Chapter 22
Statement of Cash Flows
Prepared by:
Patricia Zima, CA
Mohawk College of Applied Arts and Technology
Statement of Cash Flows
Introduction to
the Statement of
Cash Flows
•Usefulness of
the statement of
cash flows
•What is cash?
•Classification of
cash flows
•Format of the
statement of
cash flows
Preparing a
Statement of Cash
Flows
•Sources of
information and
steps in the process
•First illustration –
Tax Consultants Inc.
•Second illustration –
Eastern Window
Products Limited
•Third illustration –
Yoshi Corporation
Perspectives
•Reporting and
disclosure issues
•Cash flow per
share information
•Distributable
cash
•Free cash flow
•Illustrative
examples
•Interpreting the
statement of cash
flows
•International
Appendix 22A
- Use of a
Worksheet
•Preparing the
worksheet
•Analyzing
transactions
•Completing
the work
sheet
2
Usefulness of the
Statement of Cash Flows
•
The information may help users (investors,
creditors, and others) assess the following:
1. Liquidity and solvency – i.e. the entity’s
ability to generate future cash flows and
its needs for cash resources
2. The amounts, timing, and uncertainty of
future cash flows
3. The reasons why net income and net cash
flow from operating activities differ
3
Cash and Cash Equivalents
Cash
• Cash on hand
• Demand deposits
All references to Cash
include Cash Equivalents
when discussing the
Statement of Cash Flows
Cash Equivalents
• Investments that are
– Short term,
– Highly liquid, and
– Easily converted to a
known amount of cash
– Subject to an
insignificant risk of
change in value
4
The Cash Flow Statement
•
The cash flow statement provides
information about:
• the cash receipts (cash inflows), and
• uses of cash (cash outflows) during the
year
•
Inflows and outflows are reported for:
• operating activities
• investing activities, and
• financing activities during the year
5
Cash Flow Classifications
1.
Operating Activities
• The cash flows resulting from the primary revenueproducing activities of the business, such as
•
•
•
•
•
Collections from customers
Payments to suppliers
Payments to employees
Payments to CRA for tax
Cash flow provided by operating activities
necessary for long term sustainability of the
business (i.e. to take advantage of new investment
opportunities, to pay dividends without seeking
external financing etc.)
6
Cash Flow Classifications
2. Investing Activities
•
•
•
The acquisition and disposal of long term
assets and long-term investments
Examples include:
• Purchase/disposal of capital assets
• Acquiring an interest in another
corporation
Cash flow generated by investing activities
shows if the business is investing in
additional long term assets that will generate
profits and increase cash flows in the future
7
Cash Flow Classifications
3. Financing Activities
•
•
•
Changes in long-term debt or equity capital
Examples include:
• Issuing debt, or repayment of debt
• Issuing new shares, or repurchase of
currently outstanding shares
Provides information to assess potential for
future claims to entity’s cash, extent of debt
and increased interest charges
8
Exercise E22-1: Identify
Transactions
• Identify each of the transactions as either
– Operating activity (mostly working capital
accounts)
– Investing activity (mostly long-term assets)
– Financing activity (mainly long-term liability
and equity accounts)
– Significant noncash investing or financing
activity
– None of the above
9
Exercise E22-1: Identify
Transactions
a)
b)
c)
d)
e)
f)
Acquisition of raw materials
Operating Activity (noncash)
Declaration of dividends
Financing Activity (noncash)
Collected cash dividends from HTM investments
Operating activity
Acquisition of a 4% interest in a company
Investing Activity
Contribution to employees’ pension plan
Operating Activity
Equipment leased through capital lease
Significant noncash investing and financing activity
10
Exercise E22-1: Identify
Transactions
g)
h)
i)
j)
k)
l)
Office space leased with an operating lease
Operating Activity (noncash)
Paid interest on outstanding debt and amortized the
discount
Operating Activity
Paid the supplier from transaction a)
Operating Activity
Acquired land by issuing preferred shares
Significant noncash investing and financing activity
Paid car dealership for vehicles
Investing Activity
Collected a dividend on investment made in d)
Operating Activity
11
Statement of Cash Flows:
Concept
Operating
activities
Inflows
Investing
activities
Financing
activities
Cash
Pool
Operating
activities
Investing
activities
Outflows
Financing
activities
12
Significant Noncash Transactions
• Transactions that do not involve the direct
receipt or disbursement of cash in the period
• Examples:
– Asset purchased, paid for by assuming
