Introduction to Statements of Cash Flows

Transcription

1 Consolidated Statements of Cash Flows Three years ended December 25,1999 (in millions -except per share amounts) Cash and cash equivalents, beginning of year $2,038 $4,102 $4,165 Cash flows provided by (used for) operations: Net income 7,314 6,068 6,945 Adjustments to reconcile net income to net cash provided by (used for) operations Depreciation 3,186 2,807 2,192 Amortization of goodwill and other acquisition-related intangibles Purchased in-process research and development Gains on sales of marketable strategic equity securities (883) (185) (106) Net loss on retirements of property, plant, and equipment Deferred taxes (219) 77 6 Change in assets and liabilities Accounts receivable 153 (38) 285 Inventories (404) Accounts payable 79 (180) 438 Accrued compensation and benefits Income taxes payable 726 (211) 17 Tax benefit from employee stock options Other assets and liabilities (819) (378) Cash flows provided by (used for) investing activities: Additions to property, plant, and equipment (3,403) (3,55 Acquisitions, net of cash received (2,979) Purchases of available-for-sale investments (7,055) ales of available for sale investments 831 es and other changes in available-for-sale investments 7 Cash Flow Statements» Exercises Total adjustments 4,021 2,994 Net cash provided by operating activities 11,335 9,062 for) investing activities Introduction to Statements of Cash Flows C H A P T E R P R I N T C O N T E N T S List of Chapter Exercises Exercise Materials Note: Excel templates and exercise solutions are only found on-line. Go to your Course Map or the URL at the top to locate exercise web pages. You are free to share and customize this work, as long as you attribute G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC

2 Navigating Accounting Exercises Chapter: Statements of Cash Flows Section: What Do I See? Module: What Do I See on Cash Flow Statements? cs.wis.010 Comparing and contrasting common line items on cash flow statements cs.wis.020 Classifying cash flows cs.wis.030 Classifying cash flows (Bischoff Global Sportswear) Section: What s Behind the Numbers? Module: Cash Flow Statements: Basics cs.wbn.bas.010 Analyzing entries' effects on all financial statements (ABC Company) cs.wbn.bas.020 Analyzing entries' effects on SCF reconciliation (Bryan's Health & Fitness and Intel) cs.wbn.bas.030 Analyzing SCF reconciliation adjustments related to customers (Bryan's Health & Fitness, Apple, Microsoft and Intel) cs.wbn.bas.040 Recording entries, creating statements, and identifying entries' financial statement effects (CreativeABCs Company) cs.wbn.bas.050 Creating direct & indirect cash flow statements before & after acquisition (Bryan's Health & Fitness) cs.wbn.bas.060 Determining non-operating effects on working capital accounts (P&G) Module: Statement of Cash Flows (SCF) Entry Map cs.wbn.map.010 Identifying entries financial-statement effects (Bischoff entries and Intel's financials) cs.wbn.map.020 Identifying entries financial-statement effects (Bischoff entries and Daimler's financials) cs.wbn.map.030 Recording entries based on company disclosures and determining their financial-statement effects (Daimler) cs.wbn.map.040 Recording entries based on company disclosures and determining their financial-statement effects (TJX) Section: How Do I Use the Numbers? Module: Analyzing cash flows: Basics cs.hun.acf.010 Interpreting and using cash flow statement information (Mattel) cs.hun.acf.020 Interpreting cash flow statement information (Yum! Brands case Part 1) cs.hun.acf.021 Interpreting and using cash flow statement information (Yum! Brands case Part 2) cs.hun.acf.030 Analyzing cash flow statements and financial performance (Analysis Mini-Case Series); no solution Cash Flow Statements Page 2

3 Cash Flow Statements» What Do I See?» Exercises EXERCISES cs.wis.010 Comparing and contrasting common line items on cash flow statements This exercise compares and contrasts the cash flow statements for Air Canada, Air France- KLM, Christian Dior, CVS-Caremark, H&M, McDonald s, and Unilever. See the companies cash flow statements on pages 2 9. Check your answers in the provided solution. (a) Cash and cash equivalents at the end of the year is the bottom line on Air Canada s cash flow statement. What synonyms on the other companies statements likely represent a similar concept? (b) Many companies list the major categories of cash flows in the following order: operating, investing, and financing. Which, if any, of the companies present their cash flow statement with different major categories or the categories in a different order? Search This exercise helps you learn how to search for information. (c) CVS-Caremark reports net cash provided by operating activities twice on its cash flow statement: at the top and bottom. Compare and contrast the two operating sections. What is similar? What is different? What s the purpose of reporting net cash provided by operating activities twice? (d) Under the indirect-method of reporting operating activities, most of the related line items that reconcile net income to net cash from operations are not cash flows. Rather, they are adjustments that explain the difference between income and cash. However, some companies list actual cash flows in their indirect cash flow statements within the operating section. Which companies, if any, list actual cash flows within their indirect-method of reporting operating activities? How do you know that these items are cash flows rather than non-cash reconciliation adjustments? (e) Which company reports the fewest line items within its operating section? Does it use a direct or indirect-method within its operating section? How can you tell? (f) Net income is the first item on McDonald s cash flow statement. Which of the other companies recognize this concept in the operating section of their cash flow statements (perhaps using a synonym)? (g) The investing section of McDonald s cash flow statement discloses it spent $2,729.8 million on capital expenditures during fiscal This is cash spent on property, plant, and equipment. What synonyms are used by other companies for their capital expenditures? (h) Under financing activities, Christian Dior reports proceeds from borrowings of 3,034 during fiscal This is cash received from issuing debt. Assuming the borrowings are long-term, what synonyms are used by other companies for their proceeds from borrowings? (i) Under IFRS, companies may elect to classify interest payments as operating or financing (where U.S. GAAP requires interest to be classified as operating). Which companies, if at all, disclose interest payments as a financing activity? (j) Reconciliation adjustments within the operating section of indirect statement of cash flows are typically one of four types: adjustments associated with (i) assets, (ii) liabilities, (iii) gains and losses, or (iv) other. Analyze CVS-Caremark s reconciliation adjustments at the bottom of their statement and classify the adjustments into one of the four categories. You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC. Cash Flow Statements Page 3

