CH 04 income statement.ppt

(1)

CHAPTER 4 FINANCIAL STATEMENTS &

ADDITIONAL DISCLOSURE

(2)

Learning Objective :

Income statement format and

classification

(3)

Evaluate past performance.

Income Statement

LO 1 Understand the uses and limitations of an income statement.

Help assess the risk or uncertainty

of achieving future cash flows.

Predicting future performance.

Usefulness

(4)

Companies omit items that cannot

be measured reliably.

Income Statement

Limitations

LO 1 Understand the uses and limitations of an income statement.

Income measurement involves

judgment.

Income is affected by the

accounting methods employed.

(5)

Single-Step Format

LO 2 Prepare a single-step income statement.

The single-step statement

consists of just two

groupings:

Income Statement (in thousands) Revenues:

Sales $ 285,000

Interest revenue 17,000 Total revenue 302,000 Expenses:

Cost of goods sold 149,000 Selling expense 10,000 Administrative expense 43,000 Interest expense 21,000 Income tax expense 24,000 Total expenses 247,000 Net income $ 55,000

Earnings per share $ 0.75

Revenues

Expenses

Net Income

Single-

Step

Single-

Step

No distinction between

Operating

and

Non-operating

categories.

(6)

Multiple-Step Format

LO 3 Prepare a multiple-step income statement.

The presentation

divides information

into major sections.

The presentation

divides information

into major sections.

Income Statement (in thousands)

Sales $ 285,000 Cost of goods sold 149,000 Gross profit 136,000

Operating expenses:

Selling expenses 10,000 Administrative expenses 43,000 Total operating expense 53,000

Income from operations 83,000

Other revenue (expense):

Interest revenue 17,000 Interest expense (21,000)

Total other (4,000) Income before taxes 79,000 Income tax expense 24,000

Income from continuting operations $ 55,000

Earnings per share $ 0.75

1. Operating Section

2. Nonoperating

Section

2. Nonoperating

Section

3. Income tax

(7)

Irregular items

fall into six categories

1. Unusual gains and losses.

2. Discontinued operations.

Reported in the

3. Extraordinary items

.

Income Statement

4. Changes in accounting principle.

5. Changes in estimates.

6. Corrections of errors

Unusual gains and losses, discontinued operation results and

extraordinary items are also referred to as

transitory

items.

Reporting Irregular Items

LO 4 Explain how to report irregular items.

(8)

Unusual Gains and Losses

Material items that are

unusual

or

infrequent

, but not

both, should be reported in a

separate section

just

above

“Income from continuing operations before

income taxes” as part of the above the line income.

Examples can include:

Write-downs of inventories, equipment, etc.

Foreign exchange transaction gains and losses

Restructuring charges

Gains or losses from sale of investments

The Board prohibits net-of-tax treatment for these

items.

Reporting Irregular Items

(9)

Multiple-Step Format

LO 3 Prepare a multiple-step income statement.

The presentation

divides information

into major sections.

The presentation

divides information

into major sections.

Sales $ 285,000 Cost of goods sold 149,000 Gross profit 136,000

Operating expenses:

Selling expenses 10,000 Administrative expenses 43,000 Total operating expense 53,000

Income from operations 83,000

Unusal Item:

Loss from inventory write-down _(3,000)

Income before income taxes 76,000 Income tax expense $ 24,000

Net Income $ 52,000

1. Operating Section

2. Nonoperating

Section

2. Nonoperating

Section

3. Income tax

(10)

Income statement format

and classification



Multi-step income statements subdivide

income in a manner that helps analysts to

forecast future operating cash flows.



This format:



Separates

operating

from

nonoperating

transactions .



Separates

“transitory”

income items

from those believed to be

“sustainable”

or “ permanent” (likely

to be repeated).

(11)

Operating vs. Non-Operating

Items



Operating transactions: relating to the

day-to-day operations.



Examples:

sales, cost of sales, selling,

general and administrative expense,

research and development costs, etc.



Non-operating:

interest revenue,

dividends revenue, interest expense,

unusual items, etc.

(12)

Discontinued Operations

occurs when,

(a)

company eliminates (discontinues) the

results of operations and

cash flows of a component

.

(b)

there is no significant continuing involvement

in that component.

Amount reported

“net of tax.”

