17-1
17
Statement of
Cash Flows
Learning Objectives
17-2
1
Discuss the usefulness and format of the statement of cash
flows.
2
Prepare a statement of cash flows using the indirect method.
3
Analyze the statement of cash flows.
LEARNING
OBJECTIVE
1
Discuss the usefulness and format of the
statement of cash flows.
Usefulness of the Statement of Cash Flows
Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet obligations.
3. Reasons for difference between net income and net cash
provided (used) by operating activities.
4. Cash investing and financing transactions during the period.
17-3
LO 1
Classification of Cash Flows
Operating
Activities
Investing
Activities
Financing
Activities
Income
Changes in
Investments
and Long-Term
Asset Items
Changes in
Long-Term
Liabilities and
Stockholders’
Equity Items
Statement Items
17-4
LO 1
Classification of Cash Flows
Operating activities—Income statement items
Cash inflows:
From sale of goods or services.
Illustration 17-1
Typical receipt and payment
classifications
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.
17-5
LO 1
Classification of Cash Flows
Investing activities—Changes in investments and long-term
assets
Illustration 17-1
Cash inflows:
Typical receipt and payment
classifications
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other
entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other
entities.
To make loans to other entities.
17-6
LO 1
Classification of Cash Flows
Financing activities—Changes in long-term liabilities and
stockholders’ equity
Illustration 17-1
Cash inflows:
Typical receipt and payment
classifications
From sale of common stock.
From issuance of debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire
capital stock (treasury stock).
17-7
LO 1
Significant Noncash Activities
1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report noncash activities in either a
17-8

separate schedule (bottom of the statement) or

separate note to the financial statements.
LO 1
Accounting Across the Organization
Net What?
17-9
LO 1
Format of the Statement of Cash Flows
Order of Presentation:
1. Operating activities.
2. Investing activities.
Direct Method
Indirect Method
3. Financing activities.
17-10
LO 1
Illustration 17-2
Format of statement of cash flows
17-11
LO 1
DO IT! 1
Classification of Cash Flows
Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 shares of $5 par value
common stock for $800,000 cash.
Financing
2. Borrowed $200,000 from Castle Bank, signing
a 5-year note bearing 8% interest.
Financing
3. Purchased two semi-trailer trucks for $170,000
cash.
Investing
4. Paid employees $12,000 for salaries and
wages.
Operating
5. Collected $20,000 cash for services performed.
Operating
17-12
LO 1
LEARNING
OBJECTIVE
2
Prepare a statement of cash flows using
the indirect method.
Three sources of information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
17-13
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-14
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-15
LO 2
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-16
LO 2
Indirect and Direct Methods
Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare.
2. Focuses on differences between net income and net
cash flow from operating activities.
17-17
LO 2
Indirect Method
COMPUTER SERVICES COMPANY
Income Statement
For the Month Ended December 31, 2017
Illustration 17-4
17-18
LO 2
Indirect Method
Illustration 17-4
2017
17-19
2016
LO 2
Indirect Method
Illustration 17-4
Additional information for 2017:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also
purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
17-20
LO 2
Step 1: Operating Activities
DETERMINE NET CASH PROVIDED/USED BY
OPERATING ACTIVITIES BY CONVERTING NET
INCOME FROM ACCRUAL BASIS TO CASH
BASIS.
Common adjustments to Net Income (Loss):

Add back non-cash expenses (depreciation, amortization,
or depletion expense).

Deduct gains and add losses.

Analyze changes in noncash current asset and current
liability accounts.
17-21
LO 2
Step 1: Operating Activities
Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of capital stock.
c. Payment of cash dividends to the company’s
stockholders.
d. None of the above.
17-22
LO 2
Step 1: Operating Activities
DEPRECIATION EXPENSE
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 17-6
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Net cash provided by operating activities
17-23
9,000
$
154,000
LO 2
Step 1: Operating Activities
LOSS ON DISPOSAL OF EQUIPMENT
Companies report as a source of cash in the investing
activities section the actual amount of cash received from
the sale.

Any loss on disposal is added to net income in the
operating section.

