chap11 Auditing text and cases

(1)

The

Statement of Cash

Flows

Part One: Financial Accounting

11

(2)

• Operations

• New borrowings

• New stock issues

• Sale of property, plant, and equipment

• Sale of other noncurrent assets

Sources of Cash

^{Slide 11-1}

(3)

• Cash dividends

• Repayment of borrowings

• Repurchase of stock

• Purchase of property, plant, and equipment

• Purchase of other noncurrent assets

Uses of Cash

^{Slide 11-2}

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• How much cash was provided by the normal, ongoing operations of the company?

• In what other ways were significant amounts of cash raised?

• Is the company investing enough in new plant and equipment to maintain or increase capacity and to replace old facilities with more efficient ones?

• Is the company reinvesting excess cash in productive assets, or is it using the cash to retire stock?

• How much cash was provided by the normal, ongoing operations of the company?

• In what other ways were significant amounts of cash raised?

• Is the company investing enough in new plant and equipment to maintain or increase capacity and to replace old facilities with more efficient ones?

• Is the company reinvesting excess cash in productive assets, or is it using the cash to retire stock?

Typical Questions Answered by the SCF

^{Slide 11-3}

(5)

Operating activities:

Transactions associated with sales revenues and cash outflows associated with the operating

expenses

Investing activities:

Transactions involving acquiring and disinvesting in long-lived assets

Financing activities:

Transactions involving borrowing of cash through noncurrent instruments and the issuance of equity securities

Major Categories on the SCF

^{Slide 11-4}

(6)

Cash flows from investing activities:

Acquisition of plant and equipment (500)

Proceeds from disposals of plant and equipment 20

Purchase of investment securities (25)

Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Cash flows from investing activities:

Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20

Proceeds from sales of investment securities 75 Net cash used by investing activities (430)

Investing Activities Section of SCF

^{Slide 11-5}

Equipment costing $500,000 was purchased for cash during the year.

Equipment that originally cost $150,000 was sold for

$20,000, resulting in an inflow of cash .

Equipment that originally cost $150,000 was sold for

$20,000, resulting in an inflow of cash .

Proceeds from disposals of plant and equipment 20

The net result of these two transaction on the balance sheet is an increase in plant and equipment of $350,000.

The net result of these two transaction on the balance

sheet is an increase in plant and equipment of $350,000.

(7)

Investing Activities Section of SCF

^{Slide 11-6}

Investment securities decreased $50,000 ($450,000 to

$400,000) during the year.

Investment securities decreased $50,000 ($450,000 to

$400,000) during the year.

The firm purchased $25,000 of new securities (an inflow of cash) and and sold $75,000 of old securities (and

outflow of cash)

The firm purchased $25,000 of new securities (an inflow of cash) and and sold $75,000 of old securities (and

outflow of cash)

Purchase of investment securities (25)

Proceeds from sales of investment securities 75 Net cash used by investing activities (430)

(8)

Financing Activities Section of SCF

^{Slide 11-7}

Short-term borrowing decreased $21,000 (from $147,000 to $126,000).

Cash flows from financing activities:

Proceeds from short-term debt 15

Payments to settle short-term debt (36)

Proceeds from long-term debt 375

Payments on long-term debt (40)

Proceeds from issuing common stock 44

Dividends paid (160)

Net cash provided by financing activities 326 Cash flows from financing activities:

Proceeds from short-term debt 15

Payments to settle short-term debt (36)

Dividends paid (60)

Net cash provided by financing activities 326

The firm borrowed $15,000 using short-term debt and paid $36,000 on old borrowings.

The firm borrowed $15,000 using short-term

debt and paid $36,000 on old borrowings.

(9)

Financing Activities Section of SCF

^{Slide 11-8}

Proceeds from long-term debt 375

Payments on long-term debt (40)

Dividends paid (60)

Long-term debt increased $335,000 (from

$500,000 in 1997 to $835,000 in 1998).

Long-term debt increased $335,000 (from

$500,000 in 1997 to $835,000 in 1998).

The firm borrowed $375,000 using long-term debt and paid $40,000 on old long-term debt.

The firm borrowed $375,000 using long-term

debt and paid $40,000 on old long-term debt.

(10)

Financing Activities Section of SCF

^{Slide 11-9}

Proceeds from issuing common stock 44

Dividends paid (60)

On the balance sheet, common stock increased

$10,000 and paid-in capital increased by

$34,000 between 1997 and 1998.

On the balance sheet, common stock increased

$10,000 and paid-in capital increased by

$34,000 between 1997 and 1998.

During 1998, Fairway issued 10,000 additional shares of $1 par value common stock resulting in

cash proceeds of $44,000.

During 1998, Fairway issued 10,000 additional shares of $1 par value common stock resulting in

cash proceeds of $44,000.

