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PDF_PP_Slides_03_(APSCW_-_F2009)

PDF_PP_Slides_03_(APSCW_-_F2009) - Handout 03 p 1...

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Unformatted text preview: Handout 03, p. 1 Objectives: Handout 03 1) 2) 3) 4) Identify the major classifications of cash flows and what types of items are reported in these classifications. Differentiate between net income and net cash flows from operating activities. Contrast the direct and indirect methods of calculating net cash flows from operating activities. Calculate net cash flows from operating, investing, and financing activities given appropriate information. Handout 03, p. 1 The Statement of Cash Flows The statement of cash flows explains how cash has been The provided and used during an accounting period. This information enables users to better understand This changes in the financial position (i.e., balance sheet) during the year. The sources and uses of cash are classified into 3 categories: The – Operating – Investing – Financing 1 Handout 03, p. 2 The Statement of Cash Flows Definition of Cash Cash Cash includes currency on hand, demand deposits with financial institutions, and other kinds of accounts that have the general characteristics of demand deposits (i.e., the customer may deposit or withdraw funds at any time without prior notice or penalty). Cash Cash equivalents are highly liquid, short‐term investments that are readily convertible to known amounts of cash and so near maturity that they present insignificant risk of changes in value due to changes in interest rates. – – – – Treasury bills Commercial paper Certificates of deposit Other instruments with maturity of no more than three months at the time of purchase and minimal credit risk. CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) July 30, 2005 Years Ended July 31, 2004 July 26, 2003 Handout 03, p. 3 Handout 03, p. 4 $ 4,401 567 1,199 244 19 205 552 537 3 (155) (488) (538) (42) (159) 54 260 (7) 688 (378) 6,962 $ 3,578 — 1,463 128 (59) 70 (14) 132 4 520 (125) (17) (61) 79 35 (125) 104 (84) (309) 5,319 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change, net of tax Depreciation and amortization Stock-based compensation related to acquisitions and investments Provision for doubtful accounts Provision for inventory Deferred income taxes Tax benefits from employee stock option plans In-process research and development Net (gains) losses and impairment charges on investments Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable Inventories Prepaid expenses and other current assets Lease receivables, net Accounts payable Income taxes payable Accrued compensation Deferred revenue Other accrued liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of short-term investments Proceeds from sales and maturities of short-term investments Purchases of investments Proceeds from sales and maturities of investments Acquisition of property and equipment Acquisition of businesses, net of cash and cash equivalents Change in investments in privately held companies Purchase of minorit y interest of Cisco S ystems, K .K. (Japan) Other Net cash provided by (used in) investing activities Cash flows from financing activities: Issuance of common stock Repurchase of common stock Other Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of fiscal year Cash and cash equivalents, end of fiscal year $ 5,741 — 1,009 165 — 221 55 35 26 (95) (373) (305) (58) (163) 62 947 (154) 541 (86) 7,568 (5,483) 10,465 (14,831) 14,165 (692) (911) (171) (34 (34) 106 2,614 (12,206) 13,570 (20,848) 20,757 (613) (104) (13) (71 ) 153 625 (9,396) 10,319 (18,063) 12,497 (717) 33 (223) (59) 94 (5,515) 1,087 (10,235) (14) (9,162) 1,020 3,722 $ 4,742 $ 1,257 (9,080) 33 (7,790) (203) 3,925 3,722 $ 578 (5,984) 43 (5,363) (5,559) 9,484 3,925 2 Handout 03, p. 4 The Statement of Cash Flows Cash Flows from Operating Activities Cash inflows and outflows from transactions and events that affect operating income (in other words, OCF includes the cash counterparts of all revenues and expenses reported in the income statement). OCF is calculated using the income statement and the current asset/liability sections of the balance sheet. Cash Inflows Collections from Customers Receipt of Interest Receipt of Dividends Other Recurring Cash Receipts Cash Outflows Payments to Suppliers Payments to Employees Payments of Taxes Payments of Interest Payments of Other Expenses Handout 03, p. 4 The Statement of Cash Flows Cash Flows from Investing Activities Cash inflows and outflows from loaning money to others, investing in securities, or in long‐term assets (e.g., equipment) used to produce goods and services. ICF is calculated using the long‐term asset section of the balance sheet. Cash Inflows Sale of