C14 - 1
Learning Objectives
Power Notes
1,Purpose of the Statement of Cash Flows
2,Reporting Cash Flows
3,Statement of Cash Flows – The Indirect Method
4,Statement of Cash Flows – The Direct Method
5,Financial Analysis and Interpretation
Chapter F14
C14
Statement of Cash Flows
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Cash Flow Basics
Statement of Cash Flows – Two Methods
Changes in Current Accounts
Statement of Cash Flows – Indirect Method
Statement of Cash Flows – Direct Method
Free Cash Flow
Slide # Power Note Topics
3
20
31
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39
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Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F14
Statement of Cash Flows
C14 - 3
Reporting Cash Flows
1,Operating activities – transactions that affect
net income.
2,Investing activities – transactions that affect
noncurrent assets.
3,Financing activities – transactions that affect
equity and debt of the entity.
The statement of cash flows reports a firm’s major
cash inflows and outflows for a period,Cash flows
are reported by three types of activities.
C14 - 4
Cash Flows
Increases in Cash Decreases in Cash
Cash
C14 - 5
Cash Flows
Increases in Cash
(receipts from
revenues)
Decreases in Cash
Operating
Cash
C14 - 6
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
Decreases in Cash
Operating Operating
Cash
C14 - 7
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
Decreases in Cash
Operating
Investing
Operating
Cash
C14 - 8
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Operating
Investing Cash
C14 - 9
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(receipts from issuing
equity and debt securities)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
Investing Cash
C14 - 10
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for dividends,and
redemption of debt securities)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(receipts from issuing
equity and debt securities)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
Investing
Financing
Cash
C14 - 11
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from operating
activities?
C14 - 12
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
Interest Revenue
Sales of goods
and services
Dividend Revenue
What are some
of the typical
cash outflows
from operating
activities?
C14 - 13
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
Sales of goods
and services
Merchandise
purchases
Payments of
wages & other
expenses
Tax payments
Interest Revenue
Dividend Revenue
C14 - 14
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from investing
activities?
C14 - 15
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assets
and other long-term
investments
Sale of marketable
securities and
investments
What are some
of the typical
cash outflows
from investing
activities?
C14 - 16
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assets
and other long-term
investments
Sale of marketable
securities and
investments
Purchase of fixed
assets and other long-
term investments
Purchase of
marketable securities
and investments
C14 - 17
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from financing
activities?
C14 - 18
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)
of stock
Sale (issuance) of
bonds and other
money market debt
Borrowing from banks
and other lending
institutions
What are some
of the typical
cash outflows
from financing
activities?
C14 - 19
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)
of stock
Sale (issuance) of
bonds and other
money market debt
Purchase of
treasury stock
Repayment and
redemption of debt
(bonds,notes,other)
Payment of cash
dividends
Borrowing from banks
and other lending
institutions
C14 - 20
Statement of Cash Flows
1,Generate cash flow from operations.
2,Maintain and expand operating capacity.
3,Pay dividends.
4,Pay debts,including interest,when due.
5,Generate future profits.
The primary attention is the flow of cash rather
than net income.
The statement of cash flows is invaluable in
assessing the capacity of a firm to achieve goals
such as:
C14 - 21
Preparing the Statement of Cash Flows
Net cash flows from operating activities will be
the difference between the operating cash
receipts and operating cash payments.
Net cash flows from operating activities is
determined by adjusting the accrual net income
from operations to reflect a cash-based net income
from operations.
Direct Method
Indirect Method
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Advantages of Using the Direct Method
1,Reports the sources and uses of operating
cash receipts and payments.
2,Is easier to understand for many investors.
3,Recommended by the Financial Accounting
Standards Board (FASB).
Note,The total amount of net cash flow from
operating activities will be the same for both
direct and indirect methods.
Investing and Financing activities sections will
be identical for both methods.
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Advantages of Using the Indirect Method
1,Focuses on the differences between net
income and net cash flow from operations.
2,Reveals the relationship between the income
statement,the balance sheet,and the
statement of cash flows.
