s tax rate is 40%. – The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month. – The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. – Grate Big sold stock during 2001 for $50, 000. – Grate Big received $10, 000 dividends from Tiny Co. 27

Direct Method - Example Cash Received from Customers Cash Paid to Employees 28

Direct Method - Example Cash Paid for Inventory Cash Paid for Interest 29

Direct Method - Example Cash Paid for Taxes Other Operating Cash Flows 30

Direct Method - Example Cash Flows From Operating Activities 31

Equipment with a book value of $40, 000 was sold for $43, 000. Bonds Payable decreased from $250, 000 to $150, 000 during 2003. Notes Payable decreased from $70, 000 to $60, 000 during 2003. 32

Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/03 Cash balance on the Balance Sheet. 33

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Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 Cost of merchandise sold 790, 000 Gross profit $ 390, 000 Operating expenses: Depreciation expense $ 7, 000 Other operating expenses 196, 000 Total operating expenses 203, 000 Income from operations $ 187, 000 Other income: Gain on sale of land $12, 000 This is an accrual basis income statement. Other expense: The direct method of reporting 8, 000 cash flows 4, 000 will Interest expense Income beforeconvert income taxthis to a cash basis statement. $ essentially 35 191, 000

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 Cost of merchandise sold Cash collected 790, 000 Changes from customers Gross profit $ 390, 000 Debit Credit Operating expenses: Sales 1, 180, 000 Depreciation expense $ 7, 000 Receivables 9, 000 Other operating expenses 196, 000 Total operating expenses 203, 000 Note: The changes in the current balance Income from operations $ sheet accounts are determined by 187, 000 Other income: comparing the beginning and ending Gain on sale of land $12, 000 Other expense: balances. Receivables increased by Interest expense 8, 000 4, 000 $9, 000 during the period. Income before income tax $ 36 191, 000

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 Cost of merchandise sold Cash collected 790, 000 Changes from customers Gross profit $390, 000 Debit Credit Operating expenses: Sales 1, 180, 000 Depreciation expense $ 7, 000 Receivables 9, 000 Other operating expenses 196, 000 Cash 1, 171, 000 Total operating expenses 203, 000 Income from operations The increase in receivables $187, 000 represents a reduction in cash Other income: relative to $12, 000 the accrual Gain on sale ofinflow land Other expense: revenue reported on the income Interest expense 8, 000 4, 000 statement. Income before income tax $ 37 191, 000

Rundell Income Statement For the Year Ended December 31, 2006 Sales $1, 171, 000 Cost of merchandise sold Cash payments for 790, 000 merchandise Gross profit Operating expenses: Cost of mdse. sold Depreciation expense Inventories Other operating expenses Total operating expenses 203, 000 Accounts payable Cash Income from operations $187, 000 Other income: Gain on sale of land Other expense: Interest expense Income before income tax Cash Basis $1, 180, 000 Changes Debit Credit 790, 000 $ 7, 000 196, 000 8, 000 3, 200 $390, 000 $12, 000 8, 000 4, 000 $ 38

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 (785, 200) Cost of merchandise sold Cash payments for 790, 000 Changes merchandise Gross profit $390, 000 Debit Credit Operating expenses: Cost of mdse. sold 790, 000 Depreciation expense $ 7, 000 minus Inventories Other operating expenses 196, 000 8, 000 plus Total operating expenses 3, 200 203, 000 Accounts payable Cash Income from operations A decrease in Inventories (credit 785, 200 $187, 000 Other income: change) and an decrease in Accounts Gain on sale of land $12, 000 have the Payable (debit change) Other expense: opposite effects. Interest expense 8, 000 4, 000 Income before income tax $ 39

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 Cost of merchandise sold 790, 000 (785, 200) 0 Gross profit $ 390, 000 Operating expenses: Changes Depreciation expense $ 7, 000 Debit Credit Other operating expenses 196, 000 Depreciation expense 7, 000 Total operating expenses 203, 000 Accumulated depreciation Income from operations $ 7, 000 187, 000 Other income: Gain on sale of land $12, 000 Other expense: Interest expense 8, 000 4, 000 Income before income tax $ 40 There is no cash flow for depreciation expense.

Rundell Income Statement For the Year Ended December 31, 2006 Sales $1, 171, 000 Cost of merchandise sold 790, 000 Gross profit Operating expenses: Depreciation expense Cash payments for Other operating expenses Total operating expenses 203, 000 Operating expenses Income from operations Accrued expenses 187, 000 Other income: Cash Gain on sale of land Other expense: Interest expense Income before income tax Cash Basis $1, 180, 000 (785, 200) $ 390, 000 (193, 800) 0 $ 7, 000 Changes 196, 000 Changes Debit Credit 196, 000 minus $ 2, 200 193, 800 $12, 000 8, 000 4, 000 $ 41

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 Cost of merchandise sold Changes Gain on sale of 790, 000 (785, 200) investments Debit Credit Gross profit $ 390, 000 Cash 72, 000 Operating expenses: Investments Depreciation expense $ 7, 000 0 60, 000 Other operating expenses 196, 000 (193, 800)Gain on sale of invest. 0 Total operating expenses 12, 000 203, 000 Income from operations $ The cash inflow of $72, 000 will 187, 000 be shown in the investing section Other income: ofsale theofstatement of cash flows Gain on land $12, 000 and Other expense: the gain is ignored. 42 Interest expense 8, 000 4, 000

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 Cost of merchandise sold 790, 000 (785, 200) Gross profit $ 390, 000 Cash paid for Changes Operating expenses: Debit Credit Depreciationinterest expense $ 7, 000 0 Interest expenses expense Other operating 196, 000 8, 000 (193, 800)Cash Total operating expenses 203, 000 Income from operations $ (8, 000) 187, 000 Other income: There is no interest payable Gain on sale of land $12, 000 0 account at the end of the year. Other expense: 43 Interest expense 8, 000 4, 000

Rundell Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1, 180, 000 $1, 171, 000 Cost of merchandise sold 790, 000 (785, 200) Gross profit $ 390, 000 Operating expenses: Depreciation. Cash expense $ 7, 000 0 paid for Changes Other operating expenses 196, 000 income taxes Debit Credit (193, 800) tax expenses expense 83, 000 Total. Income operating 500 203, 000 Income tax payable plus Cash (83, 500) Income from operations $ 187, 000 Other income: (83, 500) Gain on sale of land $12, 000 Other expense: 44 Interest expense 8, 000 4, 000 (8, 000)

Rundell Income Statement For the Year Ended December 31, 2006 Sales $1, 171, 000 Cost of merchandise sold 790, 000 Gross profit Operating expenses: Depreciation expense Other operating expenses (193, 800) Total operating expenses 203, 000 Income from operations 187, 000 Other income: Gain on sale of land Other expense: Interest expense Cash Basis $1, 180, 000 Two different viewpoints $ 390, 000 $ of 7, 000 0 income from 196, 000 operations (785, 200) Accrual Basis $12, 000 8, 000 Cash $ Basis 0 4, 000 45 (8, 000)

Operating Activities—Direct Method Cash flows from operating activities: Cash inflows: Cash received from customers $1, 171, 000 Cash outflows: Cash payments for merchandise Cash payments for operating expenses Cash payments for interest Cash payments for income tax Net cash flow from operating activities $ 100, 500 $785, 200 193, 800 8, 000 83, 5001, 070, 500 46

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