Fixed Assets Sale of Intangible Assets Receipt of Loan Repayment Sale of Investment Securities Sale of Businesses Cash Outflows Purchase of Fixed Assets Purchase of Intangible Assets Originating Loans Purchase of Investment Securities Purchase of Businesses 3 Handout 03, p. 4 The Statement of Cash Flows Cash Flows from Financing Activities Cash inflows and outflows from borrowing money, selling stock, and paying dividends. FCF is calculated using the long‐term liability and equity sections of the balance sheet. Cash Inflows Loans Issuing Bonds and Notes Issuing Stock Cash Outflows Principal Repayments Acquiring Treasury Stock Paying Dividends Handout 03, p. 5 The Statement of Cash Flows Preparation and Presentation The information needed to prepare the SCF usually comes from 3 sources: Comparative Balance Sheets: Changes in assets, liabilities, and equity during a period. Income Statements: Information needed to determine OCF. Selected Transaction Data: Data from the general ledger can provide additional information about the sources and uses of cash. 4 Handout 03, p. 5 The Statement of Cash Flows Preparation and Presentation Preparing the SCF involves 3 steps: Determine the Net Change in Cash: Examine the beginning and ending balance of cash from the comparative BS. Determine OCF: Analyze the income statement, current assets and current liabilities from the comparative BS, and selected transaction data. Determine ICF and FCF: Examine long‐term assets (long‐term liabilities and equity) from the comparative BS and selected transaction data to determine ICF (FCF) Handout 03, p. 5 The Statement of Cash Flows Cash Flows from Operating Activities Why calculate OCF? Revenue recognition is guided by the revenue recognition principle (not cash receipts) Expense recognition is guided by the matching principle (not cash payments). Therefore, accrual based net income does not equal operating cash flow. To arrive at operating cash flow, it is necessary to report revenues and expenses on a cash basis. This is done by eliminating the effects of noncash income statement transactions. 5 Handout 03, p. 5 The Statement of Cash Flows Cash Flows from Operating Activities Presented using either the direct or the indirect approach. – Direct approach explicitly reports each cash inflow/outflow – Indirect approach starts with net income and adjusts for noncash expenses, gains and losses, and changes in current assets and liabilities. Companies that use the direct approach are required to disclose the indirect approach in a supplementary schedule. Most companies (more than 90%) use the indirect approach. In contrast, the investing and financing sections of the cash flow statement are always presented directly. Handout 03, pp. 5, 6 The Statement of Cash Flows The Indirect Approach to Presenting OCF The indirect approach starts with net income and reconciles it to OCF. Under accrual accounting: Net Income = Revenues – Expenses + Gains – Losses To reconcile net income to OCF, we need to make the following adjustments: – Deduct gains from net income and add losses back to net income – Adjust net income for the difference between revenues and cash collections – Adjust net income for the difference between expenses and cash payments 6 Handout 03, p. 6 The Statement of Cash Flows The Indirect Approach to Presenting OCF It is important to understand that most income statement accounts have a corresponding current asset account and/or current liability account. For example: IS Sales COGS Salary Exp Rent Exp Current Asset Accounts Receivable Inventory Prepaid Salaries Prepaid Rent Current Liability Deferred Revenue Accounts Payable Salaries Payable Rent Payable The relationships among these accounts can help us calculate the cash The counterparts of revenues and expenses. Handout 03, p. 6 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts To adjust net income for the difference between operating revenue and collections from customers, we need to: – Deduct the change in gross accounts receivable – Deduct net write‐offs of accounts receivable during the period Net write‐offs = [Bad Debt Expense – (Δ in Allowance for UA)] – Add the change in deferred revenue – Conceptually, we are deducting the change in the associated current asset (accounts receivable) and adding the change in the associated current liability (deferred revenue). 