Accounting for Week 11

Actuary
Statement of Cash Flow (2)
 Refreshment

Assume all items involve cash unless there is information to the contrary:

1. Payment of interest on notes payable. 1. Operating

2. Issuance of share capital—ordinary. 2. Financing
3. Exchange of land for patent. 3. -
4. Amortization of patent. 4. -
5. Sale of building at book value. 5. Investing
6. Issuance of bonds for land. 6. -
7. Payment of dividends. 7. Financing
8. Purchase of land. 8. Investing
 Refreshment
Assume all items involve cash unless there is information to the contrary:

9. Depreciation. 9. Operating
10. Conversion of bonds into ordinary shares. 10. -
11. Receipt of dividends on investment 11. Operating
12. Loss on sale of land. 12. Operating
13. Retirement of bonds. 13. Financing
14. Receipt of interest on notes receivable. 14. Operating
 Using Cash Flows to Evaluate a Company

USED BY COMPANY FOR INVEST

Free Cash Flow

Free cash flow describes the cash remaining from operations after adjustment for
capital expenditures and dividends.
 Using Cash Flows to Evaluate a Company

Illustration

Required: Calculate free cash flow.

Cash provided by operating activities €4,189

Less: Expenditures on property and equipment 1,794
Dividends paid 2,088
Free cash flow €307
 Using Worksheet – Indirect Method

Using a Worksheet to
Prepare the Statement of
Cash Flows-Indirect Method
 Using Worksheet – Indirect Method

Preparing a Worksheet
1. Enter in the statement of financial position accounts section the statement of financial position
accounts and their beginning and ending balances.

2. Enter in the reconciling columns of the worksheet the data that explain the changes in the
statement of financial position accounts other than cash and their effects on the statement of
cash flows.

3. Enter on the cash line and at the bottom of the worksheet the increase or decrease in cash.
This entry should enable the totals of the reconciling columns to be in agreement.
Statement of Cash Flows – Direct Method

Statement of Cash Flows-Direct Method

1. Compute net cash provided by operating activities by adjusting each item
in the income statement from the accrual basis to the cash basis.

2. Companies report only major classes of operating cash receipts and cash
payments.

3. For these major classes, the difference between cash receiptsand cash
payments is the net cash provided by operating activities.
 Statement of Cash Flows – Direct Method

Step 1: Operating Activities

Statement of Cash Flows – Direct Method
Statement of Cash Flows – Direct Method
Statement of Cash Flows – Direct Method
 Statement of Cash Flows – Direct Method

Cash Receipts from Customers

For Computer Services Company, accounts receivable decreased €10,000.
 Statement of Cash Flows – Direct Method

Cash Payments to Suppliers

In 2014, Computer Services Company’s inventory increased €5,000 and cash payments to
suppliers were €139,000.
 Statement of Cash Flows – Direct Method

Cash Payments for Operating Expenses

Cash payments for operating expenses were €115,000.
 Statement of Cash Flows – Direct Method
Cash Payments for Income Taxes
Cash payments for income taxes were €49,000.
Statement of Cash Flows – Direct Method

Step 1:
Operating
Activities
 Statement of Cash Flows – Direct Method

Step 2: Investing and Financing Activities

Increase in Equipment. (1) Computer Services purchased for cash equipment costing
€25,000. And (2) it sold for €4,000 cash equipment costing €8,000, whose book value was
€7,000.
 Statement of Cash Flows – Direct Method

Step 2: Investing and Financing Activities

Increase in Building. From the additional information, the company acquired an office
building for €120,000 cash. This is a cash outflow reported in the investing section.

Building
1/1/14 Balance 40,000
Office building 120,000

12/31/14 Balance 160,000

 Statement of Cash Flows – Direct Method

Step 2: Investing and Financing Activities

Increase in Land. Computer Services purchased land of €110,000 Significant non-cash
by directly exchanging bonds for land. investing and financing
transaction.

Increase in Bonds Payable. Bonds Payable increased

€110,000. The additional information indicated that Computer
Services issued €110,000 of long-term bonds in direct exchange Significant non-cash
for land. investing and financing
transaction.
 Statement of Cash Flows – Direct Method

Step 2: Investing and Financing Activities

Increase in Share Capital - Ordinary. The Share Capital - Ordinary Financing activity.
account increased €20,000. The additional information indicated that
Computer Services issued ordinary shares for cash.

Increase in Retained Earnings. The

€116,000 net increase in Retained Earnings resulted from net income Financing activity (cash
of €145,000 and the declaration and payment of a cash dividend of dividend).
€29,000.
 Statement of Cash Flows – Direct Method

Step 2: Investing and

Financing Activities
 Statement of Cash Flows – Direct Method

Step 3: Net Change in Cash

Compare the net change in cash on the Statement of Cash Flows with the change in the cash
account reported on the Statement of Financial Position to make sure the amounts agree.