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Chapter 22
The Statement
of Cash Flows
Intermediate Accounting 10th edition
Nikolai Bazley Jones
An electronic presentation
by Norman Sunderman
Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation.
Thomson, the Star logo, and South-Western are trademarks used herein under license.
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Purpose of a Cash Flow
Statement
1.
2.
3.
4.
5.
Helps users assess
A firm’s ability to generate positive cash flows
from operating activities.
A firm’s ability to meet its obligations and pay
dividends.
The reasons for the difference between net
income and net cash flows.
The effect of investing and financing on a firm’s
financial position.
Both the cash and noncash investing and
financing transactions during the period.
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Operating Activities
Operating activities include
all transactions and other
events that are not investing
and financing activities.
Cash receipts from the
sale of goods or services
and collections of
accounts receivable are
typical cash inflows
from operating
activities.
Operating activities
include transactions
involving acquiring,
selling, and delivering
goods for sale, as well as
providing services.
Cash payments to
suppliers for inventory
and on account, for wages,
and for taxes are examples
of cash outflows from
operating activities.
4
Investing Activities
Investing activities include transactions
involving noncurrent assets and shortterm investments.
Outflows (3)
Inflows (3)
1. Lending money and collecting principal on
the loans.
2. Acquiring and
selling investments
(both current and noncurrent).
3. Acquiring and
selling property, plant,
and equipment.
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Financing Activities
Financing activities include transactions
involving liabilities & equity:
Inflows (2)
1. Issuing stock for cash
(new issue or treasury stock)
2. Borrowing money (bonds and notes)
Outflows (3)
1. Paying cash dividends
2. Repayments of amounts borrowed
3. Purchase of treasury stock
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Cash and Cash Equivalents
The cash flow statement is prepared using cash
and cash equivalents.
 Cash equivalents
─ Within 3 months of maturity when purchased
─ No risk--treasury bonds, treasury notes,
treasury bills, money market, commercial
paper
─ Known amount of cash
 Purchases of cash equivalents are not
reported
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Indirect and Direct Methods
FASB No. 95 allows two
ways for a company to
calculate and report its
net cash flow from
operating activities on its
statement of cash flows.
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Indirect and Direct Methods
Even though the FASB
recommends the direct
method, more than 98%
of companies use the
indirect method.
The first is called the
direct method and the
second is the indirect
method.
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Steps in Visual Inspection
Method-Indirect Method
Prepare the statement’s heading and list
the three major sections.
2. Determine the net income and list it as
the first item in the net cash flow from
operating activities section.
3. Add back any non-cash expenses.
4. Adjust net income for gains and losses
not related to operations.
1.
Continued
10
Steps in Visual Inspection
Method-Indirect Method
Adjust net income for the change in
deferred taxes
6. Adjust net income for income and losses
on investments carried under the equity
method.
5.
Continued
11
Steps in Visual Inspection
Method-Indirect Method
7.
Examine all working capital accounts,
except cash, short-term non-trade notes
payable and dividends payable.
A Debit to a noncash account is a
Decrease in cash. (If the account had
net debits during the year).
A Credit to a noncash account is an
increase in cash. (if the account had net
credits during the year).
Continued
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Steps in Visual Inspection
Method-Indirect Method
Calculate the cash provided or cash
used by operating activities.
9. Examine comparative balance sheets
for changes in non-current assets.
10. Calculate the cash provided or cash
used by investing activities.
11. Examine long-term liabilities and equity
accounts.
8.
Continued
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Steps in Visual Inspection
Method-Indirect Method
12. Calculate the cash provided or cash
13.
14.
15.
16.
17.
used by financing activities.
Calculate the net change in cash that
occurred during the accounting period.
Add the beginning cash
The total should equal the ending cash
on the balance sheet
List interest and taxes paid.
List significant noncash investing and
financing activities.