Any gain on disposal is deducted from net income in the
operating section.
17-24
LO 2
Step 1: Operating Activities
LOSS ON DISPOSAL OF EQUIPMENT
Illustration 17-7
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of equipment
3,000
Net cash provided by operating activities
17-25
$
157,000
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
When the Accounts Receivable balance decreases, cash receipts
are higher than revenue earned under the accrual basis.
Accounts Receivable
1/1/017
Balance
Sales Revenue
12/31/17 Balance
30,000
507,000
Receipts from customers
Illustration 17-8
517,000
20,000
Company adds to net income the amount of the decrease in
accounts receivable.
17-26
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
Illustration 17-9
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of equipment
3,000
Decrease in accounts receivable
Net cash provided by operating activities
17-27
10,000
$
167,000
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.
Inventory
1/1/17
Balance
Purchases
12/31/17 Balance
10,000
155,000
Cost of goods sold
150,000
15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
17-28
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
Illustration 17-9
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
Net cash provided by operating activities
17-29
$
162,000
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual
basis. The company deducts the decrease from net income to
arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher
than the expenses paid.
17-30
LO 2
Step 1: Operating Activities
CHANGES TO NONCASH CURRENT ASSET
Illustration 17-9
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
Increase in prepaid expenses
(4,000)
Net cash provided by operating activities
17-31
$
158,000
LO 2
Step 1: Operating Activities
CHANGES IN CURRENT LIABILITIES
When Accounts Payable increases, the company received
more in goods than it actually paid for. The increase is added
to net income to determine net cash provided by operating
activities.
When Income Tax Payable decreases, the income tax expense
reported on the income statement was less than the amount of
taxes paid during the period. The decrease is subtracted from
net income to determine net cash provided by operating
activities.
17-32
LO 2
Step 1: Operating Activities
CHANGES IN CURRENT LIABILITIES
Illustration 17-10
Cash flows from operating activities:
Net income
$
145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
9,000
Loss on disposal of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
Increase in prepaid expenses
(4,000)
Increase in accounts payable
16,000
Decrease in income taxes payable
(2,000)
Net cash provided by operating activities
17-33
$
172,000
LO 2
Step 1: Operating Activities
Summary of Conversion to Net Cash Provided by
Operating Activities—Indirect Method
Illustration 17-11
17-34
LO 2
DO IT! 2a
Cash from Operating Activities
Josh’s PhotoPlus reported net income of $73,000 for 2017.
Included in the income statement were depreciation expense of
$7,000 and a gain on disposal of equipment of $2,500. Josh’s
comparative balance sheets show the following balances.
Accounts receivable
Accounts payable
12/31/16
12/31/17
$17,000
$21,000
6,000
2,200
Calculate net cash provided by operating activities for Josh’s
PhotoPlus.
17-35
LO 2
DO IT! 2a
Cash from Operating Activities
Josh’s PhotoPlus reported net income of $73,000 for 2017, which
included depreciation expense of $7,000 and a gain on disposal
of equipment of $2,500. Accounts receivable increased $4,000
and accounts payable decreased by $3,800. Calculate net cash
provided by operating activities.
17-36
LO 2
Step 2: Investing and Financing Activities
Company purchased land of $110,000 by issuing long-term
bonds. This is a significant noncash investing and financing
activity that merits disclosure in a separate schedule.
Land
1/1/17
Balance
Issued bonds
12/31/17 Balance
20,000
110,000
130,000
Bonds Payable
1/1/17
17-37
Balance
For land
20,000
110,000
12/31/17 Balance
130,000
LO 2
Step 2: Investing and Financing Activities
Partial statement
17-38
Illustration 17-13
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
172,000
$
20,000
(29,000)
(9,000)
22,000
33,000
55,000
Disclosure: Issuance of bonds to purchase land
$
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 2
Step 2: Investing and Financing Activities
From the additional information, the company acquired an office
building for $120,000 cash. This is a cash outflow reported in the
investing section.
Building
1/1/17
Balance
Office building
12/31/17 Balance
17-39
40,000
120,000
160,000
LO 2
Step 2: Investing and Financing Activities
Partial statement
17-40
Illustration 17-13
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
172,000
$
20,000
(29,000)
(9,000)
22,000
33,000
55,000
Disclosure: Issuance of bonds to purchase land
$
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 2
Step 2: Investing and Financing Activities
The additional information explains that the equipment increase
resulted from two transactions: (1) a purchase of equipment of
