Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by
Gabriela H. Schneider, CMA; Grant MacEwan College

C H A P T E R
23

1. Describe the purpose and uses of the statement of cash flows.
2. Define cash and cash equivalents.
3. Identify the major classifications of cash flows and explain the significance of each.
4. Contrast the direct and indirect methods of calculating net cash flow from operating activities.

5. Differentiate between net income and net cash flows from operating activities.
6. Prepare a statement of cash flows.
7. Read and interpret a statement of cash flows.
8. Identify the financial reporting and disclosure requirements for the statement of cash flows.
9. Use a work sheet to prepare a statement of cash flows.

Introduction to the
Statement
Usefulness
What is cash?
Classification of cash flows
Format of the statement
Preparing a
Statement of
Cash Flows
Sources of information and steps
First illustration
Second illustration
Third illustration
Interpreting the statement
Reporting and
Disclosure
Requirements
Cash flow statements
Cash flow per share
Financial reporting example
Use of a
Worksheet
Preparation
Analysis of transactions
Completing the worksheet

• The information may help users assess the following:
• The entity’s ability to generate future cash flows
• The entity’s ability to pay dividends and meet obligations
• The reasons why net income and net cash flow from operating activities differ
• Cash and non-cash investing and financing activities during the year

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
• Not subject to a significant change in value

• 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

Operating activities
Investing activities
Financing activities
Inflows
Cash
Pool
Outflows
Operating activities
Investing activities
Financing activities

• There are TWO methods of preparing the statement of cash flows:
• Indirect method
• Direct method
• The indirect method derives cash flows from accrual basis statements
• The direct method determines cash flows directly for each source or use of cash

Statement of Cash Flows:
Indirect Method - Concept
Earned
Revenues
Expenses
Incurred
+ Eliminate non-cash revenues
Net Income
Operating cash flow
-
Eliminate non-cash charges

The Statement of Cash Flows:
Indirect Method
Accrual Basis Statements
Income Statement items and changes in Current
Assets and Current Liabilities
Balance Sheet:
Changes in
Non-Current Assets
Cash Flow Statement
Operating activities:
Adjust net income for accruals , non-cash charges and nonoperating gains/losses
Investing activities:
Inflows from sale of assets and outflows from purchases of assets
Balance Sheet:
Changes in Non-Current
Liabilities and Equity
Financing activities:
Inflows and outflows from loan and equity transactions

Direct Method (Operating Activities)
Inflows
• From sales of goods or services
• From returns on loans (interest) and returns on equity securities
(dividends)
Outflows
• To suppliers for inventory
• To employees for services
• To government for taxes
• To lenders for interest
• To others for expenses

• For the direct and indirect methods: the sections reporting investing and financing activities are the same
• The net inflows or outflows for each section (under the two methods) are identical
• The operating activities are reported differently

Format of the Statement of
Cash Flows: Indirect Method
Cash flows from operating activities:
Net Income (Loss) $ XXX
Adjustments (List individual inflows and outflows) $ XX
Net cash flow from operating activities $ 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

Format of the Statement of Cash
Flows: Direct Method
Cash flows from operating activities:
Cash receipts (individually): Inflows $ XXX
Cash payments to suppliers (separately): outflows ($ XXX)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List individual inflows and outflows)
Net cash flow from investing activities
Cash flows from financing activities:
(List individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
$ XX
$ XXX

Intelmarkets begins operations on January 1, 2000.
The income statement and balance sheet for year 2000 follow.
Revenues:
Income Statement
$ 200,000
Less: Cost of goods sold
Gross Margin
Less: Operating expenses
Net Income before Tax: less: Income Tax
Net Income after Tax
110,000
90,000
40,000
50,000
15,000
$ 35,000
Operating expenses do not contain any non-cash charges

Assets:
Cash
Accounts Receivable
Inventory
Land
Total
Liabilities and Equity:
Accounts Payable
Common Stock
Retained Earnings
Total
Balance Sheet
Dec 31, 2000 Jan 1, 2000
$ 25,000
32,000
29,000
110,000
$196,000
$-0-
-0-
-0-
-0-
$-0-
$ 24,000
147,000
25,000
$196,000
$-0-
-0-
-0-
$-0-

Accrual Basis
Net Income after Tax $35,000
Cash Flow
Net Income after Tax $35,000
Accounts Receivable +$ 32,000
Inventory +$ 29,000
Accounts Payable +$ 24,000
Less: Increase in A/R $ 32,000
Less: Increase in Inv. $ 29,000
Add: Increase in A/P $ 24,000
Changes between beginning and ending balances
Operations: Net Outflow 2,000
See explanations next slide