debt, or issuance of shares
– Exchanges of non-monetary assets
– Conversion of debt to equity
• Noncash transactions are not reported on the
Statement of Cash Flows
• If material, they are reported as notes to the
statement or in a supplementary schedule to
the financial statements
13
Preparing a
Statement of Cash Flows
•
Two methods of preparing the operating cash
flow section of the Statement of Cash Flows:
1. Indirect method
2. Direct method
• Indirect method derives operating cash flows
from accrual basis income statement
• Direct method determines operating cash
flows directly for each operating source or use
of cash
14
In favour of Direct Method
• Is more consistent with objective of a
statement of cash flows
• Knowing specific sources of cash inflows and
purposes of cash outflows helps in estimating
future cash flows
• Lending officers and other investors prefer
direct method
• AcSB encourages use of direct method as it
provides additional information
15
Cash Flow from Operations:
Indirect Method – Concept
Earned
Revenues
+
Net Income
Expenses
Incurred
-
Eliminate
non-cash revenues
Operating
cash flow
Eliminate
non-cash charges
16
The Statement of Cash Flows:
Indirect Method
Accrual Basis Statements
Cash Flow Statement
Income Statement items
and changes in Current
Assets and Current Liabilities
Operating activities:
Adjust net income for accruals,
non-cash charges and nonoperating gains/losses
Balance Sheet:
Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
outflows for purchases of assets
Balance Sheet:
Changes in Non-Current
Liabilities and Equity
Financing activities:
Inflows and outflows from loan
and equity transactions
17
Format of the Statement of
Cash Flows (Indirect Method)
Cash flows from operating activities:
Net Income (Loss)
Adjustments (List individual adjustments)
Net cash flow from operating activities
$ XXX
$ XX
$ XXX
Cash flows from investing activities:
(List individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Change in cash
$ XXX
18
Format of the Statement of Cash
Flows (Direct Method)
Cash flows from operating activities:
Cash receipts (individually): Inflows
Cash payments (separately): outflows
Net cash flow from operating activities
$ XXX
($ XXX)
$ XXX
Cash flows from investing activities:
(List individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Change in cash
$ XXX
19
Cash Flows from Operations: Direct
Method
Inflows
Outflows
• Received from
customers for cash
sales and on
account
• Cash dividends and
interest received
• To suppliers for cash
purchases and
payments on account
• To employees for
salaries and wages paid
• To government for taxes
paid
• To lenders for interest
paid
• To others for expenses
paid
20
Indirect Method: Example
Tax Consultants Inc. began operations on January 1, 2008.
The income statement and balance sheet for year 2008 follow.
Income Statement
Revenues
Less: Operating expenses
Income before Tax
Less: Income Tax
Net Income
$ 125,000
85,000
40,000
6,000
$ 34,000
A dividend of $14,000 was declared during year.
21
Indirect Method: Example
Balance Sheet
Dec 31, 2008 Jan 1, 2008
Assets:
Cash
Accounts Receivable
Total
$ 49,000
36,000
$ 85,000
$-0-0$-0-
Liabilities and Shareholders’ Equity:
Accounts Payable
$ 5,000
Common Shares
60,000
Retained Earnings
20,000
Total
$85,000
$-0-0-0$-022
Operating Activities
Accrual Basis
Net Income
$34,000
Accounts Receivable +$ 36,000
Accounts Payable
+$ 5,000
Changes between beginning
and ending balances
Cash Flow
Net Income
$34,000
Less: Increase in A/R
Add: Increase in A/P
$ 36,000
$ 5,000
Operations: Net Inflow $3,000
See explanations next slide
23
Operating Activities
Accounts Receivable
Increased by $36,000
Cash collections are
less than revenue
recognized
Reduce net income
by $36,000 to derive
cash flows from
operations
24
Operating Activities
Accounts Payable
Increased by $5,000
Cash paid for purchases
is less than expenses
reported
Increase net income
by $5,000 to derive
cash flows from
Operations; net
income for the year
increases by $5,000
25
Investing and
Financing Activities
Accrual Basis
Common Stock + $60,000
Retained Earnings +
$20,000
Cash Flow
Financing Activities:
Issue of Shares: $60,000
Dividends paid: ( 14,000)
Inflow
46,000
Beg Bal:
$
0
Net Income:
34,000
less: Dividends (14,000)
End Balance: $20,000
26
Cash Flow Statement:
(Indirect Method) - Summary
• Cash provided by operating activities: $ 3,000
• Cash used by investing activities:
-0-
• Cash provided by financing activities:
46,000
• Net inflow for the year
$ 49,000
• Beginning cash balance:
$
• Cash, end of year
$ 49,000
-0-
27
Other Items
• Income statement gains and losses on disposal
of long-term assets must be adjusted in
determining cash from operations. Why?
