Statement of Cash Flows
Sid Glandon, DBA, CPA
Associate Professor of Accounting
1
Purpose
Reports on cash inflows and outflows for an
accounting period
 Provides information regarding

 ability
of firm to generate cash from operations
 ability to maintain and expand operating
capacity
 ability to meet financial obligations and pay
dividends
2
Types of Cash Flow Activities
Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities

3
Operating Activities
Receipts from revenues
 Payments for expenses

4
Investing Activities
Receipts from sale of noncurrent assets
 Payments for acquisition of noncurrent
assets

5
Financing Activities
Receipts from issuance of equity and debt
securities
 Payments for

 dividends
 redemption
of equity securities (treasury stock)
 redemption of debt securities
6
Noncash Investing/Financing

Supplementary schedule to the statement
 Noncash
Investing Activities
 Acquisition
of plant assets by issuing bonds or
capital stock
 Purchase a building through a mortgage loan
 Noncash
Financing Activities
 Issuance
of capital stock in exchange for convertible
preferred stock or debt
7
Method of Reporting
Cash Flows from Operating Activities
Direct Method
 Indirect Method (reconciliation method)

8
Cash Flows from Operating Activities:
Direct Method
Cash received from customers
 Cash paid for inventory, labor, and services

9
Cash Flows from Operating Activities:
Indirect Method
Net income
 plus
noncash charges to net income
 plus/minus changes in current assets
 plus/minus changes in current liabilities
 plus/minus gains/losses on investing activities
 plus/minus gains/losses on financing activities
10
Cash Flows From Operating Activities-Indirect Method
Net income (from the income statement)
Add: Amortization
Depreciation
Changes in current assets:
Increases
Decreases
Changes in current liabilities:
Increases
Decreases
Gains from investing or financing
Losses from investing or financing
Net cash flows from operating activities
$
+
+
+
+
+
$
11
The Three Foolers
Reported as Operating Activities
Interest paid on debt
 Interest received on investments
 Dividends received on investments

12
Using the Worksheet Approach
Prepare comparative balance sheets
 Identify changes in cash for each account
 Using income statement and T-account
analysis

