---
title:
output:
  revealjs::revealjs_presentation:
    theme: white
    css: white-edits.css
    highlight: tango
    transition: slide
    self_contained: false
    pandoc_args: ["--wrap=preserve"]
    reveal_plugins: ["chalkboard","search"]
    transitionSpead: fast
    mathjax: "https://cdnjs.cloudflare.com/ajax/libs/mathjax/2.7.1/MathJax.js?config=TeX-AMS_SVG"
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## ACCT 101: Cash Flows, Part 2 {data-background-video="../Backgrounds/title.mp4" data-background-video-loop=true class="header no-toc-progress present-only" data-state="no-toc-progress"}

<!-- "reveal_plugins:..." and "chalkboard:" are handled by prep.py -->
```{r helpers, echo=FALSE, warning=FALSE, message=F}
library(knitr)
library(kableExtra)
html_df <- function(text, cols=NULL, col1=FALSE, full=F) {
  if(!length(cols)) {
    cols=colnames(text)
  }
  if(!col1) {
    kable(text,"html", col.names = cols, align = c("l",rep('c',length(cols)-1))) %>%
      kable_styling(bootstrap_options = c("striped","hover"), full_width=full)
  } else {
    kable(text,"html", col.names = cols, align = c("l",rep('c',length(cols)-1))) %>%
      kable_styling(bootstrap_options = c("striped","hover"), full_width=full) %>%
      column_spec(1,bold=T)
  }
}
```

<h3 class="date"><br>Session 10</h3>
<h2 class="author"><br>Dr. Richard M. Crowley<br>rcrowley@smu.edu.sg<br><a href="http://rmc.link/">http://rmc.link/</a></h2>

## ACCT 101: Cash Flows, Part 2 {data-background="../Backgrounds/title.jpg" class="header no-toc-progress present-not" data-state="no-toc-progress"}

<h3 class="date"><br>Session 10</h3>
<h2 class="author"><br>Dr. Richard M. Crowley<br>rcrowley@smu.edu.sg<br><a href="http://rmc.link/">http://rmc.link/</a></h2>


# Front matter {data-background="../Backgrounds/section.jpg" class="header"}

## Quiz 2 {data-background="../Backgrounds/studying.jpg" class="default present-only"}

- Average score: 81\%
- Median score: 85\%
- PP&E: 84\%
- Inventory: 79\%
- Journal entries: 90\%
- Calculations: 74\%


## Learning objectives {data-background="../Backgrounds/default.jpg" class="default"}

<div class="left">
![Diagram](../Course_Diagrams/ACCT_101_course_map_10.png){width=450px}
</div>
<div class="right">

Cash Flows

1. Learn how to construct a statement of cash flows
2. Apply the *direct* method
3. Calculate net investing cash flow
4. Calculate net financing cash flow

</div>

# Statement of cash flows {data-background="../Backgrounds/section.jpg" class="header"}

## Format {data-background-image="../Backgrounds/reference.jpg" class="default"}

<div class="left">
1. Start with a comparative balance sheet and the year's income statement
2. List all operating cash flows and sum
    - Can use direct or indirect method
3. List all investing cash flows and sum
4. List all financing cash flows and sum
5. Sum all cash flows
6. Reconcile this change using balance sheet cash
</div>
<div class="right">
<img src="../Diagrams/SCF.png" width="500px">
</div>

# Operating cash flows {data-background="../Backgrounds/section.jpg" class="header"}

## Operating cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

Two equivalent methods:

<div class="clearfix">
<div class="left">
Indirect method

- Backs out operating cash flow by starting with net income and adjusting out accruals
- Most commonly used
- Easiest to do
</div>
<div class="right">
Direct method

- Tracks and reports exactly where operating cash flows came from
- Preferred by IFRS
- Most useful for investors
</div>
</div><br>

- Both methods will get you to the same operating cash flow amount

> We will cover the direct method today

## Indirect method for OCF recap {data-background-image="../Backgrounds/default.jpg" class="default"}

- Use information from the income statement first
- Adjust for changes in current assets and current liabilities
    - Transactions with working capital can affect cash while not affecting the income statement

<img src="../Diagrams/OCF.png" width="700px">

## Formatting OCF {data-background-image="../Backgrounds/reference.jpg" class="default"}

<div class="left">
Indirect method

<img src = "../Diagrams/SCF_OCF_indirect.png" width = "375px">
</div>
<div class="right">
Direct method