4 2 NAVIGATING ACCOUNTING Figure 1 Air Canada Statement of Cash Flow This figure is an excerpt from Air Canada s 2011 annual report, page 80. Complies with IFRS. CONSOLIDATED STATEMENT OF CASH FLOW The accompanying notes are an integral part of the consolidated financial statements. Source: See accompanying notes in annual report Cash Flow Statements Page 4

5 EXERCISES 3 Figure 2 Air France-KLM Statements of Cash Flows This figure is an excerpt from Air France-KLM s 2011 annual report, page 54. Complies with IFRS. Source: See accompanying notes in annual report Cash Flow Statements Page 5

6 4 NAVIGATING ACCOUNTING Figure 3 Christian Dior Cash Flow Statement This figure is an excerpt from Christian Diror s 2011 annual report, page 84. Complies with IFRS. 5. Consolidated cash flow statement (EUR millions) Notes I - OPERATING ACTIVITIES AND OPERATING INVESTMENTS Operating profit 5,203 4,172 3,164 Net increase in depreciation, amortization and provisions 1, Other computed expenses (35) (117) (41) Dividends received Other adjustments (29) (1) (43) Cash from operations before changes in working capital 6,270 4,911 3,964 Cost of net financial debt: interest paid (197) (195) (250) Income taxes paid (1,557) (905) (906) Net cash from operating activities before changes in working capital 4,516 3,811 2,808 Change in inventories and work in progress (783) (110) 115 Change in trade accounts receivable (71) (14) 216 Change in trade accounts payable (373) Change in other receivables and payables (33) Total change in working capital (548) Net cash from operating activities 3,968 4,091 2,957 Purchase of tangible and intangible fixed assets (1,835) (1,103) (783) Proceeds from sale of tangible and intangible fixed assets Guarantee deposits paid and other operating investments (16) (8) (6) Operating investments (1,820) (1,078) (763) Net cash from operating activities and operating investments (free cash flow) 2,148 3,013 2,194 II - FINANCIAL INVESTMENTS Purchase of non-current available for sale financial assets (518) (1,724) (93) Proceeds from sale of non-current available for sale financial assets Impact of purchase and sale of consolidated investments (a) 2.4 (785) (61) (277) Net cash from (used in) financial investments (1,286) (1,715) (321) III - TRANSACTIONS RELATING TO EQUITY Capital increases of subsidiaries subscribed by minority interests (a) Acquisition and disposals of treasury shares and related derivatives by the Group Interim and final dividends paid by Christian Dior SA 14.3 (396) (375) (287) Interim and final dividends paid to minority interests in consolidated subsidiaries (805) (697) (604) Purchase and proceeds from sale of minority interests 2.4 (1,413) (185) - Net cash from (used in) transactions relating to equity (2,504) (943) (828) IV - FINANCING ACTIVITIES Proceeds from borrowings 3, ,826 Repayment of borrowings (1,405) (1,386) (2,496) Purchase and proceeds from sale of current available for sale financial assets 6 (32) 321 Net cash from (used in) financing activities 1,635 (764) 651 V - EFFECT OF EXCHANGE RATE CHANGES (114) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (I+II+III+IV+V) 48 (239) 1,582 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13 1,996 2, CASH AND CASH EQUIVALENTS AT END OF PERIOD 13 2,044 1,996 2,235 Transactions included in the table above, generating no change in cash: Source: See accompanying notes in annual report Cash Flow Statements Page 6