 Spread
changes in cash to appropriate columns
 Reconcile balances of each type of activity
13
Spencer Company
Comparative Balance Sheets
December 31, 2001 and 2000
Assets
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Total assets
Liabilities and Stockholders' Equity
Accounts payable (merchandise creditors)
Accured expenses (operating expenses)
Interest payable
Income tax payable
Dividends payable
Mortgage note payable
Bonds payable
Common stock, $25 per value
Paid-in capital in excess of par
Retained earnings
Total liabilities and stockholders' equity
2001
2000
$
57,870 $
66,200
137,180
117,800
211,500
190,150
5,160
6,120
44,500
93,500
77,250
75,000
412,500
225,000
(91,260)
(81,220)
493,700
437,500
(179,700)
(149,750)
$ 1,168,700 $ 980,300
$
58,715
11,000
1,875
5,000
15,660
175,000
100,000
450,000
47,250
304,200
$ 1,168,700
$
$
51,875
10,500
1,875
8,500
12,500
250,000
375,000
41,250
228,800
980,300
14
Spencer Company
Income Statement
For The Year Ended December 31, 2001
Sales
Cost of merchandise sold
Gross profit
Operating expenses:
Depreciation expense
Other operating expenses
Operating income
Other income:
Gain on sale of land
Gain on sale of investments
Other expense:
Interest expense
Income before income tax
Income tax
Net income
$ 1,520,700
1,110,200
410,500
$
39,990
227,110
267,100
143,400
20,500
11,000
31,500
$
25,000
149,900
38,500
111,400
15
T-Account: Investments
Description
Debit
Beginning balance
$93,500
Purchase of investment
40,500
Sale of investment
Ending balance
$44,500
T-Account: Equipment
Description
Debit
Beginning balance
$437,500
Purchase of equipment
56,200
Ending balance
$493,700
T-Account: Accumulated Depreciation
Description
Debit
Beginning balance
Current year depreciation
Ending balance
Credit
$89,500
Credit
Credit
$149,750
29,950
$179,700
16
T-Account: Land
Description
Beginning balance
Purchase of land
Sale of land
Ending balance
T-Account: Buildings
Description
Beginning balance
Purchase of building
Ending balance
Debit
$75,000
62,500
Credit
$60,250
$77,250
Debit
$225,000
187,500
$412,500
T-Account: Accumulated Depreciation
Description
Debit
Beginning balance
Current year depreciation
Ending balance
Credit
Credit
$81,220
10,040
$91,260
17
T-Account: Dividends Payable
Description
Debit
Beginning balance
Dividends declared
Dividends paid
$32,900
Ending balance
T-Account: Mortgage Payable
Description
Debit
Beginning balance
Issuance of mortgage
Ending balance
T-Account: Bonds Payable
Description
Debit
Beginning balance
Bonds retired at face
$150,000
Ending balance
Credit
$12,500
36,000
$15,600
Credit
$0
175,000
$175,000
Credit
$250,000
$100,000
18
T-Account: Common Stock
Description
Debit
Beginning balance
Sold 3,000 shares, $25 par value
Ending balance
Credit
$375,000
75,000
$450,000
T-Account: Additional Paid-In Capital, Common Stock
Description
Debit
Credit
Beginning balance
$41,250
Sold 3,000 shares, $2 excess of par
6,000
Ending balance
$47,250
T-Account: Retained Earnings
Description
Debit
Beginning balance
Net income
Dividends declared
$36,000
Ending balance
Credit
$228,800
111,400
$304,200
19
Accounts
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Dividends payable
Martgage note payable
Bonds payable
Common stock, $25 par value
Paid-in capital in excess of par
Retained earnings
December 31,
2001
2000
$57,870
$66,200
137,180
211,500
5,160
44,500
77,250
412,500
(91,260)
493,700
(179,700)
(58,715)
(11,000)
(1,875)
(5,000)
(15,660)
(175,000)
(100,000)
(450,000)
(47,250)
(304,200)
$0
117,800
190,150
6,120
93,500
75,000
225,000
(81,220)
437,500
(149,750)
(51,875)
(10,500)
(1,875)
(8,500)
(12,500)
0
(250,000)
(375,000)
(41,250)
(228,800)
$0
Changes in Cash
Increase Decrease
$8,330
$19,380
21,350
$960
49,000
2,250
187,500
10,040
56,200
29,950
6,840
500
3,500
3,160
175,000
150,000
75,000
6,000
75,400
431,850
$431,850
440,180
8,330
$431,850
20
Accounts
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Dividends payable
Martgage note payable
Bonds payable
Common stock, $25 par value
Paid-in capital in excess of par
Retained earnings
Changes in Cash
Increase Decrease
$8,330
Operating Activities
Increase Decrease
$19,380
21,350
$19,380
21,350
$960
49,000
2,250
187,500
10,040
Net Cash Flows
10,040
56,200
29,950
6,840
500
29,950
6,840
500
3,500
3,500
3,160
175,000
150,000
75,000
6,000
75,400
431,850
$431,850
Analysis of retained earnings:
Net income
Gain on sale of investments
Gain on sale of land
Dividends
$960
440,180
8,330
$431,850
111,400
11,000
20,500