<img src = "../Diagrams/SCF_OCF.png" width = "500px">
</div>

## Direct method for OCF {data-background-image="../Backgrounds/default.jpg" class="default"}

- Still based on:
    - Income statement
    - Changes in current assets
    - Changes in current liabilities
- Goal is to directly calculate:
    - Cash collections
        - From customers
        - Optionally, from interest and dividends
    - Cash payments
        - To suppliers
        - To employees
        - For operating expenses
        - Optionally, for interest and dividends
        - For taxes

## Direct method: General approach {data-background-image="../Backgrounds/reference.jpg" class="default"}

1. Start with the related current asset or liability account
    - Record all steps in a T-account
2. Consider changes in the account(s) recorded on the income statement
3. Are there any non-cash changes to this account?
4. The cash collection will balance the T-account

## Direct method: Collections, simple {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with A/R
2. Income statement info:
    - Revenue
3. No non-cash changes in simple cases
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_customers0.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> This requires careful consideration of business activities

## Direct method: Collections with bad debt {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with A/R and Allowance for Uncollectible Accounts
2. Income statement info:
    - Revenue
    - Bad debt expense
    - Gain on re-estimation
3. Non-cash changes:
    - Write-off of A/R
4. The cash collection will balance the T-accounts

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_customers.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> We need to consider effects from other accounts

## Direct method: Collections with unearned revenue {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with A/R and Unearned Revenue
2. Income statement info:
    - Revenue
3. No non-cash changes
4. The cash collection will balance the T-accounts

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_customers2.png" width="350px" style="margin: 0px 0px">
</div>
</div>

> There can be multiple sources for **Revenue**

## Direct method: Payments to suppliers {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with A/P and Inventory
2. Income statement info:
    - COGS
3. Non-cash changes:
    - Purchases on account (assume all purchases)
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_suppliers.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> Use A/P and Inventory to find payments to suppliers

## Direct method: Payments for expenses {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the payable associated with the expense
2. Income statement info:
    - The expense amount
3. No non-cash changes in simple cases
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_expense.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> Use payable and expense to find payments for prepaid expenses

## Direct method: Payments for expenses (prepaid) {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the prepaid expense associated with the expense
2. Income statement info:
    - The expense amount
3. No non-cash changes
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_prepaid.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> Use prepaid expense and expense to find payments for expenses

## Direct method: Payment for interest expense {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with tinterest payable
2. Income statement info:
    - The expense amount
3. No non-cash changes
    - Bond amortization
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/OCF_direct_interest.png" width="400px" style="margin: 0px 0px">
</div>
</div>

> Make sure to take bond amortization into account

# Investing cash flows {data-background="../Backgrounds/section.jpg" class="header"}

## Investing cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

- Based on:
    - Income statement
    - Balance sheet
    - Additional information
- Goal is to directly calculate:
    - Inflows: 
        - Sales of long-term assets
        - Collection of loan principle
    - Outflows:
        - Purchases of long-term assets
        - Loans made to other

## Determining investing cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="left">
- Only 1 method to use
    - Essentially the direct method
- Investing cash flows can be a bit trickier
    - Need to consider cash from journal entries
</div>
<div class="right">
Format

<img src = "../Diagrams/SCF_ICF.png" width = "400px">
</div>

## Investing cash flows: General approach {data-background-image="../Backgrounds/reference.jpg" class="default"}

1. Start with the asset account and any related accounts
    - Record all steps in a T-account
2. Consider changes in the account(s) recorded on the income statement
3. Are there any non-cash changes to these accounts?
4. Cash collections are either in the T-account OR...
5. Re-construct the journal entry to determine them

## Investing: Inflows from PP&E sale {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the PP&E account and accumulated depreciation
2. Income statement info:
    - Gain/loss on asset sale
    - Depreciation expense
3. Non-cash changes:
    - Disposal amount
    - Disposal depreciation amount
4. Finish tallying T-Accounts
5. Cash will be in the journal entry

</div>
<div class="right">
<img src="../Diagrams/ICF_ppe.png" width="400px" style="margin: 0px 0px">
</div>
</div>

# Financing cash flows {data-background="../Backgrounds/section.jpg" class="header"}

## Financing cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

- Based on:
    - Income statement
    - Balance sheet
    - Additional information
- Goal is to directly calculate:
    - Inflows: 
        - Issuance of shares
        - Sales of treasury shares
        - Receipt of bond or loan principle
    - Outflows:
        - Purchases of treasury shares
        - Payment of principle
        - Optionally, payment of dividends
        

## Determining financing cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="left">
- Only 1 method to use
    - Essentially the direct method
- Financing cash flows can be a bit trickier
    - Need to consider cash from journal entries
</div>
<div class="right">
Format

