ACG 2071
Module 2: Statement of Cash Flows
Purpose of the Statement of Cash Flows
 Reports a firm’s major cash inflows and outflows for a period.
 Provides useful information about a firm’s ability to generate cash from
operations, maintain and expand its operating capacity, meet financial
obligations, and pay dividends.
 One of the basic financial statements.
Importance of Cash Flows
 We look more favorably at a company that is financing its expenditures
with cash from operations than one that does it by selling its assets
 Whether company has enough cash to pays its existing debts as they
mature.
Reporting Cash Flows
Three types of activities:
Cash Flows from Operating Activities
Include those transactions and events that determine net income.
 Cash inflows include
o Cash from sales
o Cash from credit collections
o Cash from interest income
 Cash outflows include
o Cash to pay bills
o Cash to pay for merchandise
o Cash to pay taxes
Cash Flows from Investing Activities
Generally include those transactions and events that affect longterm assets.
 Purchase and sale of short-term investments
 Lending and collecting money for notes receivable
 Cash inflows
o From selling securities
o From selling notes
Created by: Prof M. Mari
Fall, 2007
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ACG 2071
Module 2: Statement of Cash Flows

o From collecting principal on loans
o From selling assets
Cash outflows
o To make loans to others
o To purchase securities
o To purchase assets
Cash Flows from Financing Activities
Include those transactions and events that affect long-term
liabilities and equity
 Obtaining cash from issuing debts and repaying the
amounts borrowed
 Receiving cash from or distributing cash to owners
 Cash inflows
o Received monies from loans issued
o Received monies from stock sold
o Received monies from bonds issued
 Cash outflows
o Paid on principal of loans
o Purchased treasury stock
o Redeemed bonds
Noncash Investing and Financing
When important investing and financing activities do not affect cash
receipts or payments, they are still disclosed.

Exchange of stocks for bonds
The sum of the three sections should equal the change in cash from the prior
year to the current year.
Created by: Prof M. Mari
Fall, 2007
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ACG 2071
Module 2: Statement of Cash Flows
Format of the Statement of Cash Flows
Company Name
Statement of Cash Flows
For period ended
Cash flows from operating activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities
Cash flows from investing activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities
Cash flows from financing activities:
Cash inflows
-Cash outflows
Net cash provided by operating activities
Net increase (decrease) in cash
Cash balance at beg of period
Cash balance at end of period
$$$$
$$$$
$$$$
$$$
$$$
$$$
Two methods of Preparing the Statement
 Direct Method – requires an analysis of the cash account
 Indirect Method – requires analysis of the financial statements
Indirect Method:
 Steps
o Find the differences in the Balance Sheet account balances for last
year and this year
Created by: Prof M. Mari
Fall, 2007
Page 3 of 10
ACG 2071
Module 2: Statement of Cash Flows
JONES COMPANY
COMPARATIVE BALANCE SHEET
For period ended December 31, 2005 and 2006
2006
CASH
2005
DIFFERENCE
$140,350
$95,900
$44,450
$95,300
$102,300
-$7,000
INVENTORIES
$165,200
$157,900
$7,300
PREPAID EXP
$6,240
$5,860
$380
INVESTMENTS
$35,700
$84,700
-$49,000
LAND
$75,000
$90,000
-$15,000
BUILDING
$375,000
$260,000
$115,000
ACCUM DEP
-$71,300
-$58,300
-$13,000
MACHINERY
$428,300
$428,300
$0
ACCUM DEP
-$148,500
-$138,000
-$10,500
$58,000
$65,000
-$7,000
$1,159,290
$1,093,660
$65,630
ACCOUNTS PAY
$43,500
$46,700
-$3,200
ACCRUED EXP
$14,000
$12,500
$1,500
$7,900
$8,400
-$500
DIV PAYABLE
$14,000
$10,000
$4,000
MORTGAGE
$40,000
$0
$40,000
BOND
$150,000
$250,000
-$100,000
COMMON STOCK
$450,000
$375,000
$75,000
PAID IN CAPITAL
$66,250
$41,250
$25,000
$373,640
$349,810
$23,830
$1,159,290
$1,093,660
$65,630
TRADE RECEIVABLES
PATENTS
TOTAL
INCOME TAX PAY
RETAINED EARNINGS
o Analyze the income statement
Created by: Prof M. Mari
Fall, 2007
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ACG 2071
Module 2: Statement of Cash Flows
JONES CO
INCOME STATEMENT
For period ended December 31, 2006
SALES
$1,180,000
COST OF MERCHANDISE
$790,000
GROSS PROFIT
$390,000
OPERATING EXPENSES
DEPRECIATION
PATENT AMORTIZATION
OTHER OPERATING
$23,500
does not reduce cash flows
$7,000
does not reduce cash flows
$196,000
TOTAL
$223,500
INCOME FROM OPERATIONS
$163,500
OTHER INCOME
GAIN ON SALE OF INVESTMENTS
not part of operating activities
but included in net income
$11,000
OTHER EXPENSES
INTEREST EXPENSE
$26,000
INCOME BEFORE TAXES
-$15,000
$148,500
INCOME TAX
$50,000
NET INCOME
cash flows from operations
$98,500 but needs to be adjusted
o Analyze the General Ledger accounts
OTHER SUPPLEMENTAL DATA
Land costing $15,000 was sold for $15,000
A mortgage note was issued for $40,000
Building costing $115,000 constructed
2,500 shares of common stock were issued at 40 in
exchange for bonds payable
Cash dividends declared were $74,670
Begin with operating section by starting with net income
Created by: Prof M. Mari
Fall, 2007
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ACG 2071
Module 2: Statement of Cash Flows