7 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why deduct the change in gross AR from net income? – AR reflects non‐cash sales (+) AR (–) Sales Cash Collections from from Customers – AR Increase: – AR Decrease: Sales Revenue > Cash Collections (Deduct from NI). Sales Revenue < Cash Collections (Add to NI). Handout 03, p. 7 The Statement of Cash Flows The Adjusting NI for the Difference between Revenues and Cash Receipts Why deduct the change in gross AR from net income? – AR reflects non‐cash sales Net Income Reconciliation Adjustments: Increase in AR Cash Flow from Operations – AR Increase = $5,000 8 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why deduct the change in gross AR from net income? – AR reflects non‐cash sales Net Income Reconciliation Adjustments: Decrease in AR Cash Flow from Operations – AR Decrease = $5,000 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why add the change in deferred revenue to net income? – Deferred revenue reflects cash received for sales are not included in NI (–) (+) Deferred Revenue Cash Collections from Customers Sales – DR Increase: – DR Decrease: Cash Collections > Sales Revenue (Add to NI). Cash Collections < Sales Revenue (Deduct from NI). 9 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why add the change in deferred revenue to net income? – Deferred revenue reflects cash received for sales are not included in NI Net Income Reconciliation Adjustments: Increase in Deferred Revenue Cash Flow from Operations – Deferred Revenue Increase = $5,000 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why add the change in deferred revenue to net income? – Deferred revenue reflects cash received for sales are not included in NI Net Income Reconciliation Adjustments: Decrease in Deferred Revenue Cash Flow from Operations – Deferred Revenue Decrease = $5,000 10 Handout 03, p. 7 The Statement of Cash Flows Adjusting NI for the Difference between Revenues and Cash Receipts Why deduct net write‐offs? – Net write‐offs represent credit sales that will never be collected (–) (+) Allowance for UA Net writeoffs offs Bad Debt Expense Handout 03, p. 7 The Statement of Cash Flows The A Note on the Presentation of OCF Using the Indirect Method Instead of (1) deducting the change in AR, (2) deducting net write‐offs, and (3) adding the bad debt expense, most firms simply deduct the change in net AR (AR minus the allowance for uncollectable accounts). This gives you the same result. Proof: Net AR = Gross AR – Allowance for Uncollectable Accounts ΔNet AR = ΔGross AR – ΔAllowance for Uncollectable Accounts ΔAllowance = Bad Debt Expense – Net‐write Offs ΔNet AR = ΔGross AR – Bad Debt Expense + Net‐write Offs –ΔNet AR = –ΔGross AR + Bad Debt Expense – Net‐write Offs 11 Handout 03, p. 8 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments There are generally two types of expenses: – Non‐cash expenses (e.g. depreciation, amortization, and bad debt expense). – Expenses that may be different from the related cash payment during the period (cost of goods sold, salaries expense, rent expense, interest expense, etc.). To adjust net income for non‐cash expenses, we simply add the expense back to net income. Handout 03, p. 8 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold For merchandising firms, we need to add the difference between cost of goods sold and payments to merchandise suppliers during the period. Thus, we adjust net income as follows: – Deduct the change in inventory (to adjust for the difference between COGS and purchases). – Add the change in accounts payable (to adjust for the difference between purchases and payments to suppliers). – Conceptually, we are deducting the change in the associated current asset (inventory) and adding the change in the associated current liability (accounts payable). 12 Handout 03, pp. 8, 9 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why deduct the change in inventory from net income? – To adjust for the difference between COGS and purchases of inventory. (+) Inventory Purchases of Inventory (–) COGS – Inventory Increase: – Inventory Decrease: Inventory Purchases > COGS (Deduct from NI). Inventory Purchases < COGS (Add to NI). The Statement of Cash Flows The Handout 03, pp. 8, 9 Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why deduct the change in inventory from net income? – To adjust for the difference between COGS and purchases of inventory. Net Income Reconciliation Adjustments: Increase in Inventory Cash Flow from Operations – Inventory Increase = $5,000 13 The Statement of Cash Flows Handout 03, pp. 8, 9 Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why deduct the change in inventory from net income? – To adjust for the difference between COGS and purchases of inventory. Net Income Reconciliation Adjustments: Decrease in Inventory Cash Flow from Operations – Inventory Decrease = $5,000 Handout 03, p. 9 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why add the change in AP to net income? – To adjust for the difference between purchases and payments to suppliers. (–) AP Payments to to Suppliers (+) Purchases of Inventory – AP Increase: – AP Decrease: Inventory Purchases > Cash Payments (Add to NI). Inventory Purchases < Cash Payments (Deduct from NI). 