<img src = "../Diagrams/SCF_FCF.png" width = "400px">
</div>

## Financing cash flows: General approach {data-background-image="../Backgrounds/reference.jpg" class="default"}

1. Start with the liability or equity account and any related accounts
    - Record all steps in a T-account
2. Consider changes in the account(s) recorded on the income statement
3. Are there any non-cash changes to these accounts?
4. Cash collections are either in the T-account OR...
5. Re-construct the journal entry to determine them

## Financing: Bond issuance {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the bond payable account and its discount or premium account
2. Income statement info:
    - Interest expense can be relevant
3. Non-cash changes:
    - Changes in discount after issuance
    - Bond retirement (in part)
4. Finish tallying T-Accounts
5. Cash will be in the journal entry

</div>
<div class="right">
<img src="../Diagrams/FCF_bondissue.png" width="400px" style="margin: 0px 0px">
</div>
</div>

## Financing: Bond retirement {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the bond payable account and its discount or premium account
2. Income statement info:
    - Interest expense can be relevant
    - Gain or loss on retirement
3. Non-cash changes:
    - Changes in discount from retirement
    - Issuance (in part)
4. Finish tallying T-Accounts
5. Cash will be in the journal entry

</div>
<div class="right">
<img src="../Diagrams/FCF_bondretire.png" width="400px" style="margin: 0px 0px">
</div>
</div>

## Financing: Dividends paid {data-background-image="../Backgrounds/default.jpg" class="default"}

<div class="clearfix">
<div class="left">
1. Start with the dividends payable account and retained earnings
2. Income statement info:
    - Net income
3. Non-cash changes:
    - Stock dividends
4. The cash collection will balance the T-account

</div>
<div class="right">
<img src="../Diagrams/FCF_dividends.png" width="400px" style="margin: 0px 0px">
</div>
</div>

# Bringing it all together {data-background="../Backgrounds/section.jpg" class="header"}

## Analysis of Cash flow {data-background-image="../Backgrounds/reference.jpg" class="default"}

```{r , echo=FALSE, warning=FALSE}
options(knitr.table.format = "html") 
text <- data.frame(
  Operating = c("$+$", "$+$", "$+$", "$+$", "$-$", "$-$", "$-$", "$-$"),
  Investing = c("$+$", "$+$", "$-$", "$-$", "$+$", "$+$", "$-$", "$-$"),
  Financing = c("$+$", "$-$", "$+$", "$-$", "$+$", "$-$", "$+$", "$-$"),
  Activity = c("Building up cash; looking for acquisition?","Paying off debt by growing CFO and PP&E sales","Expanding via internal growth and borrowing","Improved CFO used to buy PP&E and pay off debt","Covering CFO shortfall via borrowing and PP&E sale","Sale of PP&E to cover debt payment and CFO shortfall","Rapid growth but shortfall in CFO","Using cash reserves to finance shortfalls and pay debt")
)
html_df(text, col1=TRUE)
```

## Practice: Constructing an SCF {data-background-image="../Backgrounds/question1.jpg" class="default"}

> Construct an SCF using the following information.  Use the indirect method to determine OCF.

<img src="../Diagrams/SCF_practice.png" width="700px">

## {data-background="../Backgrounds/graph_paper.png" class="print-only"}

## Solution: Constructing an SCF {data-background-image="../Backgrounds/answer.jpg" class="default exclude"}

<img src="../Diagrams/SCF_practice-Solution.png" height="600px">

# End matter {data-background="../Backgrounds/ending.jpg" class="header"}

## Wrap up {data-background="../Backgrounds/ending.jpg" class="default"}

- For next week
    1. Chapter 12: Financial statement analysis
    2. Next week:
        - Homework 5 will be provided
        - We will discuss financial ratios
        - We will have some time for in class review
    3. In two weeks:
        - Group project presentations
        - Email me slides by 10am of the class day
    4. Extra practice available
        - Cash flow statement eLearn quiz
- Survey on the class session at <a href="https://rmc.link/101survey10">rmc.link/101survey10</a>

## Teaching methods  {data-background="../Backgrounds/people.jpg" class="default never"}

- Working through difficult problems in groups:
    1. Is difficult
    2. Makes you learn significantly more

<img src="../Figures/Teaching_method.png" height="400px">

> Source: <a href="https://www.pnas.org/content/116/39/19251">Measuring actual learning versus feeling of learning...</a>

## Packages used for these slides {data-background="../Backgrounds/code.jpg" class="default stack"}

- kableExtra
- knitr
- revealjs

## References {data-background="../Backgrounds/books-old.jpg" class="default stack never"}

## Custom code {data-background="../Backgrounds/code.jpg" class="default stack never"}

<small style="width:100%">
```{r, eval=F}

```
</small>

## NOTES {class="never"}

