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CH 13
CH 13
Chapter
13
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.
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Investing Activities
Generally Non-Current Asset Items
Financing Activities
Generally Non-Current Liability and Equity Items
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Classification
1. Issued 100,000 HK$50 par value ordinary shares for HK$8,000,000 cash. 2. Borrowed HK$2,000,000 from Castle Bank, signing a 5-year note bearing 8% interest. 3. Purchased two semi-trailer trucks for HK$1,700,000 cash. 4. Paid employees HK$120,000 for salaries and wages. 5. Collected HK$200,000 cash for services provided.
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Financing
Financing
Investing Operating Operating
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Indirect Method
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3. A building costing $120,000 and equipment costing $25,000 were purchased for cash.
4. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash. 5. Issued ordinary shares for $20,000 cash. 6. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
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Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Common adjustments to Net Income (Loss):
Add back non-cash expenses (depreciation and amortization expense). Deduct gains and add losses that resulted from investing and financing activities.
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Operating Activities
Question
Which is an example of a cash flow from an operating activity? a. Payment of cash to lenders for interest. b. Receipt of cash from the sale of shares.
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Operating Activities
Depreciation Expense
Although depreciation expense reduces net income, it does not
reduce cash.
Illustration 13-7
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Operating Activities
Loss on Sale of Equipment
Because companies report as a source of cash in the investing
section.
Any gain on sale is deducted from net income in the operating section.
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Operating Activities
Loss on Sale of Equipment
Computer Services income statement reports a $3,000 loss on the sale of equipment (book value $7,000, less $4,000 cash received from sale of equipment).
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Operating Activities
Changes to Non-Cash Current Asset Accounts
When the Accounts Receivable balance decreases, cash receipts are higher than revenue earned under the accrual basis.
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Accounts Receivable 1/1/011 Balance Revenues 30,000 507,000 20,000 Receipts from customers 517,000
12/31/11 Balance
Therefore, the company adds to net income the amount of the decrease in accounts receivable.
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Operating Activities
Changes to Non-Cash Current Asset Accounts
Illustration 13-10
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Net cash provided by operating activities $ 9,000 3,000 10,000 167,000 $ 145,000
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Operating Activities
Changes to Non-Cash Current Asset Accounts
When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold.
Merchandise Inventory 1/1/11 Balance Purchases 10,000 155,000 15,000 Cost of goods sold 150,000
12/31/11 Balance
As a result, cost of goods sold does not reflect cash payments made for merchandise. The company deducts from net income this inventory increase.
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Operating Activities
Changes to Non-Cash Current Asset Accounts
Illustration 13-10
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Net cash provided by operating activities $ 9,000 3,000 10,000 (5,000) 162,000 $ 145,000
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Operating Activities
Changes to Non-Cash Current Asset Accounts
When the Prepaid Expense balance increases
Cash paid for expenses is higher than expenses reported on an accrual basis.
Company deducts the increase from net income to arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher than the expenses paid.
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Operating Activities
Changes to Non-Cash Current Asset Accounts
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Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Net cash provided by operating activities
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Operating Activities
Changes to Non-Cash Current Liability Accounts
When Accounts Payable increases
Company received more in goods than it actually paid for. Increase is added to net income.
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Operating Activities
Changes to Non-Cash Current Liability Accounts
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities
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145,000
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1/1/11
20,000 110,000
130,000 Bonds Payable 1/1/11 Balance For land 20,000 110,000 130,000
12/31/11 Balance
12/31/11 Balance
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172,000 (120,000) (25,000) 4,000 (141,000) 20,000 (29,000) (9,000) 22,000 33,000 55,000 110,000
$ $
12/31/11 Balance
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172,000 (120,000) (25,000) 4,000 (141,000) 20,000 (29,000) (9,000) 22,000 33,000 55,000 110,000
$ $
12/31/11 Balance
27,000 Cash Accumulated depreciation Loss on sale of equipment Equipment 4,000 1,000 3,000
8,000
Journal Entry
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Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities Cash flows from investing activities: Purchase of building Purchase of equipment Sale of equipment Net cash used by investing activities Cash flows from financing activities: Issuance of ordinary shares Payment of cash dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period
145,000
9,000 3,000 10,000 (5,000) (4,000) 16,000 (2,000) 172,000 (120,000) (25,000) 4,000 (141,000) 20,000 (29,000) (9,000) 22,000 33,000 55,000
12/31/11 Balance
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172,000 (120,000) (25,000) 4,000 (141,000) 20,000 (29,000) (9,000) 22,000 33,000 55,000 110,000
$ $
12/31/11 Balance
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Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities Cash flows from investing activities: Purchase of building Purchase of equipment Sale of equipment Net cash used by investing activities Cash flows from financing activities: Issuance of ordinary shares Payment of cash dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period
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145,000
9,000 3,000 10,000 (5,000) (4,000) 16,000 (2,000) 172,000 (120,000) (25,000) 4,000 (141,000) 20,000 (29,000) (9,000) 22,000 33,000 55,000
Question
Which is an example of a cash flow from an investing activity? a. Receipt of cash from the issuance of bonds payable. b. Payment of cash to repurchase outstanding shares. c. Receipt of cash from the sale of equipment. d. Payment of cash to suppliers for inventory.
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Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.
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Illustration 13-16
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Presently, the FASB and the IASB are involved in a joint project on
the presentation and organization of information in the financial statements. One interesting approach, revealed in a published proposal from that project, is that in the future the income
of cash flows.
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Appendix A
SO 5 Explain how to use a worksheet to prepare the statement of cash flows using the 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 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.
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SO 5 Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.
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Additional information: 1. In 2011, the company declared and paid a $32,000 cash dividend. 2. Bonds were issued at face value for $130,000 in cash. 3. Equipment costing $180,000 was purchased for cash. 4. Equipment costing $20,000 was sold for $17,000 cash when the book value of the equipment was $18,000. 5. Ordinary shares of $60,000 were issued to acquire land.
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Illustration 13B-9
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Illustration 13B-11
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Illustration 13B-13
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Financing activity.
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
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