7 EXERCISES 5 Figure 4 CVS Caremark Statements of Cash Flows This figure is an excerpt from CVS Caremark s K annual report, page 26. Complies with U.S. GAAP. Consolidated Statements of Cash Flows Year Ended December 31, In millions Cash flows from operating activities: Cash receipts from customers $ 97,688 $ 94,503 $ 93,568 Cash paid for inventory and prescriptions dispensed by retail network pharmacies (75,148) (73,143) (73,536) Cash paid to other suppliers and employees (13,635) (13,778) (13,121) Interest received Interest paid (647) (583) (542) Income taxes paid (2,406) (2,224) (2,339) Net cash provided by operating activities 5,856 4,779 4,035 Cash flows from investing activities: Purchases of property and equipment (1,872) (2,005) (2,548) Proceeds from sale-leaseback transactions ,562 Proceeds from sale of property and equipment Acquisitions (net of cash acquired) and other investments (1,441) (177) (101) Purchase of available-for-sale investments (3) (5) Sale or maturity of available-for-sale investments 60 1 Proceeds from sale of subsidiary 250 Net cash used in investing activities (2,410) (1,640) (1,069) Cash flows from financing activities: Increase (decrease) in short-term debt 450 (15) (2,729) Proceeds from issuance of long-term debt 1, ,800 Repayments of long-term debt (2,122) (2,103) (653) Dividends paid (674) (479) (439) Derivative settlements (19) (5) (3) Proceeds from exercise of stock options Excess tax benefits from stock-based compensation Repurchase of common stock (3,001) (1,500) (2,477) Other (9) Net cash used in financing activities (3,460) (2,798) (3,232) Net increase (decrease) in cash and cash equivalents (14) 341 (266) Cash and cash equivalents at the beginning of the year 1,427 1,086 1,352 Cash and cash equivalents at the end of the year $ 1,413 $ 1,427 $ 1,086 Reconciliation of net income to net cash provided by operating activities: Net income $ 3,457 $ 3,424 $ 3,696 Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,568 1,469 1,389 Stock-based compensation Gain on sale of subsidiary (53) Deferred income taxes and other noncash items Change in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net (748) 532 (86) Inventories 607 (352) (1,199) Other current assets (420) (4) 48 Other assets (49) (210) (2) Accounts payable 1,128 (40) 4 Accrued expenses 85 (176) (66) Other long-term liabilities 2 (44) 38 Net cash provided by operating activities $ 5,856 $ 4,779 $ 4,035 Source: See accompanying notes in annual report Cash Flow Statements Page 7

8 6 NAVIGATING ACCOUNTING Figure 5 H&M Cash Flow Statement This figure is an excerpt from H&M s 2011 annual report, page 13. Complies with IFRS. GROUP CASH FLOW STATEMENT SEK M 1 DECEMBER 30 NOVEMBER ,942 25, ,262 3,061 Current operations Profit after financial items* Provisions for pensions Depreciation Tax paid -5,666-5,451 Cash flow from current operations before changes in working capital 18,658 22, ,331-1,557 1,337 1,552 17,420 21,838 Cash flow from changes in working capital Current receivables Stock-in-trade Current liabilities CASH FLOW FROM CURRENT OPERATIONS Investment activities Investment in leasehold rights ,946-4, ,209-5, ,056-10,129 Dividend -15,723-13,239 CASH FLOW FROM FINANCING ACTIVITIES -15,723-13,239 CASH FLOW FOR THE YEAR -2,359-1,530 Liquid funds at beginning of the financial year 16,691 19,024 Cash flow for the year -2,359-1,530 Investment in buildings and land Investment in equipment Adjustment of consideration/acquisition of subsidiaries Change in short-term investments, 4 12 months Other investments CASH FLOW FROM INVESTMENT ACTIVITIES Financing activities Exchange rate effect Liquid funds at end of the financial year** ,319 16,691 * Interest paid for the Group amounts to SEK 5 m (7). Received interest for the Group amounts to SEK 568 m (356). ** Liquid funds and short-term investments at the end of the financial year amounted to SEK 21,277 m (24,858). Source: See accompanying notes in annual report Cash Flow Statements Page 8

9 EXERCISES 7 Figure 6 McDonald s Corporation Statements of Cash Flows This figure is an excerpt from McDonald s K annual report, page 29. Complies with U.S. GAAP. Consolidated Statement of Cash Flows In millions Years ended December 31, Operating activities Net income $ 5,503.1 $ 4,946.3 $ 4,551.0 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 1, , ,216.2 Deferred income taxes (75.7) Impairment and other charges (credits), net (3.9) 29.1 (61.1) Gain on sale of investment (94.9) Share-based compensation Other (78.7) (347.1) Changes in working capital items: Accounts receivable (160.8) (50.1) (42.0) Inventories, prepaid expenses and other current assets (52.2) (50.8) 1.0 Accounts payable 35.8 (39.8) (2.2) Income taxes Other accrued liabilities 18.7 (43.2) 2.1 Cash provided by operations 7, , ,751.0 Investing activities Capital expenditures (2,729.8) (2,135.5) (1,952.1) Purchases of restaurant businesses (186.4) (183.4) (145.7) Sales of restaurant businesses and property Proceeds on sale of investment Other (166.1) (115.0) (108.4) Cash used for investing activities (2,570.9) (2,056.0) (1,655.3) Financing activities Net short-term borrowings (285.4) Long-term financing issuances 1, , ,169.3 Long-term financing repayments (624.0) (1,147.5) (664.6) Treasury stock purchases (3,363.1) (2,698.5) (2,797.4) Common stock dividends (2,609.7) (2,408.1) (2,235.5) Proceeds from stock option exercises Excess tax benefit on share-based compensation Other (10.6) (1.3) (13.1) Cash used for financing activities (4,533.0) (3,728.7) (4,421.0) Effect of exchange rates on cash and equivalents (97.5) Cash and equivalents increase (decrease) (51.3) (267.4) Cash and equivalents at beginning of year 2, , ,063.4 Cash and equivalents at end of year $ 2,335.7 $ 2,387.0 $ 1,796.0 Supplemental cash flow disclosures Interest paid $ $ $ Income taxes paid 2, , ,683.5 See Notes to consolidated financial statements. Source: See accompanying notes in annual report Cash Flow Statements Page 9