$25,000, and (2) the sale for $4,000 of equipment costing $8,000.
Illustration 17-12
Equipment
1/1/17
Balance
Purchase
12/31/17 Balance
Journal
Entry
17-41
10,000
25,000
Equipment sold
8,000
27,000
Cash
Accumulated Depreciation
Loss on Disposal of Equipment
Equipment
4,000
1,000
3,000
8,000
LO 2
Statement
of Cash
Flows
Indirect
Method
17-42
Illustration 17-13
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
$
145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
$
20,000
(29,000)
(9,000)
22,000
33,000
55,000
LO 2
Step 2: Investing and Financing Activities
The increase in common stock resulted from the issuance of
new shares.
Common Stock
1/1/17
Balance
Shares sold
12/31/17 Balance
17-43
50,000
20,000
70,000
LO 2
Step 2: Investing and Financing Activities
Illustration 17-13
Partial statement
17-44
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
172,000
$
20,000
(29,000)
(9,000)
22,000
33,000
55,000
Disclosure: Issuance of bonds to purchase land
$
110,000
(120,000)
(25,000)
4,000
(141,000)
LO 2
Step 2: Investing and Financing Activities
Retained earnings increased $116,000 during the year. This
increase can be explained by two factors: (1) Net income of
$145,000 increased retained earnings, and (2) Dividends of
$29,000 decreased retained earnings.
Retained Earnings
Dividends
29,000
1/1/17
Balance
Net income
12/31/17 Balance
17-45
48,000
145,000
164,000
LO 2
Statement
of Cash
Flows
Indirect
Method
17-46
Illustration 17-13
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Loss on disposal of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of building
Purchase of equipment
Sale of equipment
Net cash used by investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of cash dividends
Net cash used by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
$
145,000
9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
172,000
(120,000)
(25,000)
4,000
(141,000)
$
20,000
(29,000)
(9,000)
22,000
33,000
55,000
LO 2
Step 2: Investing and Financing Activities
Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
17-47
LO 2
Step 3: Net Change in Cash
Compare the net change in cash on the Statement of Cash
Flows with the change in the cash account reported on the
Balance Sheet to make sure the amounts agree.
Illustration 17-4
2017
17-48
2016
LO 2
Accounting Across the Organization
Burning Through Our Cash
Box (cloud storage), Cyan (game creator), Fireeye (cyber security), and Mobile Iron
(mobile security of data) are a few of the tech companies that recently have issued
or are about to issue stock to the public. Investors now have to determine whether
these tech companies have viable products and high chances for success. An
important consideration in evaluating a tech company is determining its financial
flexibility—its ability to withstand adversity if an economic setback occurs. One way
to measure financial flexibility is to assess a company’s cash burn rate, which
determines how long its cash will hold out if the company is expending more cash
than it is receiving. Fireeye, for example, burned cash in excess of $50 million in
2013. But the company also had over $150 million as a cash cushion, so it would
take over 30 months before it runs out of cash. And even though Box has a much
lower cash burn rate than Fireeye, it still has over a year’s cushion. Compare that to
the tech companies in 2000, when over one-quarter of them were on track to run out
of cash within a year. And many did. Fortunately, the tech companies of today seem
to be better equipped to withstand an economic setback.
Source: Shira Ovide, “Tech Firms’ Cash Hoards Cool Fears of a Meltdown,” Wall Street
Journal (May 14, 2014).
17-49
LO 2
LEARNING
OBJECTIVE
3
Analyze the statement of cash flows.
Free Cash Flow
Illustration 17-14
Free cash flow describes the cash remaining from operations
after adjustment for capital expenditures and dividends.
17-50
LO 3
Free Cash Flow
Illustration 17-15
Microsoft’s cash flow
information ($ in millions)
Required:
Calculate
Microsoft’s
free cash
flow.
Cash provided by operating activities
Less: Expenditures on property, plant, and equipment
Dividends paid
Free cash flow
17-51
$21,863
4,257
7,455
$10,151
LO 3
LEARNING
OBJECTIVE
4
APPENDIX 17A: Statement of Cash
Flows Using the Direct Method.
1. Compute net cash provided by operating activities by
adjusting each item in the income statement from the
accrual basis to the cash basis.
2. Companies report only major classes of operating
cash receipts and cash payments.
3. For these major classes, the difference between
cash receipts and cash payments is the net cash
provided by operating activities.
17-52
LO 4
Step 1: Operating Activities
17-53
Illustration 17A-2
Major classes of cash
receipts and payments
LO 4
Direct Method
COMPUTER SERVICES COMPANY
Income Statement
For the Month Ended December 31, 2017
Illustration 17-4
17-54
LO 4
Direct Method
Illustration 17-4
2017
17-55
2016
LO 4
Direct Method
Illustration 17-4
Additional information for 2017:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also
purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
17-56
LO 4
