Chapter 13
“How Well Am I Doing?”
Statement of Cash Flows
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
13-2
Purpose of the Statement of Cash Flows
Are cash flows
sufficient to
support ongoing
operations?
Will the company
have to borrow
money to make
needed
investments?
Can we meet
our obligations
to creditors?
Can we pay
dividends?
Why is there a
difference
between net
income and net
cash flow?
13-3
Learning Objective 1
Classify changes in noncash
balance sheet accounts as
sources or uses of cash.
13-4
Definition of Cash
The term cash on the statement of cash flows refers
broadly to both currency and cash equivalents.
Currency and
Bank Accounts
Treasury
Bills
Cash
Money Market
Funds
Commercial
Paper
13-5
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
4. Changes in
Capital Stock
5. Dividends
Paid to
Stockholders
3. Changes in
Liabilities
Net Cash
Flows for a
Period
1. Net Income
2. Changes in
Noncash
Assets
13-6
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
Net Income
Net Loss
Changes in noncash assets
Changes in liabilities*
Changes in capital stock
accounts
Dividends paid to stockholders
Sources
Always
Decreases
Increases
Uses
Always
Increases
Decreases
Increases
Decreases
Always
Total sources - Total uses = Net cash flow
* Contra asset accounts, such as the Accumulated Depreciation and
Amortization account, follow the rules for liabilities.
13-7
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
Increases in noncash asset
accounts imply uses of cash.
Example: Inventory is
purchased on credit from
a supplier.
It is implied that cash
was used to acquire the
inventory.
13-8
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
Increases in liability accounts imply
sources of cash.
Example: Inventory is
purchased on credit from
a supplier.
It is implied that an increase
in a payable has the effect
of increasing cash available
for other uses.
13-9
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
Decreases in noncash assets
accounts imply sources of cash.
Example: Accounts receivable
decreases when a company
pays its bill.
The company’s cash
increases accordingly.
13-10
Constructing the Statement of Cash Flows Using
Changes in Noncash Balance Sheet Accounts
Decreases in liability accounts
imply uses of cash.
Example: If a company
makes a payment on a
note payable.
The company’s cash balance
decreases accordingly.
13-11
A Simplified Statement of Cash Flows
Ed's Pizza Hut
Comparative Balance Sheet Account Balances
Cash
Accounts Receivable
Inventory
Land
Equipment
Accumulated Depr.
Accounts Payable
Salaries Payable
Note Payable - Joe Doe
Common Stock
Retained Earnings
3/31/2009
3/31/2008
Change
DR (CR)
DR (CR)
Incr. (Decr.)
$
71,000 $
90,000 $
(19,000)
23,000
40,000
(17,000)
322,000
300,000
22,000
68,000
100,000
(32,000)
112,000
84,000
28,000
(45,000)
(39,000)
6,000
(38,000)
(27,000)
11,000
(9,000)
(14,000)
(5,000)
(50,000)
(50,000)
(500,000)
(450,000)
50,000
(4,000)
(34,000)
(30,000)
$
- $
-
13-12
A Simplified Statement of Cash Flows
Additional Information:
 There was a net loss for the year of $27,000.
 Depreciation charges for the year were $6,000.
 During the year, Ed sold land originally costing
$32,000 for $32,000.
 During the year, Ed purchased equipment for
$28,000.
 During the year, Ed paid dividends of $3,000 to the
stockholders.
 Ed issued $50,000 of common stock to settle the
note due to Joe Doe.
13-13
A Simplified Statement of Cash Flows
Here is a summary of the sources
of cash for Ed’s Pizza Hut.
Ed's Pizza Hut
Sources of Cash
Decrease in A/R
$
Decrease in Land
Increase in A/P
Depreciation charges
Total sources of cash
$
17,000
32,000
11,000
6,000
66,000
13-14
A Simplified Statement of Cash Flows
Here is a summary of the uses of cash.
Ed's Pizza Hut
Uses of Cash
Net loss
Increase in Inventory
Increase in Equipment
Increase in Salaries Payable
Dividends paid
Total uses of cash
$
$
27,000
22,000
28,000
5,000
3,000
85,000
The net cash flow for Ed’s Pizza Hut is ($19,000):
$66,000 in sources minus $85,000 in uses.
13-15
A Simplified Statement of Cash Flows
Ed's Pizza Hut
Sources of Cash
Decrease in A/R
$
Decrease in Land
Increase in A/P
Depreciation charges
Total sources of cash
$
17,000
32,000
11,000
6,000
66,000
Ed's Pizza Hut
Uses of Cash
Net loss
Increase in Inventory
Increase in Equipment
Increase in Salaries Payable
Dividends paid
Total uses of cash
$
$
27,000
22,000
28,000
5,000
3,000
85,000
This simplified
approach does not
follow the format
required for
external reporting
purposes. It is for
illustrative
purposes only.
13-16
Learning Objective 2
Classify transactions as
operating, investing, or
financing activities.