10 8 NAVIGATING ACCOUNTING Figure 7 Tesco PLC Cash Flow Statement This figure is an excerpt from Tesco s 2012 annual report, page 94. Complies with IFRS. Group cash flow statement 52 weeks 52 weeks Year ended 25 February * notes m m Cash flows from operating activities Cash generated from operations 29 5,688 5,613 Interest paid (531) (614) Corporation tax paid (749) (760) Net cash generated from operating activities 4,408 4,239 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired (65) (89) Proceeds from sale of property, plant and equipment, investment property and non-current assets classified as held for sale 1,141 1,906 Purchase of property, plant and equipment and investment property (3,374) (3,178) Proceeds from sale of intangible assets 3 Purchase of intangible assets (334) (373) Net decrease/(increase) in loans to joint ventures 122 (194) Investments in joint ventures and associates (49) (174) Investments in short-term and other investments (1,972) (683) Proceeds from sale of short-term and other investments 1, Dividends received from joint ventures and associates Interest received Net cash used in investing activities (3,183) (1,873) Cash flows from financing activities Proceeds from issue of ordinary share capital Increase in borrowings 2,905 2,217 Repayment of borrowings (2,720) (4,153) Repayment of obligations under finance leases (45) (42) Purchase of non-controlling interests (89) Dividends paid to equity owners (1,180) (1,081) Dividends paid to non-controlling interests (3) (2) Own shares purchased (303) (31) Net cash used in financing activities (1,366) (2,994) Net decrease in cash and cash equivalents (141) (628) Cash and cash equivalents at beginning of the year 2,428 3,102 Effect of foreign exchange rate changes 24 (46) Cash and cash equivalents including cash held in disposal group at the end of the year 2,311 2,428 Cash held in disposal group (6) Cash and cash equivalents at the end of the year 18 2,305 2,428 Source: See accompanying notes in annual report Cash Flow Statements Page 10

11 EXERCISES 9 Figure 8 Unilever Cash Flow Statement This figure is an excerpt from Unilever s 2012 annual report, page 67. Complies with IFRS. Consolidated cash flow statement for the year ended 31 December million 2011 million 2010 million 2009 Net profit 4,623 4,598 3,659 Taxation 1,622 1,534 1,257 Share of net profit of joint ventures/associates and other income from non-current investments (189) (187) (489) Net finance costs: Finance income (92) (77) (75) Finance cost Pensions and similar obligations (71) (20) 164 Operating profit 6,433 6,339 5,020 Depreciation, amortisation and impairment 1, ,032 Changes in working capital: (177) 169 1,701 Inventories (219) (573) 473 Trade and other current receivables (399) (343) 640 Trade payables and other liabilities 441 1, Pensions and similar obligations less payments (553) (472) (1,028) Provisions less payments 9 72 (258) Elimination of (profits)/losses on disposals (215) (476) 13 Non-cash charge for share-based compensation Other adjustments Cash flow from operating activities 6,639 6,818 6,733 Income tax paid (1,187) (1,328) (959) Net cash flow from operating activities 5,452 5,490 5,774 Interest received Purchase of intangible assets (264) (177) (121) Purchase of property, plant and equipment (1,835) (1,638) (1,248) Disposal of property, plant and equipment Acquisition of group companies, joint ventures and associates (3,098) (1,252) (409) Disposal of group companies, joint ventures and associates 1, Acquisition of other non-current investments (88) (85) (95) Disposal of other non-current investments Dividends from joint ventures, associates and other non-current investments (Purchase)/sale of financial assets (1,072) 578 (269) Net cash flow (used in)/from investing activities (4,467) (1,164) (1,263) Dividends paid on ordinary share capital (2,485) (2,323) (2,106) Interest and preference dividends paid (496) (494) (517) Net change in short-term borrowings 1,261 (46) (227) Additional financial liabilities 3, ,140 Repayment of financial liabilities (907) (1,391) (4,456) Capital element of finance lease rental payments (16) (22) (24) Other movements on treasury stock 30 (124) 103 Other financing activities (395) (295) (214) Net cash flow (used in)/from financing activities 411 (4,609) (4,301) Net increase/(decrease) in cash and cash equivalents 1,396 (283) 210 Cash and cash equivalents at the beginning of the year 1,966 2,397 2,360 Effect of foreign exchange rate changes (384) (148) (173) Cash and cash equivalents at the end of the year 15 2,978 1,966 2,397 The cash flows of pension funds (other than contributions and other direct payments made by the Group in respect of pensions and Source: See accompanying notes in annual report Cash Flow Statements Page 11

12 Cash Flow Statements» What Do I See?» Exercises EXERCISES cs.wis.020 Classifying cash flows Identify the following examples as operating (O), investing (I), or financing (F) activities. Consider where you would see the effects on a cash flow statement. Check your answers in the provided solution. Issue common stock in exchange for cash Buy a building with cash Purchase inventory on account Sell inventory on account Collect cash from customers Usage This exercise helps you learn how to use accounting information. Pay suppliers Receive interest earned Pay cash dividend to shareholders Recognize depreciation expense Purchase securities Pay employees wages Sell securities Issue long-term debt Sell building for cash Pay interest on debt loan You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC. Cash Flow Statements Page 12