Note: A

component

of an entity comprises

operations

and

cash flows

that can be clearly distinguished,

operationally and for financial reporting purposes, from

the rest of the entity (SFAS 144).

Reporting Irregular Items

other than the Unusual

Items

(13)

Discontinued Operations (contd.):

Examples of a component:

a reportable

segment, an operating segment, a

reporting unit, a subsidiary, or an

asset group

.

• Other required treatment

: 1) must

restate all presented periods with the

discontinued operations separated

reported, 2)

the identity of the business

segment and the details of disposal must

be

disclosed in footnotes

Reporting Irregular Items

(14)

Illustration:

KC Corporation had after tax income from

continuing operations of $55,000,000 in 2008. During 2008, it

disposed of its restaurant division at a pretax loss of

$270,000. Prior to disposal, the division operated at a pretax

loss of $450,000 in 2008. Assume a tax rate of 30%. Prepare

a partial income statement for KC.

Reporting Discontinued

Operations –Component Sold

Income from continuing operations

$55,000,000

Discontinued operations:

Loss from operations, net of $135,000 tax

315,000

Loss on disposal, net of $81,000 tax

189,000

Net income

$54,496,000

Total loss on discontinued operations

504,000

(15)

Reporting Discontinued Operations –

Component Sold

Income from continuing operations 55,000

Discontinued operations:

Loss from operations, net of tax 315 Loss on disposal, net of tax 189 Total loss on discontinued operations 504

Net income $ 54,496

Discontinued Operations

are reported after

“Income from continuing

operations.”

Previously labeled as

“Net Income”.

Moved to

LO 4 Explain how to report irregular items. Income Statement (in thousands)

Sales $ 285,000 Cost of goods sold 149,000

(16)

Reporting Discontinued

Operations- Component Held

for Sale

Reporting for Components Held For Sale

Operating income

or loss of the

component from

the beginning of

the reporting

period to the end of

the reporting

period.

An “impairment

loss” if the carrying

value of the assets

of the component

is more than the

fair value minus

(17)

Reporting Discontinued Operations –

Componet

Held for sale

 Two components of

discontinued operations are reported:



Gain or loss from

operations



Impairment loss

(18)

Extraordinary items

are nonrecurring material

items that differ significantly from a company’s

typical business activities.

Extraordinary Item must be both of an

Unusual Nature and

Occur Infrequently

Company must consider the

environment

in which it

operates.

Amount reported

“net of tax.”

Reporting Irregular Items

(19)

Are these items Extraordinary?

(a) A large portion of a tobacco manufacturer’s

crops are destroyed by a hail storm. Severe

damage from hail storms in the locality where

the manufacturer grows tobacco is rare.

(b) A citrus grower's Florida crop is damaged by

frost.

(c) A company sells a block of common stock of a

publicly traded company. The block of shares,

which represents less than 10% of the

publicly-held company, is the only security investment the

company has ever owned.

YES

Reporting Extraordinary

Items

NO

YES

(20)

Are these items Extraordinary?

(d) A large diversified company sells a block of

shares from its portfolio of securities which it

has acquired for investment purposes. This is

the first sale from its portfolio of securities.

(e) An earthquake destroys one of the oil refineries

owned by a large multi-national oil company.

Earthquakes are rare in this geographical

location.

(f) A company experiences a material loss in the

repurchase of a large bond issue that has been

outstanding for 3 years. The company regularly

repurchases bonds of this nature.

NO

Reporting Extraordinary

Items

YES

NO

(21)

Illustration:

KC Corporation had after tax income from

continuing operations of $55,000,000 in 2007. In addition, it

suffered an unusual and infrequent pretax loss of $770,000

from a volcano eruption. The corporation’s tax rate is 30%.

Prepare a partial income statement for KC Corporation

beginning with income from continuing operations.

Income from continuing operations

$55,000,000

Extraordinary loss, net of $231,000 tax

539,000

Net income

$54,461,000

Reporting Extraordinary

Items

($770,000 x 30% = $231,000 tax)

(22)

Extraordinary loss, net of tax 539

Net income $ 54,461

Extraordinary Items

are reported after

“Income from continuing

operations.”

Previously labeled as

“Net Income”.

