Financial Accounting II

Chapter 16

Reporting the Statement

of Cash Flow

Prepared By S.Mujtaba Hashim

Financial Accounting II ACC113

Why cash flow?

1- To report all cash receipt (Inflow) and cash payment (Outflow) during the period.
2- It shows operating, Investing and Financing activities.

 Importance of cash flow :

1- how he company obtain cash?

2- where the company spent cash?
3- The change in Cash purchase.
4- How did the business fund its operation?
5- Dose the business has cash to pay its debt?
6- did they make any Dividend payment?
7- Did they borrow and repay any loans?

 Measurement of cash flow :

1- Cash.
2- Cash Equivalents:
a) Short-term, highly liquid investments.
b) convertible into cash.
c) sufficiently close to maturity so that market value is unaffected by interest rate
changes.

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Classification of cash flow:

1- Operating activities :

A- Inflow:
 Receipts from customers.
 Cash dividend received (dividend revenue).
 Interest from borrowers.

B- Outflow:
 Salaries and wages.
 Payment to suppliers.
 Taxes and fines.
 Interest paid to lenders.

2- Investment Activities: (Long-term Assets)

A- Inflow:
 Selling long-term Assets.
 Selling equity investment.
 Collecting principle on loan.

B- Outflow:
 Purchasing long-term Assets.
 Purchasing equity investment.
 Purchasing debt Investment.

3- Financing activities :
A- Inflow:
 Issuing its own equity security.
 Issuing Bonds and Notes.
 Issuing long-term liabilities.
 Contributions by owners.

B- Outflow:
 Pay dividend.
 Purchasing treasury stock.
 Repaying cash loans.
 Withdrawals.

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4- Non-Cash Investing and Financing activities :

 Retirement of debt by issuing equity stock.

 Conversion of preferred stock to common stock.
 Lease of assets in a capital lease transaction.
 Purchase of long-term assets by issuing note or bond.
 Exchange of noncash assets for other noncash assets.
 Exchange of noncash assets by issuing equity or debt.
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What you need to do the cash flow?

1- Two balance sheets (Two rows years).

2- on Income statement (current year).
3-Additional Information (current year).

- Format of cash flows:

1- Direct method.
2- Indirect method.

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Financial Accounting II ACC113

Net Income

Adjustment to reconcile net income to net cash from activities:

1- Cash flow from Operating activities:

* Increase / decrease in current assets: (opposite sign)
- Account receivable.
- Merchandise inventory.
- Prepaid expense.
* Increase / decrease in current liabilities: (follow sign)
- Account payable.
- Interest payable.
- Taxes payable.
* Depreciation expense. (always positive)
* Any gain or loss. (Opposite sign)
Net cash from operating activities.

2- Cash flow from Investment activities:

- Purchase plant assets.
- Purchase long-term investment. Purchases negative (-)
- Sale plant assets. Sales positive (+)
- Sale long-term investment.
Net cash from investing activities.

3- Cash flow from financing activities:

- Paid to retire notes / bonds.
- Dividend payment. Payment negative (-)
- Issuing common stock.
Issuing positive (+)
- Issuing bonds or notes.
Net cash from financing activities.
= Net increase/decrease in cash
+ Cash balance from Prior year
= Cash balance at current year

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Example : Prepare the statement of cash flows for Genesis. Shown bellow December 31, 2018
and 2019, balance sheets of Genesis along with its 2019 income statement.

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Financial Accounting II ACC113

Additional information for 2019:

a. The accounts payable balances result from inventory purchases.

b. Purchased $60,000 in plant assets by issuing $60,000 of notes payable.
c. Sold plant assets with a book value of $8,000 (original cost of $20,000 and
accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss.
d. Received $15,000 cash from issuing 3,000 shares of common stock.
e. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain.
f. Declared and paid cash dividends of $14,000.

