Review of Chapter 8/9

Current liabilities and Contingent Liabilities

Financing with Bonds versus Share Capital
Accounts payable turnover, Earnings per share,
Times Interest Earned & Debt Ratio
Issuing Shares
Repurchasing shares
Cash Dividends and Stock Dividends
Return on assets
Return on equity
The Statement of Cash Flows

Chapter 10
 Objective 1

Explain the uses of

the statement of cash flows
The Statement of Cash Flows

The statement of cash flows

reports the entity’s cash flows
(cash receipts and cash payments)
during the period.
 Purposes of the Cash Flow
Statement

The statement of cash flows serves the following purposes:

1. Predict future cash flows
2. Evaluate management decisions
3. Determine the company’s ability to pay dividends to
shareholders and payments to creditors
4. Show the relationship of net income
to the business’s cash flows
 What is Cash?

cash on hand cash in the bank cash equivalents

Cash equivalents are highly liquid,

short-term investments that can be
converted into cash with little delay.
– Money-market investments
– Canadian government securities
 Objective 2

Explain and classify cash flows

from operating, investing, and
financing activities
Operating, Investing, and
Financing Activities

A business engages in three

types of business activities:

Operating activities

Investing activities

Financing activities
 Operating, Investing, and
Financing Activities
Operating activities create revenues,
expenses, gains, and losses.

Investing activities include

long-term assets, investments and
loaning money.
Financing activities include changes
relating to contributed equity (investors)
& borrowings (creditors).
 Two Formats for
Operating Activities
Indirect Method
Net income $XXX
Adjustments:
Depreciation, etc. XXX
Net income provided by operating activities $XXX
Direct Method
Collection from customers $XXX
Deductions:
Payment to suppliers, etc. XXX
Net income provided by operating activities $XXX
 Objective 3

Prepare a statement of cash flows

using the indirect method
of determining cash flows
from operating activities
 Cash Flows from Operating
Activities
Operating activities are related to the
transactions that make up net income

It begins with net income, taken from the net

income, and is followed by adjustments to
reconcile net income to cash
 Operating Activities – Indirect
Method
Adjustments to net income include:

• Depreciation/amortization expense
• Gains and losses on the sale of long-term
assets
• Changes in the current assets (not including
cash) and current liabilities account (working
capital)
 Operating Activities – Indirect Method

Net income is adjusted for:

Depreciation – is an allocation of a cost; no effect on

cash. Since it is deducted as an expense, it must be
added back to net income (to cancel the deduction)

Gains/(Losses) – results from selling long-term assets.

Originally, it is added (deducted) from net income but
since it doesn’t represent cash (also, it is an investing
activity), it must be subtracted(added) back
 Operating Activities – Indirect Method

Changes in non-cash working capital accounts:

Add: Decreases in current assets (not cash)

Increases in current liabilities

Subtract: Increases in current assets (not

cash)
Decreases in current liabilities
 Operating Activities – Indirect
Method
Start with Net income
Add: Depreciation expense
Losses from sales of assets
Deduct: Gains from sales of assets
Add/Deduct: Non-cash changes in working capital
Add: Decreases in current assets (not cash)
Increases in current liabilities
Deduct: Increases in current assets (not cash)
Decreases in current liabilities
 Operating Activities – Indirect Method
Steps
1. Determine the change in cash from last year
to this year.
2. Determine the change in non-cash working
capital accounts using the balance sheet
3. Start with net income and add back
depreciation and losses and deduct any gains.
4. Add or subtract where applicable, the change
(increase or decrease) in non-cash working
capital accounts
 Question #1
Net income $750,000
Accounts receivable (net) 16,000 decrease
Inventory 14,500 increase
Prepaid insurance 2,900 increase
Accounts payable 15,200 decrease

The amount of cash provided by operations is:

a. $740,600 b. $750,000 c. $733,400
 Investing Activities
Cash Receipts
Sales of assets (investments, land, building,
equipment, intangible assets and so on)
Collections of loans receivable

Cash Payments
Purchase of assets (investments,land, building,
equipment, intangible assets and so on)
Loans to others
 Cash Flow Statement:
Investing Activities
Cash Flow Statement
For the Year Ended December 31, 2014 (In thousands)

Cash flows from investing activities:

Acquisition of property,plant&equip $(306)
Loan to another company (11)
Proceeds from sale of prop,plant&equip 62
Net cash used for investing activities $(255)
 Computing Acquisition and
Sales of Property, Plant &
Equipment
Property, Plant & Equipment (Net)
Beginning balance Depreciation
Acquisitions Carrying amount of assets sold

Ending balance
 Computing Acquisition and
Sales of Property, Plant &
Equipment
From the sale of property, plant & equipment:

Cash received = Carrying amount + Gain-Loss

 Computing Acquisition and
Sales of Investments

Investments
Beginning balance Carrying amount of investments
Purchases sold

Ending balance
 Computing Loans Made & Their
Collections

Loans and Notes Receivable

Beginning balance
New loans made Collections

Ending balance
 Question #2
A gain on the sale of machinery would be shown
on the cash flow statement as

a. An increase to operating activities

b. A decrease to investing activities
c. An increase to investing activities
d. A decrease to operating activities
 The Indirect Method:
Financing Activities
Cash Receipts
Issuance/sale of shares
Borrowing (issuance of notes or bonds
payable)

Cash Payments
Repurchase of shares
Payment of notes or bonds payable
Payment of dividends
 Cash Flow Statement:
Financing Activities
Cash Flow Statement (Indirect Method)
For the Year Ended December 31, 2014 (In thousands)

Cash flows from financing activities:

Proceeds from issuance of common shares $101
Proceeds from issuance of long-term debt 94
Payment of long-term debt (11)
Payment of dividends (17)
Net cash provided by financing activities $167
 Computing Issuances and
Payments of Debt

Notes payable
Beginning balance
Payments Issuance of new debt
Ending balance
 Computing Issuances and
Repurchases of Shares

Common Shares
Beginning balance
Repurchase of shares Issuance of new shares
Ending balance
 Computing Dividend Payments

Retained Earnings
Dividend declarations Beginning balance
and payments Net income
Ending balance
 Question #3
In 2011, ABC Company borrowed $50,000 (due
in 5 years), paid dividends of $12,000, issued
2,000 shares of stock for $30 per share,
purchased land for $24,000 and received
dividends of $6,000. Net income was $85,000.
How much should be reported as net cash
provided by financing activities?

a. $110,000 b. $80,000 c. 98,000

 Noncash Investing and
Financing Activities

Suppose Bradshaw Corporation issued common

shares valued at $320,000 to acquire a warehouse.

Warehouse Building 320,000

Common Shares 320,000
 Noncash Investing and
Financing Activities
Non cash investing and financing activities are
disclosed in a note to the financial statements

They are not reported on the cash flow statement

because they do not involve cash
 Measuring Cash Adequacy:
Free Cash Flow
Free cash flow is the amount of cash available from
operations after paying for planned investments in
property, plant & equipment,
Free cash flow
=
Net cash flow from operating activities
–
Cash expenditures on
property, plant & equipment
 Question #4
A firm’s predominate recurring source of cash
over the long-run should be:

a. Borrowing
b. Sale of nonrecurring assets
c. Sale of capital stock
d. Operations
End of Chapter
10