Step 1: Operating Activities
Cash Receipts from Customers
For Computer Services, accounts receivable decreased $10,000.
Illustration 17A-4
Accounts Receivable
1/1/017
Balance
Sales revenue
12/31/17
Balance
30,000
507,000
Receipts from customers
517,000
20,000
Illustration 17A-5
17-57
LO 4
Step 1: Operating Activities
Cash Payments to Suppliers
In 2017, Computer Services Company’s inventory increased $5,000
and cash payments to suppliers were $139,000.
Inventory
1/1/17
Balance
Purchases
12/31/17
Balance
10,000
155,000
Cost of goods sold
15,000
Illustration 17A-8
Accounts Payable
Payment to suppliers
139,000
1/1/17
Balance
Purchases
12/31/17
17-58
150,000
Balance
12,000
155,000
28,000
LO 4
Step 1: Operating Activities
Cash Payments to Suppliers
In 2017, Computer Services Company’s inventory increased $5,000
and cash payments to suppliers were $139,000.
Illustration 17A-10
Formula to compute cash payments
to suppliers—direct method
17-59
LO 4
Step 1: Operating Activities
Cash Payments for Operating Expenses
Cash payments for operating expenses were $115,000.
Illustration 17A-11
Illustration 17A-12
17-60
LO 4
Step 1: Operating Activities
Cash Payments for Interest
In 2017, Computer Services’ had interest expense of $42,000.
Interest Payable
Cash paid for interest
42,000
1/1/17
Balance
Interest expense
12/31/17 Balance
17-61
0
42,000
0
LO 4
Step 1: Operating Activities
Cash Payments for Income Taxes
Cash payments for income taxes were $49,000.
Income Tax Payable
Cash paid for taxes
49,000
1/1/17
Balance
Income tax expense
12/31/17 Balance
8,000
47,000
6,000
Illustration 17A-15
17-62
LO 4
Step 1: Operating Activities
Illustration 17A-16
Operating activities section
of the statement of cash flows
17-63
LO 4
Step 2: Investing and Financing Activities
Increase in Equipment. (1) Equipment purchased for $25,000, and (2)
equipment sold for $4,000, cost $8,000, book value $7,000.
Equipment
1/1/17
Balance
Purchases
12/31/17 Balance
10,000
25,000
Illustration 17A-17
Cost of equipment sold
8,000
27,000
Accumulated Depreciation
Equipment sold
1,000
1/1/17
Balance
1,000
Depreciation expense
3,000
12/31/17 Balance
17-64
3,000
LO 4
Step 2: Investing and Financing Activities
Increase in Equipment. (1) Equipment purchased for $25,000, and (2)
equipment sold for $4,000, cost $8,000, book value $7,000.
Cash
4,000
Accumulated Depreciation
1,000
Loss on Disposal of Equipment
3,000
Equipment
17-65
8,000
LO 4
Step 2: Investing and Financing Activities
Increase in Land. Land increased
$110,000. The company purchased
land of $110,000 by issuing bonds.
Significant noncash
investing and financing
transaction.
Increase in Building. Acquired building
for $120,000 cash.
Investing transaction.
Increase in Bonds Payable. Bonds
Payable increased $110,000. The
company acquired land by exchanging
bonds for land.
Significant noncash
investing and financing
transaction.
17-66
LO 4
Step 2: Investing and Financing Activities
Increase in Common Stock. Increase in
Common Stock of $20,000. Increase
resulted from the issuance of new
shares of stock.
Increase in Retained Earnings. The
$116,000 net increase in Retained
Earnings resulted from net income of
$145,000 and the declaration and
payment of a cash dividend
of $29,000.
17-67
Financing
transaction.
Financing
transaction (cash
dividend)
LO 4
Illustration 17A-18
Statement of cash flows,
2017—direct method
17-68
LO 4
Step 3: Net Change in Cash
Compare the net change in cash on the Statement of Cash Flows with
the change in the cash account reported on the Balance Sheet to
make sure the amounts agree.
Illustration 17-4
2017
17-69
2016
LO 4
LEARNING
OBJECTIVE
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
17-70
5
APPENDIX 17B: Use a worksheet to prepare the
statement of cash flows using the indirect method.
Preparing the Worksheet
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
Additional information for 2017:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also
purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
17-71
LO 5
Preparing the Worksheet
1. Enter in the balance sheet accounts section the balance sheet
accounts and their beginning and ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the balance sheet accounts other than
cash and their effects on the statement of cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
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LO 5
Preparing
the
Worksheet
Illustration 17B-3
Completed worksheet—
indirect method
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LO 5
LEARNING
OBJECTIVE
6
APPENDIX 17C: Use the T-account approach to
prepare a statement of cash flows.
The change in cash is equal to the change in all of the other
balance sheet accounts.
If we analyze the changes in all of the noncash balance sheet
accounts, we will explain the change in the cash account.
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LO 6
Illustration 17C-1
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LO 6
A Look at IFRS
LEARNING
OBJECTIVE
7
Compare the procedures for the statement of
cash flows under GAAP and IFRS.
Relevant Facts
Similarities