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Simple Statement of
Cash Flows
RYAN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2007
The
statement’s
heading
15
Adjustments to Net Income
Remember the adjustments
to net income are:
• Noncash expenses
• Gains/losses on
investments
• Deferred taxes
• Equity income
• Working capital changes
Indirect MethodRyan Corporation
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Added back
since
depreciation
Net Cash flows From Operating Activities:
Net income
$14,000 is not an
outflow of
Adjustments for differences
cash.
between income flows and cash
flows for operating activities:
Add: Depreciation expense
8,000
Credits to
noncash
Decrease in accounts receivable 2,600
accounts
Increase in salaries payable
800
Debits to
Less: Increase in inventory
(2,000)
noncash
Decrease in accounts payable (7,000)
accounts
Net cash provided by operating
Same number as
activities
$16,400
direct method
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Page 1140
Leyton Company Information
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Simple Statement of Cash
Flows-Leyton Company
Net Cash Flow From Operating Activities
Net income
$ 7,000
Adjustments for differences between income
and cash flows from operating activities:
Add: Depreciation expense
2,300
Increase in accounts payable
1,500
Less: Increase in accounts receivable
(2,700) 1,100
Net cash provided by operating activities
$8,100
Cash Flows From Investing Activities
Payment for purchase of building
$(12,000)
Proceeds from sale of land, at cost
3,000
Net cash used for investing activities
(9,000)
Continued
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Simple Statement of
Cash Flows
Net cash provided by operating activities
$8,100
Net cash used for investing activities
(9,000)
Cash Flows From Financing Activities
Proceeds from issuance of bonds
Payment of dividends
Net cash provided by financing activities
Net increase in Cash
Cash, January 1, 2007
Cash, December 31, 2007
$ 7,000
(3,500)
This amount should match the balance
of the Cash account in the ledger.
3,500
$2,600
4,000
$6,600
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Sale of Equipment
Gains and losses from investing
activities should be eliminated from
operating activities by adding losses
and deducting gains from net
income.
Dack Company sold equipment
with a cost of $2,200 and
accumulated depreciation of
$700 for $2,100.
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Sale of Equipment
Historical cost
2,200
Less: Accumulated depreciation
700
Book value
$1,500
Gain (not operating)
?
Cash proceeds
$2,100
Deduct $600 from net
income to reconcile net
income to operating cash.
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Interest Paid and
Income Taxes Paid
FASB Statement Number 95
requires that a company using the
indirect method also disclose its
interest paid and income taxes
paid.
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Interest Paid
Interest Expense
1,100
$100 discount
amortization
will not require
cash
= $1,000
Interest Payable
Cash Paid 500
Bal.
0
1,000
= $1,000
Bal.
500
Jones Company had $1,100 of interest expense,
including $100 amortization of bond discount. The
beginning balance in Interest Payable was $0 and
the ending balance was $500. How much cash was
paid for interest?
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Taxes Paid
Taxes Payable and Deferred Taxes can be combined to find taxes paid.
Taxes Payable/Deferred Taxes
= $7,050
1,500 Bal.--Taxes Payable
Cash Paid
2,820
1,920 Bal.--Deferred Taxes
3,630 Taxes Expense
= $7,050
2,130 Bal.--Taxes Payable
2,100 Bal.--Deferred Taxes
The beginning and ending balances in Taxes Payable were
$1,500 and $2,130 and the beginning and ending balances
in Deferred Taxes were $1,920 and $2,100. Tax Expense
was $3,630. How much cash was paid?
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Direct Method
Under the direct method, a
company deducts its
operating cash outflows from
its operating cash inflows to
determine its net cash flow
from operating activities.
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Direct Method
Inflows (3)
1. Cash from customers (A/R)
2. Cash from interest revenue (Interest Receivable)
3. Cash from dividend revenue (Dividends Rec.)
Outflows (5)
1. Cash paid to suppliers (A/P)
2. Cash paid for wages (Wages Payable)
3. Other cash expenses (Prepaid/Accrued)
4. Cash paid for interest expense (Interest Payable)
5. Cash paid for taxes (T/P and Deferred Tax)
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Direct Method
Use T accounts to examine the
3 inflows and 5 outflows in the
direct method.
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Cash From Customers
Sales Revenue
Accounts Receivable
30,000
42,000
Bal.
Bal.
