Statement of cash flows Constructing the Statement Illustration Continued: Some observations 6. The $50 decline in intangible assets reflects amortization. Amortization is a noncash expense similar to depreciation and is added back to income 7. The $20 decrease in accounts payable is a negative(cash outflow)adjustment to income because amounts due suppliers declined. 8. The $20 decrease in long-term debt reflects a $10 repayment (a financing outflow) and a $10 reduction due to conversion of debt into equity (a noncash transaction 9. The $50 increase in capital stock reflects a $40 issuance of stock (a financing inflow) and a $10 stock issuance by converting debt(a noncash transaction) 10. The $60 increase in retained earnings is summarized in T-account form Retained Earnings 260 Beginning Dividends paid 1201 Net income Ending The $180 net income, after adjustments, yields the source of cash from operations of $304. The $120 dividend is a financing cash outflow
Illustration Continued: Some observations 6. The $50 decline in intangible assets reflects amortization. Amortization is a noncash expense similar to depreciation and is added back to income. 7. The $20 decrease in accounts payable is a negative (cash outflow) adjustment to income because amounts due suppliers declined. 8. The $20 decrease in long-term debt reflects a $10 repayment (a financing outflow) and a $10 reduction due to conversion of debtinto equity (a noncashtransaction). 9. The $50 increase in capital stock reflects a $40 issuance of stock (a financing inflow) and a $10 stock issuanceby convertingdebt(a noncash transaction). 10. The $60 increase in retainedearnings is summarizedin T-accountform: Retained Earnings 260 Beginning Dividends paid 120 180 Net income 320 Ending The $180 net income, after adjustments, yields the source of cash from operations of $304. The $120 dividend is a financing cashoutflow. Statement of Cash Flows Constructing the Statement
Statement of cash flows Constructing the Statement llustration Continued: Drawing on the analysis, change in cash is explained Toronto Technology Corporation Statement of Cash Flows(s thousands For the Year Ended December 31 Year 2 Cash flows from operating activities Net income s180 Add(deduct) adjustments to cash basis Depreciation Amortization of intangibles Decrease in accounts receivables 55 Increase in inventory Decrease in accounts payable Net cash flows from operating activities 304 Cash flows from investing activities: Purchase of fixed assets (314) Sale of fixed assets Net cash fiows used in investing activities 234 Cash flows from financing activities: Sale of capital stock 40 Payment of dividends 120 Repayment of long-term debt Net cash flows used in finan activities 9Q) Net increase(decrease)in cash (20) Schedule of noncash financing and investing activities Common stock issued in conversion of long-term debt 10 Can be presented in a footnote. Any amounts paid for interest and income taxes mustalso be dis closed
Illustration Continued: Drawing on the analysis, change in cash is explained as: Toronto Technology Corporation Statement of Cash Flows ($ thousands) For the Year Ended December 31, Year 2 Cash flows from operating activities: Net income $ 180 Add (deduct) adjustments to cash basis: Depreciation 64 Amortization of intangibles 50 Decrease in accounts receivables 55 Increase in inventory (25) Decrease in accounts payable (20) Net cash flows from operating activities $ 304 Cash flows from investing activities: Purchase of fixed assets (314) Sale of fixed assets 80 Net cash flows used in investing activities (234) Cash flows from financing activities: Sale of capital stock 40 Payment of dividends (120) Repayment of long-term debt (10) Net cash flows used in financing activities (90) Net increase (decrease) in cash $ (20) Schedule of noncash financing and investing activities:* Common stock issued in conversion of long-term debt $ 10 *Can be presented in a footnote. Any amounts paid for interest and income taxes must also be disclosed. Statement of Cash Flows Constructing the Statement
Reconstruction Analysis Objectives Reconstruction aims to provide an extensive analysis of complex transactions T-account analysis is a common tool of reconstruction analysis of transactions Aim of T-account analysis is to reconstruct in summary form the transactions affecting all balance sheet accounts during the reporting period
Reconstruction aims to provide an extensive analysis of complex transactions. T-account analysis is a common tool of reconstruction analysis of transactions. Aim of T-account analysis is to reconstruct in summary form the transactions affecting all balance sheet accounts during the reporting period. Reconstruction Analysis Objectives
Reconstruction Analysis Determining Cash Flows-Important Relations Incoe Erect on Statement ltem Double-Entry Eifects Cash from Operations Debit expense or loss Cr to cash Use of cash Cr to noncash account Add back-not using cash Credit income or gain Dr to cash Source of cash Dr to noncash account Deduct--not providing cash
Income Effect on Statement Item Double-Entry Effects Cash from Operations Debit expense or loss Cr. to cash Use of cash Cr. to noncash account Add back—not using cash Credit income or gain Dr. to cash Source of cash Dr. to noncash account Deduct—not providing cash Reconstruction Analysis Determining Cash Flows - Important Relations
Reconstruction Analysis Determining Cash Flows-Important Relations [Changes in operating working capital accounts Account Change Effect on Cash from Operations Accounts Receivable Increase(Dr. Sales not collected in cash Decrease(Cr) Collections exceed sales(prior period receivables collected) Inventories Increase(Dr) Cash purchases exceed cost of sales Decrease(Cr. Some cost of goods sold represents a reduction in inventories(cash purchases are less than cost of goods sold Prepaid Expenses Increase(Dr. Cash paid for expenses that are charged to uture periods(cash spent exceeds expenses in income statement) Decrease(Cr. Some expenses in the income statement were paid for in prior years and do not require a current cash outlay Trade Accounts or Increase(Cr) Some purchases are not yet paid for Notes Payable Decrease(Dr. Cash payments to suppliers exceed purchases for the period
[Changes in operating working capital accounts] Account Change Effect on Cash from Operations Accounts Receivable Increase (Dr.) Sales not collected in cash. Decrease (Cr.) Collections exceed sales (prior period receivables collected). Inventories Increase (Dr.) Cash purchases exceed cost of sales. Decrease (Cr.) Some cost of goods sold represents a reduction in inventories (cash purchases are less than cost of goods sold). Prepaid Expenses Increase (Dr.) Cash paid for expenses that are charged to future periods (cash spent exceeds expenses in income statement). Decrease (Cr.) Some expenses in the income statement were paid for in prior years and do not require a current cash outlay. Trade Accounts or Increase (Cr.) Some purchases are not yet paid for. Notes Payable Decrease (Dr.) Cash payments to suppliers exceed purchases for the period. Reconstruction Analysis Determining Cash Flows - Important Relations