Accounts Receivable
Increased by $32,000
Cash collections are less than revenue recognized
Reduce net income by $32,000 to derive cash flows from operations

Inventory increased by $29,000
Cost of goods sold for the year decreases by $29,000
Reduce net income by $29,000 to derive cash flows from operations
Net income for the year increases by $29,000

Land
Accrual Basis
+ $110,000
Cash Flow
Investing Activities:
Purchase of Land: ($110,000)
Outflow ($110,000)
Common Stock +$147,000
Retained Earnings+$ 25,000
Financing Activities:
Issue of Common Stock: $147,000
Dividends paid: ( 10,000)
Inflow 137,000
Beg Bal: $ 0
Net Income: 35,000 less: Dividends( 10,000)
End Balance: $25,000

Cash Flow Statement:
(Indirect Method) - Summary
• Cash used by operating activities:($ 2,000)
• Cash used by investing activities:($110,000)
• Cash from financing activities: $137,000
• Net inflow for the year $ 25,000
• Beginning cash balance:
• Ending cash balance
$ -0-
$ 25,000

Indirect Method:
Special Items - Summary
• Note the following adjustments to net income in deriving operating cash flow:
• Loss on sale of assets is added to net income
• Gain on sale of assets is deducted from net income
• Discount on bonds payable (as amortized) is added to net income
• Premium on bonds payable (as amortized) is deducted from net income

Cash Receipts
From sale of goods and services to customers
From receipts of interest and dividends
Cash Payments less
To suppliers
To employees
For operating exp
For interest
For taxes equals
Cash flow from operations

Cash Flow Statement: Direct Method
Refer to the data for the indirect method.
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/R balances
- Increase in A/R balances
= $200,000 - $32,000 = $168,000
Cash payments to suppliers:
= cost of goods sold + increase in inventory
- decrease in inventory
+ decrease in accounts payable
- increase in accounts payable
= $110,000 + $29,000 - $24,000 = $115,000

Cash Flow Statement: Direct Method
Cash payments for operating and other expenses:
= Operating expenses + increase in prepaid expenses
- decrease in prepaid expenses
+ decrease in accrued expenses payable
- increase in accrued expenses payable
$40,000 operating + $15,000 tax = $55,000
Note: There are no accruals in the balance sheet for these accounts. So, these are deemed cash payments.

Operating Activities:
Cash receipts from sales
Cash paid to suppliers for merchandise
Cash paid for income taxes
Net cash outflow
$ 168,000
(115,000)
(55,000)
$ 2,000

Given:
2002 2001
Property, plant, and equipment $277,000 $247,000
Accumulated depreciation (178,000) ( 167,000)
Other information:
Depreciation expense
Gain on sale of equipment
$ 33,000
$ 14,500
During 2002, equipment costing $45,000 was sold for cash
Present relevant T- accounts and cash flow information.

• Prepare the T-Account for accumulated depreciation and determine the accumulated depreciation on asset sold
• Determine the cash flow from sale of equipment
• Determine any purchases of plant and equipment (at cost)
• Identify the inflows and outflows affecting the operating and investing sections

1 Accumulated Depreciation
Accum. deprec. (beg) : $167,000
Plus: depreciation expense $ 33,000 less: depreciation on equip sold (?) $ 22,000
Accum. deprec. (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:Accu depr 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:
Depreciation - Inflow $33,000
Gain on sale
Investing Activities:
($14,500)
Sale of equipment - inflow $37,500
Asset purchases - outflow ($75,000)

Reporting Significant
Non-Cash Transactions
• Transactions not involving cash inflows or cash outflows are non-cash transactions
• They are not reported in the body of the cash flow statement
• If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements
• Example: issue of bonds (payable) for the purchase of land

• Aid in statement preparation
• Guidelines for using the worksheet
1. Balance Sheet section – list debit balances separately from credit balances, regardless of the type of account
2. Bottom half of the worksheet is for
Statement data – cash outflows and inflows
3. Amounts entered on the worksheet are not journal entries, or entirely debits and credits
• Top half of the worksheet may be considered debts and credits
• Bottom half of the worksheet may be considered cash inflows and outflows

Balance Sheet Accounts
Debit balance accounts
Totals
Credit balance accounts
Totals
Cash Flows
Operating Activities
Net income
Net loss
Adjustments
Investing Activities
Receipts (dr.)
Payments (cr.)
Financing Activities
Receipts (dr.)
Payments (cr.)
Totals
Increase (decrease) in cash
Totals
End of Last
Year Balances
XX
XX
XX
XX
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
XX
XX
XX
XX
XX
Reconciling Items
Debits Credits
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
End of Current
Year Balances
XX
XX
XX
XX
XX
XX

Copyright © 2002 John Wiley & Sons Canada, Ltd.
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