Reporting Extraordinary

Items

Moved to

(23)

Reporting Irregular Items

Interest expense (21,000) Total other (4,000) Income before taxes 79,000 Income tax expense 24,000

Discontinued operations:

Loss from operations, net of tax 315 Loss on disposal, net of tax 189 Total loss on discontinued operations 504

Income before extraordinary item 54,496

Extraordinary loss, net of tax 539

Net income ####

Reporting when both

Discontinued Operations

and

Extraordinary Items

are present.

Discontinued

Operations

Discontinued

Operations

Extraordinary Item

(24)

Income statement format:

Income from Continuing

Operations



Ideally, this includes only

the normal, recurring,

“sustainable” ongoing

operating activities of the

firm.



(2) :

Gains and losses that

occur infrequently—

called:

“special” or “unusual”

items

“ The Line“

These items are included as part of income from continuing operations before tax

(25)

Income statement format:

T

ransitory items

– below the line



Nonrecurring items

include:

1.

Special or unusual

items

( above the line) 2.

Discontinued

operations

3.

Extraordinary losses

and gains

“Below the line”

(26)

How common are

nonrecurring losses?



Conservative bias of accrual accounting encourages early

recognition of declines in asset values below cost or book value

but delays recognition of increases in value until after the asset

is sold.



_{Firms’ incentives to separately disclose and clearly label}

losses (but not gains)

(27)

Companies are required to report irregular items in

the financial statements so users can

determine the long-run earning power

of the company.

Reporting Irregular Items

Illustration 4-5

Number of Irregular Items Reported in a Recent Year by 600 Large Companies

(28)

Learning Objective :

How to report a change in accounting

principle, accounting estimate, and

(29)

Type of Accounting

Change

Definition

Change in Accounting

Principle

Change from one GAAP method

to another GAAP method

Change in Accounting

Estimate

Revision of an estimate

because of new information or

new experience

Change in Reporting

Entity

Preparation of financial

statements for an accounting

entity other than the entity that

existed in the previous period

Accounting Changes

(1)

(2)

(30)

(1) Change in Accounting

Principle (SFAS 154)



Occurs when changing from one GAAP

method to another GAAP method



For example, a change from LIFO to FIFO



Voluntary changes in accounting principles

are accounted for

retrospectively

by revising

prior years’ financial statements (for

comparability).



Changes in depreciation, amortization, or

depletion

methods

are accounted for the

same way as a

change in accounting

(31)



Prior years’ financial

statements that are

presented for

comparative purposes

are

restated

.



Adjusted

all accounts

balances

to reflect what

those accounts would

have been under the new

method.

(32)

(2) Change in Accounting

Estimate



Examples: Changes in the estimates of



_{Inventory obsolescence.}



_{Uncollectible receivables.}



_{Useful lives and salvage values of assets.}



_{Liabilities for warranty costs and income}

taxes.

(33)

Change in Accounting

Estimate



Require “

prospective

” adjustment : Use the

new estimates in the current and future

periods (i.e., no restatements).



Past income is never adjusted.



Estimate changes are sometimes hard to

(34)

Change in Estimate:

Arcadia HS, purchased equipment for

$510,000 which was estimated to have a useful life of 10 years

with a salvage value of $10,000 at the end of that time.

Depreciation has been recorded for 7 years on a straight-line

basis. In 2010 (year 8), it is determined that the total estimated

life should be 15 years with a salvage value of $5,000 at the end of

that time.

Questions:



What is the journal entry to correct the prior years’

depreciation?



Calculate the depreciation expense for

2010.

No Entry

Required

Change in Accounting

Estimate:

(35)

Equipment

$510,000

Fixed Assets:

Accumulated depreciation

350,000

Net book value (NBV)

$160,000

Balance Sheet

(Dec. 31, 2009)

2. Change in Estimate Example

After 7 years

Equipment cost

$510,000

Salvage value

- 10,000

Depreciable base

500,000

Useful life (original)

10 years

Annual depreciation

$ 50,000

x 7 years = $350,000

x 7 years =

$350,000

First, establish

NBV at date of

change in estimate.

First, establish

NBV at date of

change in estimate.

(36)

2. Change in Estimate Example

After 7 years

Net book value

$160,000

Salvage value (new)

5,000

Depreciable base

155,000

Useful life remaining

8 years

Annual depreciation

$ 19,375

Depreciation

Expense calculation

for 2010.