3,Less costly to prepare.
4,Must be prepared as a supplemental report
even if the direct method is used.
5,98 percent of companies surveyed use the
indirect method,
C14 - 24
Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Cash payments for acquiring land (10,000)
Cash received as owner’s investment $15,000
Deduct cash withdrawal by owner 2,000
Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
C14 - 25
Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
Cash payments for acquiring of land (10,000)
Cash received as owner’s investment $15,000
Deduct cash withdrawal by owner 2,000
Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
C14 - 26
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
C14 - 27
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
C14 - 28
Cash Relationships and Cash Flows
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
C14 - 29
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
Cash Relationships and Cash Flows
C14 - 30
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
The cash flows are determined by analyzing
liabilities,stockholders’ equity,and noncash assets.
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
1 2 3
1
2
3
Cash Relationships and Cash Flows
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Determine the debit or credit change of each item above.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
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Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These debit changes are subtracted from net income in the
operating activities section of the statement of cash flows.
Think of these debits as deductions from net income in arriving
at net cash flow from operations,
C14 - 33
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These credit changes are added to net income in the operating
activities section of the statement of cash flows.
Think of these credits as additions to net income in arriving at
net cash flow from operations,
C14 - 34
Cash flows from operating activities:
Operating Activities – Indirect Method
Start with the accrual basis net income
shown on the income statement,
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities – Indirect Method
Because depreciation expense reduced net income but did not
require an outflow of cash,it is added back to net income,
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities – Indirect Method
These represent credit changes in the current accounts,Think
of these credits as additional income from a cash perspective.
Why do these represent an increased cash flow?
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities – Indirect Method
These represent debit changes in the current accounts,Think
of these debits as additional expense from a cash perspective.
Why do these represent a reduced cash flow?
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities – Indirect Method
This gain was included in net income but did not represent an
operating cash flow,The related cash inflow from the sale is
reported in the cash flows from investing activities section.
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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These changes in current accounts were used to prepare
the statement of cash flows with the indirect method,
They will also be used for the direct method that follows.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
C14 - 40
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
This is an accrual basis income statement.
The direct method of reporting cash flows will
essentially convert this to a cash basis statement.
C14 - 41
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $960,000
Cost of merchandise sold 580,000
Gross profit $380,000
Operating expenses:
Depreciation expense $ 18,000
Other operating expenses 260,000
Total operating expenses 278,000
Income from operations $102,000
Other income:
Gain on sale of investments $30,000
Other expense:
Interest expense 14,000 16,000
Income before income tax $118,000
Income tax 27,500
Net income $ 90,500
Debit Credit
Sales 960,000
Receivables 9,000
Cash
ChangesCash collectedfrom customers
Note,All income statement account
balances are zero at the beginning
of a period,Therefore,the balance
shown represents the amount of
change during the period.
C14 - 42
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
Note,The changes in the current balance sheet
accounts are determined by comparing the
beginning and ending balances,Receivables
increased by $9,000 during the period.
C14 - 43
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
The increase in receivables
represents a reduction in cash inflow
relative to the accrual revenue
reported on the income statement.
C14 - 44
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash
ChangesCash payments formerchandise
C14 - 45
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 785,200
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments formerchandise
C14 - 46
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 785,200
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments formerchandise
A decrease in inventories (credit
change) and an decrease in accounts
payable (debit change) have the
opposite effects.
C14 - 47
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Depr,expense 7,000
Accum,depreciation 7,000
ChangesDepreciation
C14 - 48
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Depr,expense 7,000
Accum,depreciation 7,000
ChangesDepreciation
There is no cash flow for
depreciation expense,
C14 - 49
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200
Cash
ChangesCash payments for operating expenses
C14 - 50
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200
Cash 193,800
ChangesCash payments for operating expenses
C14 - 51
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
C14 - 52
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
Why isn’t the cash inflow
of $72,000 shown here?
C14 - 53
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
The cash inflow of $72,000
will be shown in the
investing section of the
statement of cash flows.