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Financial Accounting II ACC113

GENSIS
Statement of Cash Flows
For Year Ended December 31, 2019
Cash flows from operating activities
Net income $ 38,000
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in accounts receivable (20,000)
Increase in inventory (14,000)
Increase in prepaid expenses (2,000)
Decrease in accounts payable (5,000)
Decrease in interest payable (1,000)
Increase in income taxes payable 10,000
Depreciation expense 24,000
Loss on sale of plant assets 6,000
Gain of retirement of bonds (16,000)
Net cash provided by operating activities $20,000
Cash flows from Investing activities :
Cash received from sale of plant assets 2,000
Net cash provided by Investing activities $2,000
Cash flows from Financing activities :
Cash received from Issuing Stock 15,000
Cash paid to retire notes (18,000)
Cash paid for dividends (14,000)
Net cash used by financing activities ($17,000)
Net increase in cash $5,000
Cash balance at prior year end 12,000
Cash balance at current year end $17,000

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Financial Accounting II ACC113

Ex1: Comparative balance sheet for Manama Company appears below:

Dec.31,2016 Dec.31,2015

Assets:
Cash $11,500 $5,000
Accounts Receivable 9,000 7,000
Inventory 13,500 9,000
Prepaid expense 3,000 4,500
Long-term investments -0- 9,000
Equipment 30,000 16,000
Accumulated depreciation-equipment (9,000) (7,000)
Total Assets $58,000 $43,500
Liabilities & stockholder’s Equity
Accounts payable $8,500 $3,500
Bonds payable (long-term) 18,500 23,500
Common Stock 20,000 11,500
Retained Earnings 11,000 5,000
Total Liabilities & stockholder’s Equity $58,000 $43,500

Additional information:
- Net income for the year ending December 31,2016 was $12,000.

- Received cash for the sale of long-term investment that had a cost of $9,000,
yielding a $1,000 loss.

- Depreciation expense for 2016 was $2,000.

- All sale and purchases of inventory are on account (or credit).

- The only change affecting retained earnings are net income and cash dividends
paid.

Required:
Prepare a statement of cash flows for the year ended December 31,2016, using the
indirect method.

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Financial Accounting II ACC113

Manama Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2016

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Financial Accounting II ACC113

Ex2: The Comparative balance sheets for Samsung Company appear below:

SAMSUNG COMPANY
Comparative balance sheet

Dec.31,2012 Dec.31,2011

Assets:
Cash $27,000 $12,000
Accounts Receivable 18,000 14,000
Prepaid expense 6,000 9,000
Inventory 27,000 18,000
Long-term investments -0- 18,000
Equipment 62,000 30,000
Accumulated depreciation-equipment (20,000) (14,000)
Total Assets $120,000 $87,000
Liabilities & stockholder’s Equity
Accounts payable $19,000 $9,000
Bonds payable (long-term) 35,000 43,000
Common Stock 40,000 25,000
Retained Earnings 26,000 10,000
Total Liabilities & stockholder’s Equity $120,000 $87,000

Additional information:
1- Net income for the year ending December 31,2012 was $40,000.
2- Cash dividends of $24,000 were declared and paid during 2012.
3- Long-term investment that had a cost of $18,000 were sold for a $14,000 cash.
4- Any purchase or sales transactions related for equipment acquired in 2012 are for
cash.

Required:
Prepare a statement of cash flows for the year ended December 31,2012, using the
indirect method

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Financial Accounting II ACC113

SAMSUNG Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2012

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Financial Accounting II ACC113
Ex 3 : Use the following financial statements and additional information to (1) prepare
a statement of cash flows for the year ended June 30, 2011, using the indirect method.

Additional Information
a. A $30,000 note payable is retired at its $30,000 carrying (book) value in exchange for
cash.
b. The only changes affecting retained earnings are net income and cash dividends
paid.
c. New equipment is acquired for $58,600 cash.
d. Received $10,000 cash for the sale of equipment that had cost $48,600, yielding a
$2,000 gain.
e. Prepaid Expenses and Wages Payable relate to Other Expenses on the income
statement.
f. All purchases and sales of merchandise inventory are on credit.

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Financial Accounting II ACC113

GECKO INC.
Statement of Cash Flows
For Year Ended June 30, 2011

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Financial Accounting II ACC113

Ex4 : The comparative balance sheets for Bapco company appear below:

Bapco COMPANY
Comparative Balance Sheets
Dec.31.2018 Dec.31.2017
Assets:
Cash .………………………………………………... $ 39,000 $ 6,500
Account Receivable ………………………….. 10,000 9,000
Inventory …………………………………………. 7000 11,500
Prepaid expense ………………………………. 3,000 5,500
Land ………………………….……………………... -0- 9,000
Equipment ………………………………………. 32,500 30,000
Accumulated depreciation ………………. (28,000) (26,000)
Total Assets $63,500 $34,000
Liabilities and stockholders’ Equity:
Accounts payable.……………………………… $ 11,000 $ 6,000
Bonds payable ………………………..…………. 20,000 25,000
Common stock …………………………………. $45,500 37,000
Retained Earnings …………………….………. 24,500 15,000
Total liabilities and equity $101,000 $83,000