13 Cash Flow Statements» What Do I See?» Exercises EXERCISES cs.wis.030 Classifying cash flows (Bischoff Global Sportswear) This exercise extends the Bischoff Global Sportswear exercises in earlier chapters. Check your answers in the provided solution. Classify events as operating, investing or financing Required Record Keeping This exercise helps you learn how to do record keeping and reporting. (a) Circle the appropriate classification of the events below as they would be reported on BGS s cash-flow statement: Operating, Investing, or Financing. Consider where you would see the effects on a cash flow statement. Events Bischoff Global Sportswear (BGS) recorded the following events during fiscal 2013, which ended December 31, All amounts are in millions of Canadian dollars. E1: Issued share capital for cash. During 2013, BGS issued common stock to its owners in exchange for $10 million cash. Classification: Operating, Investing, or Financing. E2: Issued non-current debt for cash. During 2013, BGS borrowed $10 million cash from several banks and promised to repay this principal with interest over 5-10 years. Loan contracts specified that the borrower (BGS) issued debt to the lender (banks). Classification: Operating, Investing, or Financing. E3: Purchased PP&E with cash. During 2013, BGS purchased $20 million of property, plant, and equipment with cash. PP&E are tangible assets used to support day-today business operations. Among other things, PP&E includes buildings, manufacturing equipment, furniture, computers, and automobiles. Classification: Operating, Investing, or Financing. E4: Purchased merchandise for resale. During 2013, BGS purchased $80 million of merchandise from other companies on account that were invoiced upon delivery. It plans to resale this merchandise to customers for a profit. These products complement the ones BGS manufactures and allows BGS to meet customers needs, which reduces the customers transaction costs. Classification: Operating, Investing, or Financing. E5: Paid invoices due. During 2013, BGS paid suppliers $225 million for goods and services previously purchased on account. Among other things, these include merchandise purchased for resale, materials purchased for manufacturing, advertising services, and utilities. BGS s policy is to pay invoices just in time to avoid penalties. Classification: Operating, Investing, or Financing. You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC. Cash Flow Statements Page 13

14 2 NAVIGATING ACCOUNTING E6a: Recognized revenue when goods were delivered. During 2013, BGS recognized $415 million of revenues when goods were delivered to customers, which was the same time customers were billed for their purchases on account. For these sales, BGS concluded it met all of the IFRS criteria for revenue recognition when goods were delivered. Classification: Operating, Investing, or Financing. E6b: Recognize product cost when goods were delivered. During 2013, BGS recognized $208 million of cost of goods sold when goods were delivered to customers. This occurred at the same time revenues were recognized in entry E6a. Entries E6a and E6b could have been combined. Classification: Operating, Investing, or Financing. E7: Collected amounts due from customers. During 2013, BGS collected $380 million from customers who had been billed earlier when goods were delivered. BGS recognizes revenue when it concludes the IFRS revenue recognition criteria are met, which can occur at times other than when cash is collected. For this reason, revenue is recorded separately from collections. Classification: Operating, Investing, or Financing. E8: Paid previously accrued expenses not invoiced. During 2013, BGS paid $10 million for previously accrued expenses that are never invoiced. For example, BGS paid employees for work performed during the last few days of The related expense and obligation had been accrued in a 2012 year-end adjusting entry. Classification: Operating, Investing, or Financing. E9: Received invoices for previously accrued expenses. During 2013, BGS received $7 million of invoices for services received and previously expensed in For example, at the end of 2012, BGS recorded an adjusting entry to expense advertisements that ran the last day of At that time, BGS was obligated to pay the advertiser but had not yet been invoiced. Classification: Operating, Investing, or Financing. E10: Recognized expenses when invoiced. During 2013, BGS recognized $20 million of expenses for services received and invoiced, but not paid during For example, BGS recognized expense during 2013 when it received invoices for advertising services received during Classification: Operating, Investing, or Financing. E11: Paid expenses when recognized. During 2013, BGS recognized $30 million of expenses when it paid for services received in For example, BGS recognized an expense when it paid employees in 2013 for services performed during Office supplies purchased with credit cards is another example of a non-invoiced expense. Classification: Operating, Investing, or Financing. E12: Prepaid future expenses. During 2013, BGS paid $20 million in advance for services it had not yet received when the payments were made. For example, BGS paid advertisers to create advertisements before the advertisements were created and BGS paid rent before benefiting from the use of buildings. Classification: Operating, Investing, or Financing. Cash Flow Statements Page 14