Add any items that are included in net income that are not part of
operations.
o Such as gains or losses on sale of investments, depreciation, and
amortization.
Follow by changes in current assets and current liabilities
o Decreases in current assets increases cash flows since assets are
used instead of purchasing new ones
o Increases in current liabilities increase cash flows since we incur
debt instead of paying
o Increases in current assets decrease cash flows since monies are
used to buy assets
o Decreases in current liabilities decrease cash flows since monies
are used to pay bills
o Current assets
 Accounts receivable
 Merchandise inventory
 Prepaid expenses
o Current liabilities
 Accounts payable
 Accrued expenses
 Salaries payable
 Income taxes payable
Came from
income
statement
Jones Company
Statement of Cash Flows
For period ended December 31, 2006
Net cash flows from operations:
Net income from operations
ADD:
Depreciation
Patent amortization
Decrease in trade receivables
Increase in accrued exp
$98,500.00
$23,500.00
$7,000.00
$7,000.00
$1,500.00
$39,000.00
DEDUCT:
Increase in inventories
Increase in prepaid exp
Decrease in accounts pay
Decrease in income tax
Gain on sale of investments
$7,300.00
$380.00
$3,200.00
$500.00
$11,000.00
-$22,380.00
Net cash flows from operations
Created by: Prof M. Mari
Fall, 2007
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$115,120.00
Came from
balance sheet
ACG 2071
Module 2: Statement of Cash Flows
Note that the majority of the information came from the balance sheet
or the income statement.
Amounts from the balance sheet were the differences between
years.
For the investing section:
 Review the income statement for sale of long-term assets
which cause a cash inflow. Report the total cash collected not
the change in the balance sheet account.
 Review the long-term asset accounts in the balance sheet for
changes in these accounts
 Purchase of long-term assets are cash outflows even if paid on
account
Net cash flows from investing
Cash inflows:
Sale of land
Sale of investments
$15,000.00
$60,000.00
$75,000.00
Cash outflows:
Construction of building
$115,000.00
-$115,000.00
Net cash flows from investing
Balance sheet shows that investments decreased by
$49,000. This is the cost of the investments sold.
Income statement shows that investments had a gain of
$11,000. Sum of the gain and the cost is the selling
price of $60,000.
-$40,000.00
Sale of land was found in the
balance sheet $15,000 cost and
in the notes for the selling price
of $15,000. Therefore no gain
or loss.
To complete the financing section:
 Report issuance of mortgages and payment of principal
 Report issuance of stock at the selling price
 Report the issuance of bonds at the selling price
 Report the payment of the company’s dividends
Created by: Prof M. Mari
Fall, 2007
Page 7 of 10
ACG 2071
Module 2: Statement of Cash Flows
Net cash flows from financing
Cash inflows:
Mortgage issued
Cash outflows:
Dividends paid
Net cash flows from financing
Net increase in cash
Beginning cash balance
Ending cash balance
$40,000.00
$70,670.00 *
-$30,670.00
$44,450.00
$95,900.00
$140,350.00
Dividends: computation
Beginning dividends payable as of Dec 31, 2005
$10,000
Cash dividends declared
$74,670
Total dividends owed
$84,670
Ending dividends payable as of Dec 31, 2006
$14,000
Dividends paid
$70,670
Created by: Prof M. Mari
Fall, 2007
Page 8 of 10
ACG 2071
Module 2: Statement of Cash Flows
Jones Company
Statement of Cash Flows
For period ended December 31, 2006
Net cash flows from operations:
Net income from operations
ADD:
depreciation
Patent amortization
Decrease in trade rec
Increase in accrued exp
$98,500.00
$23,500.00
$7,000.00
$7,000.00
$1,500.00
$39,000.00
DEDUCT:
Increase in inventories
Increase in prepaid exp
Decrease in accts pay
Decrease in income tax
Gain on sale of invest.
$7,300.00
$380.00
$3,200.00
$500.00
$11,000.00
-$22,380.00
Net cash flows from operations
Net cash flows from investing
Cash inflows:
Sale of land
Sale of investments
$115,120.00
$15,000.00
$60,000.00
$75,000.00
Cash outflows:
Construction of building
$115,000.00
-$115,000.00
Net cash flows from investing
Net cash flows from financing
Cash inflows:
Mortgage
issued
-$40,000.00
$40,000.00
Cash outflows:
Dividends paid
Net cash flows from financing
Net increase in cash
Beginning cash balance
Ending cash balance
Created by: Prof M. Mari
Fall, 2007
Page 9 of 10
$70,670.00
-$30,670.00
$44,450.00
$95,900.00
$140,350.00
ACG 2071
Module 2: Statement of Cash Flows
Schedule of Non Cash Activities:
 Listed on the bottom of statement of cash flows
 Shows exchanges
Created by: Prof M. Mari
Fall, 2007
Page 10 of 10