Depreciation

Expense calculation

for 2010.

Depreciation expense

19,375

Accumulated depreciation

(37)

Learning Objective :

Comprehensive Income

(38)

Comprehensive income



The change in equity excluding owner

related transactions such as investments

from owners and dividends distribution.



Components of Comprehensive income:



Net income.



Other comprehensive income items:

Gains and losses which bypass income

statement and are reported directly

in the stockholders’ equity of the

(39)

Comprehensive income(contd.)



Examples of “

other

comprehensive

income” items:

1. Unrealized gains (losses) from

valuation of investments.

2. Gains (losses) of foreign currency

translation

adjustments

.

3. Unrealized gains and losses associated

with derivatives.

4. Gains (losses) from amendments

to

(40)

Three approaches to reporting Comprehensive

Income (SFAS No. 130, June 1997):

1.

A second separate income statement;

2.

A combined income statement of

comprehensive income; or

3.

As part of the statement of stockholders’

equity

Special Reporting Issues

LO 8 Explain how to report other comprehensive income.

(41)

Special Reporting Issues

Comprehensive

Income

Second

income

statement

(42)

V. Gill Inc.

Combined Statement of Comprehensive Income For the Year Ended December 31, 2010

Sales revenue $ 800,000 Cost of goods sold 600,000 Gross profit 200,000 Operating expenses 90,000 Net income 110,000 Unrealized holding gain, net of tax 30,000 Comprehensive income $ 140,000

Special Reporting Issues

Comprehensive

Income

Combined

income

statement

(43)

Special Reporting Issues

Comprehensive Income

-

Statement of Stockholder’s Equity

(44)

Special Reporting Issues

Comprehensive Income

- Balance Sheet Presentation

Regardless of the display format used, the

accumulated other

_{accumulated other}

comprehensive income

of $90,000 is reported in the stockholders’

equity section of the balance sheet.

(45)

Summary



Differences between cash-basis and

accrual-basis income measurement.



Accrual revenues and expenses better reflect effort and

accomplishment.



Accrual income is useful in predicting future operating cash

flows.



Revenue is recognized when two conditions

are satisfied:



“Critical event”—firm has earned the revenue.



“Measurability”—amount and collectability are reasonably

assured.



Time of sale is the most common point when revenue is

recognized.

(46)

Summary (contd.)



Product costs are matched to their

traceable revenues, period costs are

expensed as the assets are used up.



Multi-step income statements

highlight nonrecurring (“transitory”)

items.



GAAP disclosures for accounting

changes aid comparisons of

performance over time.

(47)

Summary (contd.)



All firms must report “Basic EPS”, and those

with complex capital structures must also

report “Diluted EPS”.



Other Comprehensive Income – changes in

assets and liabilities resulting from

incomplete or open transactions that

bypass the income statement and are

reported as direct adjustments to

stockholders’ equity.

(48)

(49)

(50)

Provides information about the cash receipts

and cash payments of a business entity

during the accounting period.

Provides information about the cash receipts

and cash payments of a business entity

during the accounting period.

Helps investors with questions about the

company’s:



Ability to generate positive cash flows.



Ability to meet its obligations and to pay

dividends.



Need for external financing.



Investing and financing transactions for the

period.

Helps investors with questions about the

company’s:



Ability to generate positive cash flows.



Ability to meet its obligations and to pay

dividends.



Need for external financing.



Investing and financing transactions for the

period.

(51)

(52)

The Statement of Cash Flows must

include the following three sections:



Cash Flows from Operating Activities



Cash Flows from Investing

Activities



Cash Flows from Financing Activities

The Statement of Cash Flows must

include the following three sections:



Cash Flows from

Operating

Activities



Cash Flows from

Investing

Activities



Cash Flows from

Financing

Activities

(53)

Outflows to:

 Suppliers of merchandise and

services.

 Employees.

 Lenders for interest.

 Governments for taxes.

Outflows

to:

 Suppliers of merchandise and

services.

 Employees.

 Lenders for interest.  Governments for taxes.

Inflows from:

 Sales to customers.

 Interest and dividends received.

Inflows from:

 Sales to customers.

 Interest and dividends received.

(54)

Cash

Flows

from

Investing

Activities

Cash

Flows

from

Investing

Activities

+

_

Inflows from:



Selling investments and plant

assets.