Companies preparing financial statements under IFRS must prepare
a statement of cash flows as an integral part of the financial
statements.

Both IFRS and GAAP require that the statement of cash flows
should have three major sections—operating, investing, and
financing—along with changes in cash and cash equivalents.
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LO 7
A Look at IFRS
Relevant Facts

Similar to GAAP, the cash flow statement can be prepared using
either the indirect or direct method under IFRS. In both U.S. and
international settings, companies choose for the most part to use the
indirect method for reporting net cash flows from operating activities.

The definition of cash equivalents used in IFRS is similar to that
used in GAAP. A major difference is that in certain situations, bank
overdrafts are considered part of cash and cash equivalents under
IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts
are classified as financing activities in the statement of cash flows
and are reported as liabilities on the balance sheet.
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LO 7
A Look at IFRS
Relevant Facts
Differences

IFRS requires that noncash investing and financing activities be
excluded from the statement of cash flows. Instead, these noncash
activities should be reported elsewhere. This requirement is
interpreted to mean that noncash investing and financing activities
should be disclosed in the notes to the financial statements instead
of in the financial statements. Under GAAP, companies may present
this information on the face of the statement of cash flows.
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LO 7
A Look at IFRS
Relevant Facts

One area where there can be substantial differences between IFRS
and GAAP relates to the classification of interest, dividends, and
taxes. The following table indicates the differences between the two
approaches.
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A Look at IFRS
Relevant Facts

Under IFRS, some companies present the operating section in a
single line item, with a full reconciliation provided in the notes to the
financial statements. This presentation is not seen under GAAP.
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A Look at IFRS
Looking to the Future
Presently, the FASB and the IASB are involved in a joint project on the
presentation and organization of information in the financial statements.
One interesting approach, revealed in a published proposal from that
project, is that in the future the income statement and balance sheet would
adopt headings similar to those of the statement of cash flows. That is, the
income statement and balance sheet would be broken into operating,
investing, and financing sections.
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LO 7
A Look at IFRS
IFRS Self-Test Questions
Under IFRS, interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
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A Look at IFRS
IFRS Self-Test Questions
IFRS requires that noncash items:
a) be reported in the section to which they relate, that is, a
noncash investing activity would be reported in the
investing section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
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LO 7
A Look at IFRS
IFRS Self-Test Questions
In the future, it appears likely that:
a) the income statement and balance sheet will have headings of
operating, investing, and financing, much like the statement of
cash flows.
b) cash and cash equivalents will be combined in a single line
item.
c) the IASB will not allow companies to use the direct approach
to the statement of cash flows.
d) None of the above.
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Copyright
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