14 The Statement of Cash Flows Handout 03, p. 9 Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why add the change in AP to net income? – To adjust for the difference between purchases and payments to suppliers. Net Income Reconciliation Adjustments: Increase in Inventory Increase in AP Cash Flow from Operations – AP Increase = $5,000 The Statement of Cash Flows Handout 03, p. 9 Adjusting NI for the Difference between Expenses and Cash Payments Cost of Goods Sold Why add the change in AP to net income? – To adjust for the difference between purchases and payments to suppliers. Net Income Reconciliation Adjustments: Decrease in AP Cash Flow from Operations – AP Decrease = $5,000 15 Handout 03, p. 9 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Expenses Other than Non‐cash Expenses and Cost of Goods Sold: For each expense, we need to add the difference between the expense and the payment for the expense during the period. Thus, we adjust net income by: – Deducting the change in prepaid expense (rent, insurance, etc.) – Adding the change in expense payable (salaries, interest, etc.). – Conceptually, we are deducting the change in the associated current asset (prepaid expense) and adding the change in the associated current liability (expense payable). Handout 03, p. 9 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Why deduct the change in prepaid expenses from net income? – Prepaid expenses have been paid but not recognized as an expense (+) (–) Prepaid Expenses Cash Payments Expense – PPD Increase: – PPDs Decrease: Cash Payments > Expenses (Deduct from NI). Cash Payments < Expenses (Add to NI). 16 The Statement of Cash Flows Handout 03, p. 9 Adjusting NI for the Difference between Expenses and Cash Payments Why deduct the change in prepaid expenses from net income? – Prepaid expenses have been paid but not recognized as an expense. Net Income Reconciliation Adjustments: Increase in PPD Expense Cash Flow from Operations – PPD Expense Increase = $5,000 The Statement of Cash Flows Handout 03, p. 9 Adjusting NI for the Difference between Expenses and Cash Payments Why deduct the change in prepaid expenses from net income? – Prepaid expenses have been paid but not recognized as an expense. Net Income Reconciliation Adjustments: Decrease in PPD Expense Cash Flow from Operations – PPD Expense Decrease = $5,000 17 Handout 03, pp. 9, 10 The Statement of Cash Flows Adjusting NI for the Difference between Expenses and Cash Payments Why add the change in payables to net income? – Payables represent non‐cash expenses (–) (+) Expense Payable Cash Payments Expense – Payable Decrease: – Payables Increase: Cash Payments > Expenses (Deduct from NI). Cash Payments < Expenses (Add to NI). The Statement of Cash Flows The Handout 03, pp. 9, 10 Adjusting NI for the Difference between Expenses and Cash Payments Why deduct the change in payables from net income? – Payables represent non‐cash expenses. Net Income Reconciliation Adjustments: Increase in Payable Cash Flow from Operations – Payable Increase = $5,000 18 The Statement of Cash Flows Handout 03, pp. 9, 10 Adjusting NI for the Difference between Expenses and Cash Payments Why deduct the change in payables from net income? – Payables represent non‐cash expenses. Net Income Reconciliation Adjustments: Decrease in Payable Cash Flow from Operations – Payable Decrease = $5,000 Handout 03, p. 10 The Statement of Cash Flows The Indirect Approach to Presenting OCF The indirect approach starts with net income and adjusts for noncash expenses, gains and losses, and changes in current assets and liabilities. Specifically: Cash Flows from Operating Activities: Net Income Adjustments to reconcile net income to cash from operations: Gain on… Loss on … Noncash expenses Decrease in current asset Increase in current liability Increase in current asset Decrease in current liability $ XXX ( XXX) XXX XXX XXX XXX ( XXX) ( XXX) $ XXX 19 Handout 03, p. 10 The Statement of Cash Flows The Indirect Approach to Presenting OCF The indirect approach starts with net income and adjusts for noncash expenses, gains and losses, and changes in current assets and liabilities. Specifically: – Deduct gains and add losses – Add noncash expenses (i.e., depreciation, amortization, bad debt, asset impairment, deferred taxes) – Add decreases in current assets and increases in current liabilities – Deduct increases in current assets and decreases in current liabilities YYZ Corporation Balance Sheets Assets Cash Accounts receivable Inventory Prepaid insurance Plant assets Accumulated depreciation Total assets Liabilities and Stockholders’ Equity Accounts payable Wages payable Taxes payable Dividends payable B...
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