15 EXERCISE 3 E13: Recognized expenses before invoiced. At the end of interim reporting periods during 2013, BGS recognized a total of $3 million of expense for services performed during the periods for which BGS had not yet received invoices by the end of the periods and the timing and amount to be paid in the future was known. For example, advertisements ran on the last day of an interim period for which the fees were known. Classification: Operating, Investing, or Financing. E14: Recognized expenses previously prepaid. At the end of interim reporting periods during 2013, BGS recognized a total of $25 million of expense for services performed during the interim periods that were prepaid prior to receiving the services. For example, BGS recognized rent expense at month-end, when the monthly rent was prepaid at the start of the month. Classification: Operating, Investing, or Financing. E15: Recognized depreciation expense. At the end of interim reporting periods during 2013, BGS recognized a total of $7 million of expense that represented the portion of the historical cost of PP&E used up during the interim periods. Classification: Operating, Investing, or Financing. E16: Sold PP&E for cash. During 2013, BGS received $15 million cash when it sold a building with $20 million of historical cost and $8 of accumulated depreciation. Consistent with an IFRS option, BGS does not recognize unrealized gains associated with PP&E. Classification: Operating, Investing, or Financing. E17: Declared dividends on share capital. During 2013, BGS declared $25 million of common stock dividends. When dividends are declared by a company s board of directors, the company is obligated to pay shareholders the declared amount at a future date. Classification: Operating, Investing, or Financing. E18: Paid dividends on share capital. During 2013, BGS paid $20 million of previously declared common stock dividends. Classification: Operating, Investing, or Financing. Cash Flow Statements Page 15

16 Cash Flow Statements» What s Behind the Numbers?» Basics» Exercises EXERCISES cs.wbn.bas.010 Analyze entries effects on all financial statements (ABC Company) Use the balance-sheet-equation (BSE) matrix and the financial statements on pages 4-7 to analyze each of ABC s entries to determine the effects to the financial statements and then interpret groups of related entries. Check your answers in the provided solution. Events ABC Company has the following events for its first year of operations. All amounts are in thousands of dollars. These events are carried forward from an income statement exercise and repeated here for your convenience. E1: ABC s shareholders contribute $1,000 of cash to ABC in exchange for 1 million shares of ABC s non-par common stock. E2: ABC purchases a building from Kaplan Properties for $200 cash. The building will be used as a store. Record Keeping This exercise helps you learn how to do record keeping and reporting. Usage This exercise helps you learn how to use accounting information. E3: ABC purchases $100 of merchandise from Healy Inc. on account and it plans to sell to customers for a profit. ABC is invoiced upon delivery. E4: ABC sells merchandise that cost $20 for $60. The customers who purchase the merchandise promise to pay the $60 in the future. ABC recognizes revenue when goods are sold to customers. E5: ABC collects $40 of the $60 that customers promised to pay (in event E4). E6: ABC pays $60 of its outstanding obligation to Healy Inc. E7: ABC receives $10 of cash from customers who owe this much in interest because they did not pay their bills on time. E8: ABC declares and pays a $20 dividend on the last day of the year. Hint: This is a special cash distribution to ABC s shareholders that reduces retained earnings. We will study more about dividends later. E9: ABC records depreciation of $10 related to the building purchased from Kaplan Properties. We assume that ABC Company pays no taxes and expects that there will be no bad debts. Continued on next page... You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC. Cash Flow Statements Page 16

17 2 NAVIGATING ACCOUNTING Required Part I: Determine the financial-statement effects of the entries Analyze ABC s entries to determine the effects to the financial statements and what an outsider would see when ABC Company recorded the entry. This exercise extends a related income statement chapter exercise. If you completed the earlier exercise, you may want to focus on the direct and indirect cash flow statements effects and use this as a review for the effects on the other financial statements. E1 Issuing common stock (a) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E2 Purchasing a building (b) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E3 Purchasing inventory on account (c) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E4a Recognizing sale on account (d) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E4b Recognizing cost of sales (e) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E5 Customer Collections (f) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E6 Supplier payments (g) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? Cash Flow Statements Page NavAcc LLC, G. Peter & Carolyn R. Wilson

18 EXERCISE 3 E7 Recognizing interest income received (h) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E8 Declare and pay dividends (i) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? E9 Recognizing depreciation (j) How does the entry affect the balance sheet? How does it affect the income statement? How does it affect the statement of changes in owners equity? How does it affect the direct and indirect cash flow statements? What would an outsider see when ABC Company recorded this entry? Part II: Determine the effects of groups of entries Analyze the reconciliation adjustments an outsider would see on ABC s indirect cash flow statement. Net Effects of Operating Entries on Depreciation Adjustment (k) What entries affected the depreciation adjustment on ABC s indirect cash flow statement? Why was this reconciliation adjustment needed? What does the sign of this adjustment tell you about the net effect of operating entries on the related account? Could outsiders reliably estimate depreciation expense? Net Effects of Operating Entries on Receivables Adjustment (l) What entries affected the receivables adjustment on ABC s indirect cash flow statement? Why was this reconciliation adjustment needed? What does the sign of this adjustment tell you about the net effect of operating entries on the related account? Could outsiders reliably estimate the amount by which the revenues included in net income exceed the collections included in cash from operations? Net Effects of Operating Entries on Inventories Adjustment (m) What entries affected the receivables adjustment on ABC s indirect cash flow statement? Why was this reconciliation adjustment needed? What does the sign of this adjustment tell you about the net effect of operating entries on the related account? Could outsiders reliably estimate the inventories purchased? When does this approach produce good estimates of the purchases? Net Effects of Operating Entries on Accounts Payable Adjustment (n) What entries affected the accounts payable adjustment on ABC s indirect cash flow statement? Why was this reconciliation adjustment needed? What does the sign of this adjustment tell you about the net effect of operating entries on the related account? Could outsiders reliably estimate the vendor payments? NavAcc LLC, G. Peter & Carolyn R. Wilson Cash Flow Statements Page 18