(11)

Financing Activities Section of SCF

Slide 11-10

Dividends paid (60)

During 1998, cash dividends amounted to $60,000.

During 1998, cash dividends

amounted to $60,000.

(12)

Net cash flow from operating activities:

Cash received from customers $3,103

Dividends and interest received 19

Cash provided by operating activities 3,122 Cash paid to suppliers and employers 2,729

Interest paid 67

Income taxes paid 98

Cash disbursed for operating activities 2,894 Net cash flow from operating activities 228

Operating Activities Section of SCF

Slide 11-11

Direct Method Direct Method Direct Method Direct Method FASB 95

encourages use of the direct method.

FASB 95 encourages

use of the direct method.

(13)

Net income $200

Noncash expenses, revenues, and losses included in income:

Depreciation 120

Deferred taxes 5

Increase in accounts receivable (87)

Increase in inventories (47)

Increase in accounts payable 56

Increase in taxes payable 1

Gain on sale of equipment (20)

Cash flow from operating activities 228

Operating Activities Section of SCF

Slide 11-12

Indirect Method Indirect Method Indirect Method Indirect Method Net cash flow from operating activities:

Net income $200

Depreciation 120

Deferred taxes 5

(14)

Operating Activities Section of SCF

Slide 11-13

Depreciation Expense 120,000

Accumulation Depreciation 120,000

The actual adjusting entry made:

Depreciation expense reduces net income, but has no effect on cash.

Let’s restate the entry by replacing depreciation.

(15)

Operating Activities Section of SCF

Slide 11-14

Cash provided by operations 120,000

Accumulation Depreciation 120,000

The restated entry:

Examine Illustration 11-6 closely. Notice that entry (3) matches the restated entry above.

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Net income $200

Depreciation 120

Deferred taxes 5

Operating Activities Section of SCF

Slide 11-15

Net income $200

Depreciation 120

Deferred taxes 5

Increase in inventories (47)

(17)

Operating Activities Section of SCF

Slide 11-16

Inventories Beginning balance 610,000

Purchases 2,337,000

Cost of sales 2,290,000 Ending balance 657,000 Beginning balance

in next period 657,000

Purchases = Cost of sales + (Ending

Balance - Beginning Balance) Purchases = Cost of sales + (Ending

Balance - Beginning Balance) Actual cash payments (assume all

purchases were cash purchases) $2,337,000 Cost of sales (based on units sold) 2,290,000 Excess of cash spent over amount recorded

as a cost on the income statement $ 47,000 Actual cash payments (assume all

purchases were cash purchases) $2,337,000 Cost of sales (based on units sold) 2,290,000 Excess of cash spent over amount recorded

as a cost on the income statement $ 47,000

(18)

Net income $200

Depreciation 120

Deferred taxes 5

Operating Activities Section of SCF

Slide 11-17

Net income $200

Depreciation 120

Deferred taxes 5

Gain on sale of equipment (20)

(19)

Operating Activities Section of SCF

Slide 11-18

Cash 20,000

Accumulated Depreciation 150,000

Equipment, at Cost 150,000

Gain on Disposal of Equipment 20,000

The journal entry made was:

Freeway Corporation sold equipment that originally cost $150,000 for $20,000. The asset was fully

depreciated at the time of sale.

Freeway Corporation sold equipment that originally cost $150,000 for $20,000. The asset was fully

depreciated at the time of sale.

This gain increased net income by $20,000.

(20)

Operating Activities Section of SCF

Slide 11-19

Cash provided by investing

activities 20,000

Accumulated Depreciation 150,000

Equipment, at Cost 150,000

Cash provided by operating

activities 20,000

The restated entry is:

The actual cash inflow should be treated as cash provided by investing activities and the gain on disposal subtracted

from net income through reducing cash provided by operations (see entry 6 in Illustration 11-6).

The actual cash inflow should be treated as cash provided by investing activities and the gain on disposal subtracted

from net income through reducing cash provided by operations (see entry 6 in Illustration 11-6).

(21)

Operating Activities Section of SCF

Slide 11-20

Suppose the equipment had a book value of $10,000 at the time of sale, and the cash proceeds totaled $15,000.

Cash 15,000

Accumulated Depreciation 140,000

Equipment, at Cost 150,000

Gain on Disposal of Equipment 5,000

The journal entry made was:

(22)

Operating Activities Section of SCF

Slide 11-20

Suppose the equipment had a book value of $10,000 at the time of sale, and the cash proceeds totaled $15,000.

Cash provided by investing

activities 15,000

Accumulated Depreciation 140,000

Equipment, at Cost 150,000

Cash provided by operating

activities 5,000

The entry restated is:

Cash provided by investing activities increased $15,000 and cash provided by operating activities decreased $5,000.

(23)