Collecting of principal on loans.

Inflows

from:



Selling investments and plant

assets.



Collecting of principal on loans

.

Outflows

to:

 Payments to acquire investments and

plant assets.

 Purchase debt or equity investments.  Make loans.

Outflows

to:

 Payments to acquire investments and

plant assets.

 Purchase debt or equity investments.  Make loans.

(55)

+

_

Inflows from:



Short-term and long-term

borrowing.



Owners (for example, from

issuing stock).

Inflows

from:



Short-term and long-term

borrowing.



Owners (for example, from

issuing stock).

Outflows

to:

 Repayments of borrowed funds.  Owners for dividends.

 Purchase treasury stock.

Outflows

to:

 Repayments of borrowed funds.  Owners for dividends.

 Purchase treasury stock.

(56)

Cash

Equivalents

Cash

Currency

 Short-term, highly liquid investments.  Readily convertible into cash.

 So near maturity that market value is unaffected by interest rate changes.

 Short-term, highly liquid investments.  Readily convertible into cash.

 So near maturity that market value is unaffected by interest rate changes.

(57)

The operating

cash flows section

can be prepared

using either the

direct method or

the indirect

method.

The operating

cash flows section

can be prepared

using either the

direct method

or

the

indirect

method.

Let’s look at

the

Direct

Method

for

preparing the

(58)



_{Accrual basis revenue includes sales}

that did not result in cash inflows.



_{Can be computed as:}

Cash Received from

Customers

Cash Received from

Customers

Decrease in

receivables

Decrease

in

receivables

Increase in

receivables

Increase

in

receivables

+

–

=

Net Sales

Direct Method

(59)

+

–

=

The A/R balance was $80,000 on 12/31/02 and

$110,000 on 12/31/03. If accrual sales

revenue for 2003 was $900,000, what was

cash basis revenue?

The A/R balance was $80,000 on 12/31/02 and

$110,000 on 12/31/03. If accrual sales

revenue for 2003 was $900,000, what was

cash basis revenue?

Decrease in

receivables

Decrease

in

receivables

Increase in

receivables

Increase

in

receivables

Net Sales

$900,000

Net Sales

$900,000

Direct Method

Cash Received from

Customers

Cash Received from

Customers

(60)

Cash Received from

Customers = $870,000

Cash Received from

Customers = $870,000

Decrease in

receivables

Decrease in

receivables

$30,000

Increase in

receivables

$30,000

Increase in

receivables

–

=

Net Sales

$900,000

Net Sales

$900,000

The A/R balance was $80,000 on 12/31/02 and

$110,000 on 12/31/03. If accrual sales revenue

for 2003 was $900,000, what was cash basis

revenue?

The A/R balance was $80,000 on 12/31/02 and

$110,000 on 12/31/03. If accrual sales revenue

for 2003 was $900,000, what was cash basis

revenue?

Direct Method

(61)

Now that we

understand the

process, let’s look at

some simplified

formulas for

(62)

Direct Method

(63)

Step 1

Step 2

Direct Method

(64)

How much did Lug Lite pay for inventory

in 2003?

a. $900,000

b. $923,000

c. $947,000

d. $877,000

Inventory, 1/1/03 $ 130,000 A/P, 1/1/03 $ 23,000 Inventory, 12/31/03 $ 165,000 A/P, 12/31/03 $ 35,000 COGS, 12/31/03 $ 900,000

Direct Method

Cash Paid for Merchandise

Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000

Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000

Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000

(65)

After deducting depreciation and other

noncash expenses, the cash paid for expenses

is affected by

(1) whether the expense was prepaid, and

(2) whether the expense was accrued.

After deducting depreciation and other

noncash expenses, the cash paid for expenses

is affected by

(1) whether the expense was prepaid, and

(2) whether the expense was accrued.

Cash Paid for

Expenses = Expenses

+ Increase in

prepaid expenses - Decrease in

prepaid expenses

+ Decrease in accrued liabilities _-_Increase_in

accrued liabilities

{

Direct Method

(66)

Now, let’s

prepare a

direct

method

Statement of

Cash Flows for

(67)

Grate Big Company

Comparative Balance Sheets - Assets

December 31,

2002

2003

Cash

$

60,000

$

70,370

Accounts Receivable, net

27,000

35,000

Inventory

230,000

200,000

Trading Securities

-

25,000

Equipment, net

500,000

425,000

Investment in Tiny Co.