0
42,000
37,000
5,000
Smith Company made cash sales of $30,000
and credit sales of $42,000. How much cash
was collected from customers?
$67,000
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Dividends and Interest Collected
Interest Receivable
Bal.
30,000
Revenue 42,000
Bal.
12,000
Dividends Receivable
Bal.
0
Revenue 4,000
Bal.
1,000
Ives Company earned interest revenue of $42,000 &
dividend revenue of $4,000. Interest Receivable had a
beginning balance of $30,000 and an ending balance of
$12,000. Dividends receivable had a beginning balance
of $0 and an ending balance of $1,000. How much cash
from interest and dividends was collected?
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Dividends and Interest Collected
=72,000 Interest Receivable
Bal.
30,000
Revenue 42,000
Bal.
12,000
60,000
=4,000Dividends Receivable
Bal.
0
3,000
Revenue 4,000
Bal.
1,000 =4,000
=72,000
Ives Company earned interest revenue of
$42,000 and dividend revenue of $4,000.
During the year $60,000 of interest and
$3,000 of dividends was collected.
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Cash Paid to Suppliers
62,000
Accounts Payable
Cash paid
$47,700
59,800
62,000 Inventory
10,300 59,800 Bal.
12,500 51,000 Cost of
goods sold
49,500
Purchases 49,500
12,100
Bal.
11,000
Copeland Company had beginning and ending balances in
Accounts Payable of $10,300 and $12,100, respectively. The
beginning and ending balances in inventory were $12,500
and $11,000 respectively. The cost of goods sold was
$51,000. How much cash was paid to suppliers?
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Cash Expenses
Prepaid and accrued expenses can be combined to
calculate the cash paid. Cash operating expenses
exclude depreciation, amortization and depletion.
Prepaid/Accrued Expenses
Prepaid Bal.
20,000
60,000 Accrued Bal.
300,000 Cash operating expenses
=$372,000
Prepaid Bal.
=$372,000
12,000
32,000 Accrued Bal.
Wolverine Company had beginning and ending balances in
accrued expenses of $60,000 and $32,000, respectively. It had
beginning and ending balances in prepaid expenses of $20,000
and $12,000, respectively. It had cash operating expenses of
$300,000. How much cash was paid for expenses?
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Cash Expenses
Prepaid/Accrued Expenses
Prepaid Bal.
20,000
Cash paid 320,000
Prepaid Bal.
12,000
60,000 Accrued Bal.
300,000 Cash operating expenses
32,000 Accrued Bal.
Wolverine Company paid $320,000 for
expenses.
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Cash Paid to Employees
Salaries Payable
0 Bal.
Cash paid 13,000
14,000 Salaries expense
1,000 Bal.
Smith Company had beginning and balances in
Salaries Payable of $0 and $1,000. respectively.
Salary expense for the year was $14,000. How
much cash was paid to employees?
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Direct Method
Ryan Corporation’s
Income Statement
Sales revenue (cash and A/R)
$70,000
Less:
Cost of goods sold (cash and A/P) $(29,000)
Salaries expense (cash and S/P)
(13,000)
Depreciation expense
(8,000) (50,000)
Income before income taxes
$20,000
Income tax expense (cash)
(6,000)
Net income
$14,000
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Cash From CustomersRyan Company
Sales Revenue
Accounts Receivable
70,000
Bal.
22,600
70,000
Bal.
20,000
72,600
Accounts receivable decreased by $2,600 for
Ryan Company. How much cash was
collected from customers?
$72,600
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Direct Method
Remember to check for these cash flows.
Inflows (3)
1. Cash from customers (A/R)
2. Cash from interest revenue (Interest Receivable)
3. Cash from dividend revenue (Dividends Rec.)
Outflows (5)
1. Cash paid to suppliers (A/P)
2. Cash paid for wages (Wages Payable)
3. Other cash expenses (Prepaid/Accrued)
4. Cash paid for interest expense (Interest Payable)
5. Cash paid for taxes (T/P and Deferred Tax)
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Cash Paid to SuppliersRyan Company
Accounts Payable
Cash paid
$38,000
10,300
31,000
3,300
Inventory
Bal.