C14 - 54
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash
ChangesCash paid for
interest expense
C14 - 55
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash 8,000
ChangesCash paid for
interest expense
There is no interest payable
account at the end of the year.
C14 - 56
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash
ChangesCash paid for
income taxes
C14 - 57
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash 83,500
ChangesCash paid for
income taxes
C14 - 58
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
C14 - 59
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
Two different views
of income from
operations
C14 - 60
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
Accrual
Basis
108,
Two different views
of income from
operations
Cash
Basis
$ 100,500
C14 - 61
Cash flows from operating activities:
Operating Activities – Direct Method
Cash inflows:
Cash received from customers $1,171,000
Cash outflows:
Cash payments for merchandise $785,200
Cash payments for operating expenses 193,800
Cash payments for interest 8,000
Cash payments for income tax 83,500 1,070,500
Net cash flow from operating activities $ 100,500
C14 - 62
Financial Analysis and Interpretation
Free Cash Flow
Use,To measure operating cash flow available
for corporate purposes after providing
sufficient fixed asset additions to maintain
current productive capacity and dividends.
Cash flow from operations $1,400,000
Less,Cash invested in fixed
assets to maintain capacity (450,000)
Less,Cash used for dividends (100,000)
Free cash flow $ 850,000
C14 - 63
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F14,
Power NotesChapter F14
Statement of Cash Flows
Learning Objectives
Power Notes
1,Purpose of the Statement of Cash Flows
2,Reporting Cash Flows
3,Statement of Cash Flows – The Indirect Method
4,Statement of Cash Flows – The Direct Method
5,Financial Analysis and Interpretation
Chapter F14
C14
Statement of Cash Flows
C14 - 2
Cash Flow Basics
Statement of Cash Flows – Two Methods
Changes in Current Accounts
Statement of Cash Flows – Indirect Method
Statement of Cash Flows – Direct Method
Free Cash Flow
Slide # Power Note Topics
3
20
31
34
39
62
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F14
Statement of Cash Flows
C14 - 3
Reporting Cash Flows
1,Operating activities – transactions that affect
net income.
2,Investing activities – transactions that affect
noncurrent assets.
3,Financing activities – transactions that affect
equity and debt of the entity.
The statement of cash flows reports a firm’s major
cash inflows and outflows for a period,Cash flows
are reported by three types of activities.
C14 - 4
Cash Flows
Increases in Cash Decreases in Cash
Cash
C14 - 5
Cash Flows
Increases in Cash
(receipts from
revenues)
Decreases in Cash
Operating
Cash
C14 - 6
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
Decreases in Cash
Operating Operating
Cash
C14 - 7
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
Decreases in Cash
Operating
Investing
Operating
Cash
C14 - 8
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Operating
Investing Cash
C14 - 9
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(receipts from issuing
equity and debt securities)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
Investing Cash
C14 - 10
Cash Flows
Increases in Cash
(receipts from
revenues)
(payments for dividends,and
redemption of debt securities)
(payments for
expenses)
(receipts from sales of
noncurrent assets)
(receipts from issuing
equity and debt securities)
(payments for aquiring
noncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
Investing
Financing
Cash
C14 - 11
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from operating
activities?
C14 - 12
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
Interest Revenue
Sales of goods
and services
Dividend Revenue
What are some
of the typical
cash outflows
from operating
activities?
C14 - 13
Cash Flows – Operating Activities
Typical cash inflows Typical cash outflows
Sales of goods
and services
Merchandise
purchases
Payments of
wages & other
expenses
Tax payments
Interest Revenue
Dividend Revenue
C14 - 14
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from investing
activities?
C14 - 15
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assets
and other long-term
investments
Sale of marketable
securities and
investments
What are some
of the typical
cash outflows
from investing
activities?
C14 - 16
Cash Flows – Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assets
and other long-term
investments
Sale of marketable
securities and
investments
Purchase of fixed
assets and other long-
term investments
Purchase of
marketable securities
and investments
C14 - 17
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
What are some
of the typical
cash inflows
from financing
activities?