100,000

130,000

Total Assets

$

917,000

$

885,370

(68)

Grate Big Company

Comparative Balance Sheets - Liabilities and Equity

December 31,

2002 2003

Accounts Payable $ 15,000 $ 12,000 Salaries Payable 7,000 5,000 Interest Payable 11,950 7,350 Income Tax Payable 20,000 17,000 Notes Payable, Bob's Bank 70,000 60,000

Bonds Payable 250,000 150,000

Premium on Bonds Payable 5,000 4,000

Common Stock 450,000 500,000

Retained Earnings 88,050 130,020 Total Liabilities and Equity $ 917,000 $ 885,370

(69)

Grate Big Company

Income Statement Amounts

For the Year Ending December 31, 2003

Sales Revenues $ 800,000

Cost of Goods Sold 560,000

Depreciation Expense 5,000

Interest Expense 28,050

Income Tax Expense 27,980

Salary Expense 80,000

Other Expenses 71,000

Amortization of Bond Premium 1,000 Gain on Sale of Equipment 3,000

Extraordinary Loss 30,000

Equity in Investee Income 40,000

Net Income $ 41,970

(70)

Direct Method - Example

Additional Information



Trading Securities were purchased during 2003 at

a cost of $25,000.



Equipment with a book value of $40,000 was sold

during the year for $43,000.



Equipment with a book value of $30,000 was

destroyed during a freak flood in 2003. There

was no insurance.



Grate Big holds a 25% investment in Tiny Co. and

accounts for it using the Equity Method.

Additional Information



Trading Securities were purchased during 2003 at

a cost of $25,000.



Equipment with a book value of $40,000 was sold

during the year for $43,000.



Equipment with a book value of $30,000 was

destroyed during a freak flood in 2003. There

was no insurance.



Grate Big holds a 25% investment in Tiny Co. and

(71)

Direct Method - Example

Additional Information



Grate Big’s tax rate is 40%.



The Notes Payable to Bob’s Bank carry a 12%

rate. The payments are due on the first day of

each month.



The Bonds Payable carry a 9% rate. Interest is

payable semiannually on July 1 & Jan. 1.



Grate Big sold stock during 2001 for $50,000.



Grate Big received $10,000 dividends from Tiny

Co.

Additional Information



Grate Big’s tax rate is 40%.



The Notes Payable to Bob’s Bank carry a 12%

rate. The payments are due on the first day of

each month.



The Bonds Payable carry a 9% rate. Interest is

payable semiannually on July 1 & Jan. 1.



Grate Big sold stock during 2001 for $50,000.



Grate Big received $10,000 dividends from Tiny

(72)

Salary Expense

$

80,000

₂₀₀₀

Add: Decrease in Salary Payable

2,000

Cash Paid to Employees

$

82,000

Salary Expense

$

80,000

₂₀₀₀

Add: Decrease in Salary Payable

2,000

Cash Paid to Employees

$

82,000

Sales Revenues

$

800,000

Less: Increase in A/R

(8,000)

Cash Received from Customers

$

792,000

Sales Revenues

$

800,000

Less: Increase in A/R

(8,000)

Cash Received from Customers

$

792,000

Direct Method - Example

Cash Received from Customers

(73)

Interest Expense

$

28,050

₂₀₀₀

Add: Decrease in Interest Payable

4,600

Cash Paid for Interest

$

32,650

Interest Expense

$

28,050

₂₀₀₀

Add: Decrease in Interest Payable

4,600

Cash Paid for Interest

$

32,650

Cost of Goods Sold $ 560,000 Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000) Cash Paid for Inventory $ 533,000

Cost of Goods Sold $ 560,000

Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000) Cash Paid for Inventory $ 533,000

Direct Method - Example

Cash Paid for Inventory

(74)

Income Tax Expense

$

27,980

₂₀₀₀

Add: Decrease in Taxes Payable

3,000

Cash Paid for Taxes

$

30,980

Income Tax Expense

$

27,980

₂₀₀₀

Add: Decrease in Taxes Payable

3,000

Cash Paid for Taxes

$

30,980

Direct Method - Example

Cash Paid for Taxes

(75)

Direct Method - Example

(76)

Grate Big Company Statement of Cash Flows

For the Period Ending December 31, 2003

I. Operating Cash Flows $ 27,370

II. Investing Cash Flows

Proceeds from sale of Equipment 43,000 III. Financing Cash Flows

Proceeds from sale of Stock $ 50,000 Principal paid on Bonds (100,000)

Principal paid on Notes (10,000) (60,000)

Net Cash Flows for the Period $ 10,370

Add: Beginning Cash Balance 60,000

Ending Cash Balance $ 70,370

Equipment with a book value of $40,000 was sold for $43,000.