Additional information:
(1) Net income for the year ending December 31, 2018 was 14,500.
(2) Cash dividends of $5,000 were declared and paid during 2018.
(3) Land sold for 8,000 cash and had a 1,000 loss.
(4) Any purchases or sales transactions related for equipment acquired in 2018 are for cash.

Required:
Prepare a statement of cash flows for the year ended December 31, 2018, using
indirect method.

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Financial Accounting II ACC113

Bapco Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2018

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Financial Accounting II ACC113

ANS ex1

Manama Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2016
Cash flows from operating activities
Net income $ 12,000
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in accounts receivable (2,000)
Decrease in prepaid expenses 1,500
Increase in inventory (4,500)
increase in accounts payable 5,000
Depreciation expense 2,000
Loss on sale of long-term investment 1,000
Net cash provided by operating activities $15,000
Cash flows from investing activities :
Sale of long-term investment 8,000
Purchase equipment (14,000)
Net cash used in investing activities (6,000)
Cash flows from financing activities:
Issuance of common stock 8,500
Retirement of bonds payable (5,000)
Payment of cash dividends (5,000 + 12,000 -11,000) (6,000)
Net cash used in financing activities (2,500)
Net increase in cash $ 6,500
Cash balance at beginning of year 5,000
Cash balance at end of year $ 11,500

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ANS ex2

SAMSUNG Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2012
Cash flows from operating activities
Net income $ 40,000
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in accounts receivable (4,000)
Decrease in prepaid expenses 3,000
Increase in inventory (9,000)
Increase in accounts payable 10,000
Depreciation expense 6,000
Loss on sale of long-term investment 4,000
Net cash provided by operating activities $50,000
Cash flows from investing activities :
Sale of long-term investment 14,000
Purchase equipment (32,000)
Net cash used in investing activities (18,000)
Cash flows from financing activities:
Issuance of common stock 15,000
Retirement of bonds payable (8,000)
Payment of cash dividends (24,000)
Net cash used in financing activities (17,000)
Net increase in cash $ 15,000
Cash balance at beginning of year 12,000
Cash balance at end of year $ 27,000

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Financial Accounting II ACC113
ANS ex3
GECKO, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2011
Cash flows from operating activities
Net income $ 86,760
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in accounts receivable (18,000)
Decrease in merchandise inventory 30,000
Increase in prepaid expenses (200)
Decrease in accounts payable (6,000)
Decrease in wages payable (9,000)
Decrease in income taxes payable (1,200)
Depreciation expense 58,600
Gain on sale of plant assets (2,000)
Net cash provided by operating activities $138,960
Cash flows from investing activities :
Cash received from sale of equip. 10,000
Cash paid for equipment (58,600)
Net cash used in investing activities (48,600)
Cash flows from financing activities:
Cash received from stock issuance 50,000
Cash paid to retire notes (30,000)
Cash paid for dividends (69,560)
Net cash used in financing activities (49,560)
Net increase in cash $ 40,800
Cash balance at beginning of year 45,000
Cash balance at end of year $ 85,800

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ANS ex4

Bapco Company
Statement of Cash Flows (Indirect Method)
For Year Ended December 31st, 2018
Cash flows from operating activities
Net income $ 14,500
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in accounts receivable (1,000)
Decrease in prepaid expenses 2,500
Decrease in inventory 4,500
Increase in accounts payable 5,000
Depreciation expense 2,000
Loss on sale of long-term investment 1,000
Net cash provided by operating activities $28,500
Cash flows from investing activities :
Sale of long-term investment 8,000
Purchase equipment (2,500)
Net cash provided by investing activities 5,500
Cash flows from financing activities:
Issuance of common stock 8,500
Retirement of bonds payable (5,000)
Payment of cash dividends (5,000)
Net cash used in financing activities (1,500)
Net increase in cash $ 32,500
Cash balance at beginning of year 6,500
Cash balance at end of year $ 39,000

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