Purchases
Bal.
9,000
29,000 Cost of
goods sold
31,000
11,000
Ryan Company had beginning and ending balances in
Accounts Payable of $10,300 and $3,300, respectively. The
beginning and ending balances in inventory were $9,000
and $11,000 respectively. The cost of goods sold was
$29,000. How much cash was paid to suppliers?
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Cash Paid to EmployeesRyan Company
Ryan Company had beginning and balances in Salaries
Payable of $200 and $1,000. respectively. Salary expense
for the year was $13,000. How much cash was paid to
employees?
Salaries Payable
200 Bal.
Cash paid 12,200
13,000 Salaries expense
1,000 Bal.
Ryan Company had no change in the Taxes Payable
and Deferred Taxes accounts.
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Direct Method-Ryan Company
Cash flows From Operating Activities:
Cash Inflows:
Cash received from customers $72,600
Cash inflows from operating
activities
$72,600
Cash Outflows:
Cash paid to suppliers
$(38,000)
Cash paid to employees
(12,200)
Cash paid for income taxes
(6,000)
Cash outflows for operating
activities
(56,200)
Net cash provided by operating activities $16,400
Reconciliation of Net Income to
Cash Provided by OperationsDirect Method
When the direct method
is used, a schedule to
reconcile net income to
cash provided by
operations is required.
Yes.
In other words, the
indirect method is
required even when
using the direct method.
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Worksheet Method
Steps 1-3: Setting up the worksheet
Step 1: Prepare the column headings on a worksheet. Then
enter the account title Cash on the first line of the
account titles column and list the beginning balance,
ending balance, and the change in cash in the
respective columns.
Step 2: Enter the titles of all the remaining accounts from
the balance sheets on the worksheet and list each
beginning and ending account balance, and the
change in the account balance directly below the
cash information.
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Worksheet Method
Steps 1-3: Setting up the worksheet
Step 3: Directly below these accounts, add the following
headings:
A. Net Cash Flow From Operating Activities
B. Cash Flows From Investing Activities
C. Cash Flows From Financing Activities
D. Investing and Financing Activities Not
Affecting Cash
Leave sufficient room below each heading.
Continued
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Worksheet Method
Step 4: Completion of the worksheet
Account for all the changes in the noncash accounts.
Reconstruct the journal entries that caused the changes in
the noncash accounts directly on the worksheet. Use these
general rules: (A) Start with net income. (B) Account for
the changes in the current assets (except cash) and current
liability accounts. (C) Account for the changes in the
noncurrent accounts.
Continued
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Worksheet Method
Step 5: Record the net change in cash
Make a final worksheet entry to record the net change in
cash. The difference between the total cash inflows and
outflows must be equal to the change in the Cash account.
Step 6: Prepare the final worksheet entry
Prepare the statement of cash flows and the accompanying
schedule from the information developed on the worksheet.
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Worksheet Method
Analyzing Complex Transactions
First, let’s reconstruct
During the year the company sold land
the
original
entry.
that cost $2,200 for $3,900.
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Worksheet Method
Analyzing Complex Transactions
Now, we can analyze
Cash
3,900
the entry to help us
Land
2,200
with recording it on 1,700
Gain on Sale of Land
the worksheet.
Cash Flows From Investing Activities:
Proceeds From Sale of Land
3,900
Land
Net Cash Flow From
Operating Activities: Gain
2,200
1,700
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Worksheet Method
Analyzing Complex Transactions
During the year, an earthquake
(extraordinary event) occurred that
destroyed aThis
building
owned by
the
is a tougher
one.
company with a cost of $10,000 and a
book value of $5,200. The company
received after-tax proceeds of $3,100
from its insurance company.
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Worksheet Method
Analyzing Complex Transactions
Cash
3,100
Accumulated Depreciation:Now,
Buildings
4,800
we can
Extraordinary loss reconstruct the2,100
entry.