Notes Payable decreased from $70,000 to $60,000 during 2003.

Bonds Payable decreased from $250,000 to $150,000 during 2003.

(77)

Grate Big Company Statement of Cash Flows

For the Period Ending December 31, 2003

I. Operating Cash Flows $ 27,370

II. Investing Cash Flows

Proceeds from sale of Equipment 43,000 III. Financing Cash Flows

Proceeds from sale of Stock $ 50,000 Principal paid on Bonds (100,000)

Principal paid on Notes (10,000) (60,000)

Net Cash Flows for the Period $ 10,370

Add: Beginning Cash Balance 60,000

Ending Cash Balance $ 70,370

Notice that the Ending

Cash Balance per the

Statement of Cash Flows

agrees with the 12/31/03

Cash balance on the

Balance Sheet.

Notice that the Ending

Cash Balance per the

Statement of Cash Flows

agrees with the 12/31/03

Cash balance on the

(78)

Let’s look at the

Indirect Method

that is used by

over 97% of all

(79)

Net Income

Net Income Cash Flows from

Operating Activities

Cash Flows from Operating Activities

Indirect Method

Changes in current assets and current

liabilities as shown on the following table.

Changes in current assets and current

liabilities as shown on the following table.

+ Losses and

- Gains

+ Losses and

- Gains

_{expenses such as}

+ Noncash

depreciation and

amortization.

+ Noncash

expenses such as

depreciation and

(80)

Use this table when adjusting Net Income

to Operating Cash Flows.

(81)

Let’s prepare a

complete

Statement of

Cash Flows

using the

(82)

Joe’s Place has prepared the Balance

Sheet as of March 31, 2003, and March

31, 2002. The Income Statement for the

year ended 3/31/03 has also been

prepared. Joe needs help preparing the

Statement of Cash Flows.

Joe’s Place has prepared the Balance

Sheet as of March 31, 2003, and March

31, 2002. The Income Statement for the

year ended 3/31/03 has also been

prepared. Joe needs help preparing the

Statement of Cash Flows.

Joe’s

Place

(83)

Joe's Place

Income Statement

For the Year Ending 3/31/03

Revenues

$

727,000

Operating Expenses

(748,000)

Depreciation Expense

(6,000)

Gain on Sale of Land

8,000

Net Loss

$

(19,000)

Joe's Place

Income Statement

For the Year Ending 3/31/03

Revenues

$

727,000

Operating Expenses

(748,000)

Depreciation Expense

(6,000)

Gain on Sale of Land

8,000

Net Loss

$

(19,000)

The $8,000 gain was the

result of selling land

costing $32,000 for $40,000

during the period.

The $8,000 gain was the

result of selling land

costing $32,000 for $40,000

during the period.

(84)

(85)

Joe’s Place issued $50,000

of no par common stock to

settle the $50,000 note

payable.

Joe’s Place issued $50,000

of no par common stock to

settle the $50,000 note

payable.

(86)

(87)

With the indirect method, always start with the net income or net loss for the period.

(88)

(89)

Accounts receivable decreased. 3/31/03 3/31/02

$23,000 - $40,000 = $(17,000)

Accounts receivable decreased. 3/31/03 3/31/02

$23,000 - $40,000 = $(17,000)

(90)

Accounts payable increased. 3/31/03 3/31/02

$38,000 - $27,000 = $11,000

Accounts payable increased. 3/31/03 3/31/02

$38,000 - $27,000 = $11,000

(91)

Inventory increased. 3/31/03 3/31/02

$350,000 - $300,000 = $50,000

Inventory increased. 3/31/03 3/31/02

$350,000 - $300,000 = $50,000

(92)

Salaries payable decreased. 3/31/03 3/31/02

$ 9,000 - $14,000 = $(5,000)

Salaries payable decreased. 3/31/03 3/31/02

$ 9,000 - $14,000 = $(5,000)

(93)

Add back non-cash expenses.

