Chapter 21 The Statement of Cash Flows Part 2 – The Mechanics of the T-Account Approach IntermediateAdvanced Accounting Accounting II Dr.Dr. Chula Chula King King © Dr. Chula King All Rights Reserved Spreadsheet versus T-Account • Spreadsheet Approach – Columns . Balance Sheet: Beginning balance, Debit and Credit changes in account balances, Ending balance . Categories of Cash Flow: Debit and credit impact from analysis of Balance Sheet changes • T-Account Approach . Cash Flow Operating Activities; Cash Flow Investing Activities; Cash Flow Financing Activities . Non-cash Accounts – Beginning and Ending Balances . Relates changes in non-cash accounts to one of the categories of cash flow © Dr. Chula King All Rights Reserved My View of Spreadsheet versus T- Account Approach • Spreadsheet Approach – Cumbersome and difficult to envision the impact of changes • T-Account Approach . More visually appealing . Easier to envision all changes to non-cash accounts and their impact on the cash flow categories . Easier to ensure that for every debit, there is a credit • Your preference © Dr. Chula King All Rights Reserved 1 Cash Flow Categories • Cash is an asset – Increases with debit; decreases with credit • Cash flow operating activities, cash flow investing activities, cash flow financing activities – subsets of the account cash • Debit indicates an inflow of cash • Credit indicates an outflow of cash © Dr. Chula King All Rights Reserved Noncash Accounts • Relate to one of the three categories of cash flow • Operations: If the account has a direct relationship to the income statement . Current assets except for investment in securities . Current liabilities except for non-trade notes payable . Accumulated depreciation and intangibles from depreciation expense and amortization expense . Retained earnings – change from closing of net income © Dr. Chula King All Rights Reserved Noncash Accounts (continued) • Investing: All assets that do not relate to operations . Never includes changes in liabilities or equity . Examples: Purchase and sale of PPE; purchase and sale of securities; purchase and sale of intangibles © Dr. Chula King All Rights Reserved 2 Noncash Accounts (continued) • Financing: All liabilities and equity that do not relate to operations . Never includes changes in assets . Examples: Issuance and retirement of long- term debt; issuance and retirement of stock, including treasury stock; payment of dividends © Dr. Chula King All Rights Reserved The Mechanics • Determine the answer – Change in cash • Draw T-Accounts for Cash Flow Operating Activities, Cash Flow Investing Activities, Cash Flow Financing Activities • Draw T-Accounts for all non-cash balance sheet accounts with beginning and ending balances . Either explicitly or implicitly relate the specific accounts to one of the three cash flow categories © Dr. Chula King All Rights Reserved The Mechanics (continued) • “Post” the specific information provided, i.e., debit and credit specific accounts . Any loss debit cash flow operating activities . Any gain credit cash flow operating activities • Once the specific information has been “posted”, plug the remaining accounts to explain account balance changes . Any debit plug to a non-cash account is accompanied by a credit to one of the categories of cash flow . Any credit plug to a non-cash account is accompanied by a debit to one of the categories of cash flow © Dr. Chula King All Rights Reserved 3 The Mechanics (continued) • Once the balance changes in all non-cash accounts have been explained, balance the three cash flow accounts • The combination of the balances in the three cash flow accounts should equal the change in cash that was determined up front • Use the debit and credit postings to the three cash flow accounts to prepare the statement of cash flows © Dr. Chula King All Rights Reserved For Example The comparative balance sheet for Apex, Inc., is presented below: $ in millions) 2013 2012 Cash $73 $22 Accounts receivable 82 66 Inventories 180 189 Property, plant and equipment 331 310 Accumulated depreciation (69) (42) Total $597 $545 Accounts payable $34 $47 Bonds payable 150 200 Common stock 214 164 Retained earnings 199 134 Total $597 $545 © Dr. Chula King All Rights Reserved For Example (continued) Additional information: a.Net income for 2013 was $125 b.Cash dividends of $60 were declared and paid c.Depreciation expense totaled $27 c.Bonds payable amounting to $50 were retired through the issuance of common stock The answer = Change in cash = $73 - $22 = Increase of $51 © Dr. Chula King All Rights Reserved 4 Cash – Ops Cash – Invest Cash – Fin (1) NI 125 16 A/R (6) 21 PPE (8) (4) C/S 50 60 Div (2) (3) Dep’n 27 13 A/P (9) 50 B/P (5) (7) Inventory 9 132 21 60 A/R-Ops Inventory-Ops PPE - Invest Acc Dep’n - Ops 66 189 9 (7) 310 42 (6) 16 (8) 21 27 (3) 82 180 331 69 A/P-Ops B/P-Fin C/S- Fin R/E-Ops & Fin (9) 13 47 200 164 134 (5) 50 50 (4) (2) 60 125 (1) 34 150 214 199 Cash flow operations $132 Cash flow investing (21) Cash flow financing (60) Change in cash $ 51 Apex Inc. Statement of Cash Flows For the year ended December 31, 2013 Cash flow from Operating Activities Net income $125 Add: Depreciation expense 27 Decrease in inventory 9 Deduct: Increase in accounts receivable (16) Decrease in accounts payable (13) $132 Cash flow from Investing Activities Purchase PPE (21) Cash flow from Financing Activities Paid dividends $(60) Issued common stock 50 Retired bonds (50) (60) Increase in cash $51 Add: Cash balance, January 1 22 Cash balance, December 31 $73 The Next Step • Exercises 1, 3, 14, 17, 22, 24 and 31 • Problems 19, 20 and 21 © Dr. Chula King All Rights Reserved 5.