• These result from investing activities, not
operating activities and
• The amount of the cash flow is the proceeds on
disposal, not the gain or loss
28
Other Items
• Income statement gains and losses on
redemption of long-term debts must be adjusted
in determining cash from operations. Why?
• These result from financing activities, not
operating activities and
• The amount of the cash flow is the amount paid
to redeem the debt, not the gain or loss
29
Direct Method: Concept
Cash Payments
Cash Receipts
To suppliers
Collections from
customers
less
To employees
For operating exp
From receipts
of interest and
dividends
equals
Cash
flow
from
operations
For interest
For taxes
30
Cash From Operations: Direct
Method
Refer to Tax Consultant Inc. the data for the indirect method.
Cash receipts from customers:
= Revenue from credit sales – Increase in A/R balances
= $125,000 – $36,000 = $89,000
Cash payments to suppliers:
= cost of goods sold
= $85,000 – $5,000 = $80,000
31
Direct Method:
Operating Activities
Operating Activities:
Cash receipts from customers
Cash paid to suppliers
Cash paid for income taxes
Net cash inflow
$ 89000
(80,000)
(6,000)
$ 3,000
32
Special Items: Amortization
Given:
Property, plant, and equipment
Accumulated amortization
2008
2007
$277,000 $247,000
(178,000) ( 167,000)
Other information:
Amortization expense
$ 33,000
Gain on sale of equipment
$ 14,500
During 2008, equipment costing $45,000 was sold for cash
Present relevant T- accounts and cash flow information.
33
Special Items:
Amortization - Steps
• Prepare the T-Account for accumulated
amortization and determine the accumulated
amortization on asset sold
• Determine cash from sale of equipment
• Determine any purchases of plant and
equipment (at cost)
• Identify the inflows and outflows affecting the
operating and investing sections
34
Special Items: Amortization
1 Accumulated Amortization
Accum. amort. (beg): $167,000
Plus: amortization
expense
$ 33,000
less: amortization on
equipment sold (?)
$ 22,000
Accum. amort. (ending): $178,000
3 Prop., Plant, & Equipment
Beginning balance:
$247,000
Add: Purchases (?)
$ 75,000
Less: Equipment Sold $ 45,000
Ending balance:
$277,000
2
Equipment Sold
Equipment sold (cost):
$45,000
Less: Accum. amort. on
equipment
22,000
Book value of equipment sold 23,000
Add: Gain on sale
14,500
Cash from sale of equipment $37,500
4
Cash Flow Statement
Operating Activities:
Amortization – Adjust. $ 33,000
Gain on sale
($14,500)
Investing Activities:
Sale of equipment - inflow $37,500
Asset purchases - outflow ($75,000)
35
Reporting and Disclosure Issues
CICA Handbook, Section 1540 requires the
following separate disclosures:
1.
2.
3.
4.
Pre-tax cash flows from extraordinary items
Cash flow for interest and dividend payments
Income tax cash flows
Business combination and business unit/segment
disposal cash flows
5. Policy for determining cash and cash equivalents,
and its components and a reconciliation of
amounts reported on statement of cash flows with
amounts reported on balance sheet
36
Cash Flow per Share Information
• Per CICA Handbook Section 1540, cash flow
per share should not be reported in financial
statements, except if payable to owners
• These cash amounts payable to owners can
be disclosed in the statement of cash flows or
in notes to the statements
37
International
• There are very few differences between
Canadian and international GAAP for the
statement of cash flows
• One difference is that IAS 7 permits a choice
for the reporting of interest and dividend
receipts and payments – i.e. interest and
dividends received may be included with
either investing or operating activities and
interest and dividends paid may be either
financing or operating
38
COPYRIGHT
Copyright © 2007 John Wiley & Sons Canada, Ltd.
All rights reserved. Reproduction or translation of
this work beyond that permitted by Access Copyright
(The Canadian Copyright Licensing Agency) is
unlawful. Requests for further information should be
addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make
back-up copies for his or her own use only and not
for distribution or resale. The author and the
publisher assume no responsibility for errors,
omissions, or damages caused by the use of these
programs or from the use of the information
contained herein.
39