C14 - 18
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)
of stock
Sale (issuance) of
bonds and other
money market debt
Borrowing from banks
and other lending
institutions
What are some
of the typical
cash outflows
from financing
activities?
C14 - 19
Cash Flows – Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)
of stock
Sale (issuance) of
bonds and other
money market debt
Purchase of
treasury stock
Repayment and
redemption of debt
(bonds,notes,other)
Payment of cash
dividends
Borrowing from banks
and other lending
institutions
C14 - 20
Statement of Cash Flows
1,Generate cash flow from operations.
2,Maintain and expand operating capacity.
3,Pay dividends.
4,Pay debts,including interest,when due.
5,Generate future profits.
The primary attention is the flow of cash rather
than net income.
The statement of cash flows is invaluable in
assessing the capacity of a firm to achieve goals
such as:
C14 - 21
Preparing the Statement of Cash Flows
Net cash flows from operating activities will be
the difference between the operating cash
receipts and operating cash payments.
Net cash flows from operating activities is
determined by adjusting the accrual net income
from operations to reflect a cash-based net income
from operations.
Direct Method
Indirect Method
C14 - 22
Advantages of Using the Direct Method
1,Reports the sources and uses of operating
cash receipts and payments.
2,Is easier to understand for many investors.
3,Recommended by the Financial Accounting
Standards Board (FASB).
Note,The total amount of net cash flow from
operating activities will be the same for both
direct and indirect methods.
Investing and Financing activities sections will
be identical for both methods.
C14 - 23
Advantages of Using the Indirect Method
1,Focuses on the differences between net
income and net cash flow from operations.
2,Reveals the relationship between the income
statement,the balance sheet,and the
statement of cash flows.
3,Less costly to prepare.
4,Must be prepared as a supplemental report
even if the direct method is used.
5,98 percent of companies surveyed use the
indirect method,
C14 - 24
Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Cash payments for acquiring land (10,000)
Cash received as owner’s investment $15,000
Deduct cash withdrawal by owner 2,000
Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
C14 - 25
Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
Cash payments for acquiring of land (10,000)
Cash received as owner’s investment $15,000
Deduct cash withdrawal by owner 2,000
Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
C14 - 26
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
C14 - 27
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Direct Method
For the Month Ended November 30,2002
Cash flows from operating activities:
NetSolutions
Statement of Cash Flows – Indirect Method
For the Month Ended November 30,2002
Cash received from customers $ 7,500
Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Net income,per income statement $ 3,050
Add increase in accounts payable 400
Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
C14 - 28
Cash Relationships and Cash Flows
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
C14 - 29
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
Cash Relationships and Cash Flows
C14 - 30
Cash
Liabilities
Stockholders’
Equity
Balance Sheet
Noncash
Assets
The cash flows are determined by analyzing
liabilities,stockholders’ equity,and noncash assets.
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
1 2 3
1
2
3
Cash Relationships and Cash Flows
C14 - 31
Determine the debit or credit change of each item above.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
C14 - 32
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These debit changes are subtracted from net income in the
operating activities section of the statement of cash flows.
Think of these debits as deductions from net income in arriving
at net cash flow from operations,
C14 - 33
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These credit changes are added to net income in the operating
activities section of the statement of cash flows.
Think of these credits as additions to net income in arriving at
net cash flow from operations,
C14 - 34
Cash flows from operating activities:
Operating Activities – Indirect Method
Start with the accrual basis net income
shown on the income statement,
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
C14 - 35
Cash flows from operating activities:
Operating Activities – Indirect Method
Because depreciation expense reduced net income but did not
require an outflow of cash,it is added back to net income,
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
C14 - 36
Cash flows from operating activities:
Operating Activities – Indirect Method
These represent credit changes in the current accounts,Think
of these credits as additional income from a cash perspective.
Why do these represent an increased cash flow?
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
C14 - 37
Cash flows from operating activities:
Operating Activities – Indirect Method
These represent debit changes in the current accounts,Think
of these debits as additional expense from a cash perspective.