19 4 NAVIGATING ACCOUNTING ABC Company BSE for Entries E1-E9 and Closing: Subdivided into Operating and Non-Operating (investing and financing) Entries E1-E9 and Cls1-2 recorded Assets = Liabilities + Owners' Equity Current + Noncurrent = Current + Permanent + Net income + C + AR + Inven + GPPE - AcDep = + AP + CS + RE + Rev - Cgs - DepEx + Intinc + IncS + + $0 + + $0 + + $0 + + $0 - + $0 = + + $0 + + $0 + + $0 + + $0 - + $0 - + $0 + + $0 + + $0 Beginning balances E3 Purchase inventory on account = E4a Recognize revenue = E4b Recognize cost of sales = E5 Customer collections = E6 Supplier payments = E7 Interest income and collection = E9 Depreciation expense = Operating Entries + - $ $ $ $0 - + $10 = + + $ $0 + + $0 + + $ $ $ $ $0 Total operations E2 Purchase building with cash = Total investing = E1 Issue stock for cash + + 1, = , E8 Dividend declared and paid = Total financing = , Non-operating Entries + + $ $ $ $ $10 = + + $ $1, $ $ $ $ $ $0 Trial balance = = Closing to and from income summary + + $ $ $ $ $10 = + + $ $1, $ $0 - + $0 - + $0 + + $0 + + $0 Ending balances CreativeABC Company Chart of Accounts ASSETS Current AR Accounts receivable C Cash Inven Inventory StInv Short-term investments + LIABILITIES Current Zoom in on the PDF to see the details. AP Accounts payable AcCB Accrued compensation & benefits TaxP Taxes payable OWNERS' EQUITY Permanent CS Common stock RE Retained earnings Net income Cgs Cost of goods sold MG&A Marketing, general & administrative expense IncS Income summary Intinc Interest income Rev Revenues, net TxExp Tax expense NavAcc LLC, G. Peter & Carolyn R. Wilson Cash Flow Statements Page 19

20 EXERCISE 5 ABC Company Balance Sheet First year of operations Assets End Bal Beg Bal Current Cash $770 $0 Accounts receivable 20 0 Inventories 80 0 Total current assets Non-current assets Property, plant, and equipment, net Historical cost of PP&E Less accumulated depreciation (10) 0 Property, plant and equipment, net Total non-current assets Total assets $1,060 $0 Liabilities and Stockholders' Equity Liabilities Current Accounts payable 40 0 Total current liabilities 40 0 Non-current 0 0 Total liabilities 40 0 Stockholders' equity Common stock 1,000 0 Retained earnings 20 0 Total stockholders' equity 1,020 0 Total liabilities and stockholders' equity $1,060 $0 ABC Statement of Comprehensive Income First year of operations Operating profit Revenues $60 Cost of sales (20) Depreciation (10) Operating profit 30 Non-operating profit Interest income 10 Net profit 40 Other comprehensive income 0 Comprehensive income $ NavAcc LLC, G. Peter & Carolyn R. Wilson Cash Flow Statements Page 20

21 6 NAVIGATING ACCOUNTING ABC Company Direct Cash Flow Statement First year of operations Operating Activities Sales collections $40 Vendor payments ($60) Interest received $10 Net cash from operations ($10) Investing Activities Purchase of building ($200) Net cash (used) for investing ($200) Financing Activities Sale of common stock $1,000 Cash dividends ($20) Net cash from financing $980 Change in cash $770 Beginning Cash balance $0 Ending cash balance $770 ABC Company Indirect Cash Flow Statement First year of operations Operating Activities Net profit $40 Depreciation $10 Receivables ($20) Inventories ($80) Accounts payable $40 Net cash from operations ($10) Investing Activities Purchase of building ($200) Net cash (used) for investing ($200) Financing Activities Sale of common stock $1,000 Cash dividends ($20) Net cash from financing $980 Change in cash $770 Beginning Cash balance $0 Ending cash balance $770 Cash Flow Statements Page NavAcc LLC, G. Peter & Carolyn R. Wilson

22 EXERCISE 7 ABC Company Statement of Changes in Equity First year of operations Common Stock Retained Earnings Reserves Total Beginning balances $0 $0 $0 $0 Comprehensive income Net profit Other comprehensive income 0 0 Total Common stock issued 1,000 1,000 Dividend declared (20) 0 (20) Ending balances $1,000 $20 $0 $1, NavAcc LLC, G. Peter & Carolyn R. Wilson Cash Flow Statements Page 22