(94)

Subtract gains.

(95)

The operating cash flows amount comes from the schedule just prepared. The operating cash flows

amount comes from the schedule just prepared.

(96)

Land originally costing $32,000 was sold for $40,000.

(97)

Dividends of $20,000 were paid to owners during the year.

(98)

Compute the net change in cash for the period.

(99)

Complete the Statement of Cash Flows by reconciling beginning cash to ending cash.

(100)

Note that the ending cash amount ties back to the Joe’s Place Balance Sheet at

3/31/03.

Note that the ending cash amount ties back to the Joe’s Place Balance Sheet at

3/31/03.

(101)

In addition, on the face

of the statement or in a

supplemental

schedule, disclose the

$50,000 noncash

financing activity.

In addition, on the face

of the statement or in a

supplemental

schedule,

disclose

the

$50,000

noncash

financing activity

.

(102)

In addition, cash

interest payments and

cash tax payments

must also be disclosed

separately.

In addition, cash

interest payments and

cash tax payments

must also be disclosed

separately.

(103)

Cash Budgets are used by management to plan and forecast future cash flows.

F o r c e m a n a g e m e n t t o c o o r d i n a t e a c t i v i t i e s .

P r o v i d e m a n a g e r s w i t h a d v a n c e n o t i c e o f a v a i l a b l e r e s o u r c e s .

P r o v i d e t a r g e t s u s e f u l i n e v a l u a t i n g p e r f o r m a n c e .

P r o v i d e a d v a n c e w a r n i n g s o f p o t e n t i a l c a s h s h o r t a g e s .

A C a s h B u d g e t c a n b e u s e d t o :

(104)



Increase collection of accounts

receivables.



Keep inventory low.



Delay payment of liabilities.



Plan timing of major expenditures.



Invest idle cash.



Increase collection of accounts

receivables.



Keep inventory low.



Delay payment of liabilities.



Plan timing of major expenditures.



Invest idle cash.

(105)

Cash Budgeting

Cash Budget

May June July August Beginning cash balance $ 27,500 $ 15,000 $ - $ -Add: Cash receipts 3,500

Total available cash $ 31,000

Less: Cash disbursements 16,000 Excess (deficiency) of

available cash over cash

disbursements $ 15,000 Financing needed

Financing repayments -Ending cash balance $ 15,000

Cash Budget

May June July August

Beginning cash balance $ 27,500 $ 15,000 $ - $ -Add: Cash receipts 3,500

Total available cash $ 31,000

Less: Cash disbursements 16,000 Excess (deficiency) of

disbursements $ 15,000 Financing needed

Financing repayments -Ending cash balance $ 15,000

The ending cash balance of one month becomes the beginning cash balance of the next month.

(106)

Cash Budgeting

Cash Budget

May June July August Beginning cash balance $ 27,500 $ 15,000 $ 10,000 $ 10,000 Add: Cash receipts 3,500 2,000 9,000 14,000 Total available cash $ 31,000 $ 17,000 $ 19,000 $ 24,000

Less: Cash disbursements 16,000 18,000 6,000 8,000 Excess (deficiency) of

disbursements $ 15,000 $ (1,000) $ 13,000 $ 16,000 Financing needed 11,000 - -Financing repayments - - 3,000 6,000 Ending cash balance $ 15,000 $ 10,000 $ 10,000 $ 10,000

Cash Budget

May June July August

Beginning cash balance $ 27,500 $ 15,000 $ 10,000 $ 10,000 Add: Cash receipts 3,500 2,000 9,000 14,000 Total available cash $ 31,000 $ 17,000 $ 19,000 $ 24,000

Less: Cash disbursements 16,000 18,000 6,000 8,000 Excess (deficiency) of

disbursements $ 15,000 $ (1,000) $ 13,000 $ 16,000 Financing needed 11,000 - -Financing repayments - - 3,000 6,000 Ending cash balance $ 15,000 $ 10,000 $ 10,000 $ 10,000

Financing is needed in June because the company must maintain a minimum cash balance of $10,000.