Why do these represent a reduced cash flow?
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
C14 - 38
Cash flows from operating activities:
Operating Activities – Indirect Method
This gain was included in net income but did not represent an
operating cash flow,The related cash inflow from the sale is
reported in the cash flows from investing activities section.
Net income,per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000
Decrease in accounts payable 3,200
Decrease in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
C14 - 39
These changes in current accounts were used to prepare
the statement of cash flows with the indirect method,
They will also be used for the direct method that follows.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit Credit
Trade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
C14 - 40
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
This is an accrual basis income statement.
The direct method of reporting cash flows will
essentially convert this to a cash basis statement.
C14 - 41
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $960,000
Cost of merchandise sold 580,000
Gross profit $380,000
Operating expenses:
Depreciation expense $ 18,000
Other operating expenses 260,000
Total operating expenses 278,000
Income from operations $102,000
Other income:
Gain on sale of investments $30,000
Other expense:
Interest expense 14,000 16,000
Income before income tax $118,000
Income tax 27,500
Net income $ 90,500
Debit Credit
Sales 960,000
Receivables 9,000
Cash
ChangesCash collectedfrom customers
Note,All income statement account
balances are zero at the beginning
of a period,Therefore,the balance
shown represents the amount of
change during the period.
C14 - 42
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
Note,The changes in the current balance sheet
accounts are determined by comparing the
beginning and ending balances,Receivables
increased by $9,000 during the period.
C14 - 43
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
The increase in receivables
represents a reduction in cash inflow
relative to the accrual revenue
reported on the income statement.
C14 - 44
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash
ChangesCash payments formerchandise
C14 - 45
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 785,200
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments formerchandise
C14 - 46
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 785,200
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cost of mdse,sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments formerchandise
A decrease in inventories (credit
change) and an decrease in accounts
payable (debit change) have the
opposite effects.
C14 - 47
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
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
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Depr,expense 7,000
Accum,depreciation 7,000
ChangesDepreciation
C14 - 48
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Depr,expense 7,000
Accum,depreciation 7,000
ChangesDepreciation
There is no cash flow for
depreciation expense,
C14 - 49
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200
Cash
ChangesCash payments for operating expenses
C14 - 50
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200
Cash 193,800
ChangesCash payments for operating expenses
C14 - 51
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
C14 - 52
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
Why isn’t the cash inflow
of $72,000 shown here?
C14 - 53
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest,12,000
ChangesGain on sale of
investments
The cash inflow of $72,000
will be shown in the
investing section of the
statement of cash flows.
C14 - 54
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash
ChangesCash paid for
interest expense
C14 - 55
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash 8,000
ChangesCash paid for
interest expense
There is no interest payable
account at the end of the year.
C14 - 56
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash
ChangesCash paid for
income taxes
C14 - 57
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash 83,500
ChangesCash paid for
income taxes
C14 - 58
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
C14 - 59
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
Two different views
of income from
operations
C14 - 60
Rundell Inc.
Income Statement
For the Year Ended December 31,2003 Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8,000 4,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
Accrual
Basis
108,
Two different views
of income from
operations
Cash
Basis
$ 100,500
C14 - 61
Cash flows from operating activities:
Operating Activities – Direct Method
Cash inflows:
Cash received from customers $1,171,000
Cash outflows:
Cash payments for merchandise $785,200
Cash payments for operating expenses 193,800
Cash payments for interest 8,000
Cash payments for income tax 83,500 1,070,500
Net cash flow from operating activities $ 100,500
C14 - 62
Financial Analysis and Interpretation
Free Cash Flow
Use,To measure operating cash flow available
for corporate purposes after providing
sufficient fixed asset additions to maintain
current productive capacity and dividends.
Cash flow from operations $1,400,000
Less,Cash invested in fixed
assets to maintain capacity (450,000)
Less,Cash used for dividends (100,000)
Free cash flow $ 850,000
C14 - 63
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F14,
Power NotesChapter F14
Statement of Cash Flows