23 Cash-Flow Statements» What s Behind Cash-Flow Statements» Basic» Exercises EXERCISES cs.wbn.bas.020 Analyzing entries effects on SCF reconciliation (Bryan s Health & Fitness and Intel) This exercise extends the Bryan s Health and Fitness exercise in earlier chapters. The entries for fiscal 2012, which ended December 31, 2012, are the same as the ones recorded in the earlier chapters. Abbreviated descriptions of the events are repeated below for your convenience. Events E1 Issued common stock to shareholders in exchange for $5,000 cash. Record Keeping This exercise helps you learn how to do record keeping and reporting. E2 E3 E4 E5 E6 E7 E8a Purchased computers for $18,600 cash. Purchased merchandise on account for $11,000. BHF was invoiced upon delivery. Collected $8,900 due from customers for previous sales. Paid $13,200 due to suppliers and other vendors for resources previously provided and invoiced. Collected $65,500 of annual membership fees from customers Related revenue is deferred until services are subsequently delivered. Paid $14,400 for insurance and other resources that will provide future benefits. Sold merchandise to customers for $22,800. $13,600 was collected at the time of the sale and the remainder was sold on account. Revenue was recognized at the time of the sale. Usage This exercise helps you learn how to use accounting information. E8b The merchandise sold in E8a cost $10,500. E9 E10 E11 E12 E13 E14 E15 E16 Paid $10,200 to tax authorities for previously expensed taxes. Paid $21,400 cash to meet obligations in accrued liabilities. Transferred $1,400 from accrued liabilities to accounts payable. Recognized $2,400 of SG&A expense during the year. $1,600 was recognized when the company received invoices and the remainder when the company paid resource providers. Recognized $36,000 of SG&A expense. $12,000 had been prepaid at earlier dates. The remainder was recorded to accrued liabilities. Recognized $10,000 of depreciation expense. Recognized $64,000 of previously deferred membership revenue. Accrued $11,100 of tax expense. You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC. Cash Flow Statements Page 23

24 2 NAVIGATING ACCOUNTING Part I: BHF s operating entries reconciliation effects Required (a) Use the BSE matrix on page 4 to complete the table below: determine how each entry affects the reconciliation of net income to net cash from operations. Note: E3 and E11 have two offsetting redundant reconciliation adjustments in the operating section of the indirect cash flow statement. We will study redundant adjustments in the next module. For now all you need to know is: (1) they are redundant because they don t affect income and don t affect cash from operations. Thus, no differences between income and cash from operations need to be reconciled; (2) the adjustments offset each other, meaning their net effect is $0; and (3) they are included for legacy reasons that will be explained in the next module. + Zoom in on the PDF to see the details. Bryan's Health and Fitness 2012: Entry-by-Entry Reconciliation Effects In Dollars, for year ended December 31, 2012 Operating activities E3 E4 E5 E6 E7 E8a E8b Net income $16,800 $0 Depreciation $10,000 Accounts receivable ($300) Inventory ($500) ($11,000) Prepaid expenses ($2,400) Accounts payable $800 $11,000 Accrued taxes $900 Other accrued liabilities $1,200 Deferred revenues $1,500 Net cash from operations $28,000 $0 In Dollars, for year ended December 31, 2012 Operating activities E9 E10 E11 E12 E13 E14 E15 E16 Net income $16,800 $0 Depreciation $10,000 Accounts receivable ($300) Inventory ($500) Prepaid expenses ($2,400) Accounts payable $800 $1,400 Accrued taxes $900 Other accrued liabilities $1,200 ($1,400) Deferred revenues $1,500 Net cash from operations $28,000 $0 Cash Flow Statements Page 24

25 EXERCISE 3 Part II: BHF s operating entries reconciliation effects on Intel s SCF Required (a) Intel s Statements of Cash Flows for the three years ended December 29, 2012 are on page 5 and the operating section for 2012 is presented below. Assume Intel had recorded BHF s operating entries in Identify the Intel Statements of Cash Flows line items directly affected (and the direction of the effects) for each entry by placing X s in the appropriate spaces below, as indicated for E3. Note: If a reported negative number changes from -2 to -3, it decreases; if it changes from - 2 to - 1, it increases. + Zoom in on the PDF to see the details. Bryan's Health and Fitness 2012: Entry-by-Entry Reconciliation Effects on Intel's 2012 SCF Year ended December 29, 2012 E3 E4 E5 E6 E7 E8a E8b Operating activities Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Net income $11,005 Depreciation 6,357 Share-based compensation $1,102 Excess tax benefit: share based payments (142) Amortization of intangibles $1,165 (Gains) losses on equity investments, net (141) (Gains) losses on divestitures $0 Deferred taxes (242) Changes in assets and liabilities: Accounts receivable (176) Inventories ($626) X Accounts payable 67 X Accrued compensation and benefits $192 Income taxes payable and receivable 229 Other assets and liabilities $94 Net cash provided by operating activities 18,884 Year ended December 29, 2012 E9 E10 E11 E12 E13 E14 E15 E16 Operating activities Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Increases Decreases Net income $11,005 Depreciation 6,357 Share-based compensation $1,102 Excess tax benefit: share based payments (142) Amortization of intangibles $1,165 (Gains) losses on equity investments, net (141) (Gains) losses on divestitures $0 Deferred taxes (242) Changes in assets and liabilities: $0 Accounts receivable (176) Inventories ($626) Accounts payable 67 Accrued compensation and benefits $192 Income taxes payable and receivable 229 Other assets and liabilities $94 Net cash provided by operating activities 18,884 Cash Flow Statements Page 25