159,690
83,960
$75,730
75,730
$75,730
21
Accounts
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Dividends payable
Martgage note payable
Bonds payable
Common stock, $25 par value
Paid-in capital in excess of par
Retained earnings
Changes in Cash
Increase Decrease
$8,330
$19,380
21,350
$960
49,000
2,250
187,500
$89,500
60,250
$40,500
62,500
187,500
10,040
56,200
56,200
29,950
6,840
500
3,500
3,160
175,000
150,000
75,000
6,000
75,400
431,850
$431,850
Analysis of retained earnings:
Net income
Gain on sale of investments
Gain on sale of land
Dividends
Investing Activities
Increase Decrease
440,180
8,330
$431,850
11,000
20,500
181,250
Net Cash Flows
$181,250
346,700
165,450
$181,250
22
Accounts
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Dividends payable
Martgage note payable
Bonds payable
Common stock, $25 par value
Paid-in capital in excess of par
Retained earnings
Changes in Cash
Increase Decrease
$8,330
Financing Activities
Increase Decrease
$19,380
21,350
$960
49,000
2,250
187,500
10,040
56,200
29,950
6,840
500
3,500
3,160
175,000
$3,160
175,000
150,000
75,000
6,000
75,400
431,850
$431,850
$150,000
75,000
6,000
440,180
8,330
$431,850
Analysis of retained earnings:
Net income
Gain on sale of investments
Gain on sale of land
Dividends
Net Cash Flows
259,160
73,160
$186,000
36,000
186,000
$186,000
23
Accounts
Cash
Trade receivables (net)
Inventories
Prepaid expenses
Investments
Land
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Dividends payable
Martgage note payable
Bonds payable
Common stock, $25 par value
Paid-in capital in excess of par
Retained earnings
December 31,
2001
2000
$57,870
$66,200
137,180
211,500
5,160
44,500
77,250
412,500
(91,260)
493,700
(179,700)
(58,715)
(11,000)
(1,875)
(5,000)
(15,660)
(175,000)
(100,000)
(450,000)
(47,250)
(304,200)
$0
117,800
190,150
6,120
93,500
75,000
225,000
(81,220)
437,500
(149,750)
(51,875)
(10,500)
(1,875)
(8,500)
(12,500)
0
(250,000)
(375,000)
(41,250)
(228,800)
$0
Changes in Cash
Increase Decrease
$8,330
Operating Activities
Increase Decrease
$19,380
21,350
$19,380
21,350
$960
49,000
Financing Activities
Increase Decrease
$960
$89,500
60,250
2,250
187,500
10,040
$40,500
62,500
187,500
10,040
56,200
29,950
6,840
500
56,200
29,950
6,840
500
3,500
3,500
3,160
175,000
$3,160
175,000
150,000
75,000
6,000
75,400
431,850
$431,850
$150,000
75,000
6,000
440,180
8,330
$431,850
Analysis of retained earnings:
Net income
Gain on sale of investments
Gain on sale of land
Dividends
Net Cash Flows
Investing Activities
Increase Decrease
111,400
$8,330
159,690
83,960
$75,730
11,000
20,500
11,000
20,500
75,730
181,250
$75,730
$181,250
346,700
165,450
$181,250
259,160
73,160
$186,000
36,000
186,000
$186,000
24
Spencer Company
Statement of Cash Flows-Indirect Method
For the Year Ended December 31, 2001
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation expense
$39,990
Increase in accounts receivable
(19,380)
Increase in inventories
(21,350)
Decrease in prepaid expenses
960
Increase in accounts payable
6,840
Increase in accrued expenses
500
Decrease in income tax payable
(3,500)
Gain on sale of investment
(11,000)
Gain on sale of land
(20,500)
Net cash provided by operating activities
Cash flows from investing activities:
Cash received from sale of investments
100,500
Cash received from sale of land
80,750
Cash payments for purchase of investments
(40,500)
Cash payments for purchase of equipment
(56,200)
Cash payments for purchase of land
(62,500)
Cash payments for purchase of building
(187,500)
Net cash used in investing activities
Cash flows from financing activities:
Cash received from issuance of mortage note
175,000
Cash received from issuance of stock
81,000
Cash paid for retirement of bonds payable
(150,000)
Cash paid for dividends
(32,840)
Net cash provided by financing activities
Net decrease in cash
Cash, January 1, 2001
Cash, December 31, 2001
Supplemental Disclosures of Cash Flow Information:
Cash paid for the year for:
Interest
Income taxes
$111,400
(27,440)
83,960
(165,450)
73,160
(8,330)
66,200
$57,870
$25,000
42,000
25
Format for Operating Activities
Cash Flows From Operating Activities
(Using the Indirect Method)
Net income (from the income statement)
$
Noncash expenses:
Amortization
Depreciation
+
+
Changes in current assets:
Increases
Decreases
Changes in current liabilities:
Increases
Decreases
+
+
-
Gains from investing or financing
Losses from investing or financing
Net cash flows from operating activities
+
$
26