Buildings
10,000
Cash Flows From Investing Activities:
Proceeds From Building Destroyed by
Earthquake
3,100
Accumulated Depreciation: Buildings 4,800
Net Cash Flow From Operating Activ. 2,100
Buildings
10,000
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Worksheet Method
Analyzing Complex Transactions
Let’s reconstruct both
entries
relatedissued
to the bond
On January 1,
the company
issue
prepare
bonds payable
withand
a face
value ofthem for
the worksheet.
$10,000, receiving proceeds
of $9,000.
The company amortized $100 of the
discount during the year.
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Worksheet Method
Analyzing Complex Transactions
Cash
Discount on Bonds Payable
Bonds Payable, 10%
9,000
1,000
10,000
Cash Flows From Financing Activities:
Proceeds From Issuance of Bonds 9,000
Discount on Bonds Payable
1,000
Bonds Payable, 10%
10,000
Continued
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Worksheet Method
Analyzing Complex Transactions
Bond Discount Amortization
Discount on Bonds Payable
100
Cash Flows From Operating Activities:
Bond Discount Amortization
100
Discount on Bonds Payable
100
100
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Partial Cash Investing and
Financing Activities
A company acquired land for $10,000
by paying $1,000 down and signing a
$9,000 note payable.
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Partial Cash Investing and
Financing Activities
Land
10,000
Cash Make the worksheet entry in
journal entry format.
Notes Payable
Land
10,000
Cash Used For Investing Activities:
Purchased Land
Note Payable
Reconstruct the entry for the
worksheet.
1,000
9,000
1,000
9,000
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Partial Cash Investing and
Financing Activities
The
…and
purchase
the issuing
of theof
land
the
note
is shown
is shown
as aas
$9,000
a $9,000
investing
financing
activity…
activity.
Schedule of
Noncash
Transactions
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Partial Cash Investing and
Financing Activities
A company acquired land for $18,000
by paying $15,000 down and signing a
$3,000 note payable.
Cash Flows From Investing Activities
Purchase of land by issuance of note
and cash
$(18,000 )
Less: Issuance of note
3,000
Cash payment for purchase of land
$15,000
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Partial Cash Investing and
Financing Activities
Land
10,000
Cash Make the worksheet entry in
journal entry format.
Notes Payable
Land
10,000
Cash Used For Investing Activities:
Purchased Land
Notes Payable
Reconstruct the entry for the
worksheet.
1,000
9,000
1,000
9,000
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Temporary and Long-Term
Investments
On November 28, 2007, Dougherty Company
purchased 1,000 shares of Bear Company common
stock for $40,000 as a temporary investment in
available-for-sale securities. On December 31, 2007,
the fair value of the stock was $42 per share.
(1) Reconstruct the two entries
related to this investment.
(2) Make the worksheet entry in
journal format.
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Temporary and Long-Term
Investments
Temporary Investment in Available-for40,000
(1) Sale Securities
Cash
40,000
Temporary Investment in Available-for
Sale Securities
40,000
(2)
Cash Flows From Investing
Activities: Payment for Purchase
of Temporary Investment
40,000
Continued
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Temporary and Long-Term
Investments
Allowance for Change in Value of
(1) Investment
Unrealized Increase in Value of
Available-for-Sale Securities
2,000
Allowance for Change in Value of
2,000
(2) Investment
Unrealized Increase in Value of
Available-for-Sale Securities
No change! The debit portion appears
only in the upper portion of the
worksheet.
2,000
2,000
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Temporary and Long-Term
Investments
On January 16, 2008, Dougherty Company sold its
investment in Bear Company stock for $45,000.
Cash
45,000
Temporary Investment in
Available-for-Sale Securities
40,000
Gain on Sale of Temporary Invest.
5,000
Unrealized Increase in Value of
Available-for-Sale Securities
2,000
Allowance for Change in Value
of Investment
2,000
62
Temporary and Long-Term
Investments
Cash Flows From Investing Activities:
Proceeds From Sale of Temporary
Investment
45,000
Temporary Investment in
Available-for-Sale Securities
40,000
Net Cash Flow From Operating
Activities: Gain on Sale of Temporary
Investment
5,000
The second entry is unchanged.
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Chapter 22
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