13-17
The Three Sections of the Statement of Cash Flows
Operating activities are
those activities that enter
into the determination of
net income.
1. Transactions
affecting current
assets
2. Transactions
affecting current
liabilities
3. Changes in
noncurrent
balance sheet
accounts that
directly affect net
income
13-18
The Three Sections of the Statement of Cash Flows
Investing activities relate to
transactions involving the
acquiring or disposing of
noncurrent assets.
1. Acquiring or
selling property,
plant and
equipment
2. Acquiring or
selling securities
held for long-term
investments
3. Lending money
to another entity
and subsequently
collecting on the
loan
13-19
The Three Sections of the Statement of Cash Flows
Financing activities relate to
transactions involving borrowing
from creditors or repaying
creditors and engaging in
transactions with the
company’s owners.
1. Issuing stock
and purchasing
treasury stock
2. Issuing longterm debt and
repayment of debt
3. Payment of
dividends (note
that interest on
debt is classified
as an operating
activity)
13-20
Format of the Statement of Cash Flows
(Indirect Method)
Operating Activities:
Net income
Changes in current assets
Changes in noncurrent assets that affect net income (e.g., depreciation)
Changes in current liabilities (except for debts to lenders and dividends
payable)
Changes in noncurrent liabilities that affect net income
Investing Activities:
Changes in noncurrent assets that are not included in net income
Financing Activities:
Changes in the current liabilities that are debts to lenders rather than
obligations to suppliers, employees, or the government
Changes in noncurrent liabilities that are not included in net income
Changes in capital stock accounts
Dividends
13-21
Format of the Statement of Cash Flows
(Indirect Method)
Operating Activities
Investing Activities
Financing Activities
Reconciliation of the
beginning cash balance
with the ending cash
balance
Noncash Investing
and Financing
Activities
13-22
Operating Activities
Net Income or Loss
Add:
Less:
$ XXX
Decrease in current noncash assets
XXX
Increase in current liabilities
XXX
Depreciation charges
XXX
Losses
XXX
Increase in current noncash assets
(XXX)
Decrease in current liabilities
(XXX)
Gains
(XXX)
Cash Flows from Operating Activities
$ XXX
Includes those activities that affect current
assets, current liabilities, or net income.
13-23
Operating Activities
Sources of cash are added to and
uses of cash are subtracted from net
cash provided by operating
activities.
Impact on Net Cash Provided by Operating Activities
Sources of Cash
Uses of Cash
(Add to Net Income)
(Subtract from Net Income)
Current
Noncash Assets
Current
Liabilities
Decreases
Increases
Increases
Decreases
13-24
Operating Activities
Net Income or Loss
Add:
Less:
$ XXX
Decrease in current noncash assets
XXX
Increase in current liabilities
XXX
Depreciation charges
XXX
Losses
XXX
Increase in current noncash assets
(XXX)
Decrease in current liabilities
(XXX)
Cash Flows from Operating Activities
$ XXX
Impact on Net Cash Provided by Operating Activities
Gains Sources of Cash
(XXX)
Uses of
Cash
(Add to Net Income)
(Subtract from Net Income)
Current
Noncash Assets
Current
Liabilities
Decreases
Increases
Increases
Decreases
13-25
Operating Activities
Net Income or Loss
Add:
Less:
$ XXX
Decrease in current noncash assets
XXX
Increase in current liabilities
XXX
Depreciation charges
XXX
Losses
XXX
Increase in current noncash assets
(XXX)
Decrease in current liabilities
(XXX)
Gains
(XXX)
Impact on Net Cash Provided by Operating
Activities
Sources of Cash
Uses of Cash
$ XXX
(Subtract from Net Income)
Decreases
Increases
Increases
Decreases
Cash Flows from
Operating Activities
(Add to Net Income)
Current
Noncash Assets
Current
Liabilities
13-26
Operating Activities
Net Income or Loss
Add:
Less:
$ XXX
Decrease in current noncash assets
XXX
Increase in current liabilities
XXX
Depreciation charges
XXX
Losses
XXX
Increase in current noncash assets
(XXX)
Decrease in current liabilities
(XXX)
Gains
(XXX)
Cash Flows from Operating Activities
$ XXX
Depreciation and Amortization charges are added back
because they are decreases in noncash assets.
13-27
Operating Activities
Net Income or Loss
Add:
Less:
$ XXX
Decrease in current noncash assets
XXX
Increase in current liabilities
XXX
Depreciation charges
XXX
Losses
XXX
Increase in current noncash assets
(XXX)
Decrease in current liabilities
(XXX)
Gains
(XXX)
Cash Flows from Operating Activities
Gains are
subtracted.
$ XXX
Losses are added.
13-28
Investing Activities
Add:
Proceeds from sale of land,
buildings, equipment, or other
noncurrent assets
Receipt of principal from
investments
Less:
Payments to acquire land,
buildings, equipment, or other
noncurrent assets
Payments to acquire
investments
Net Cash Flows from Investing Activities
$ XXX
XXX
(XXX)
(XXX)
$ XXX
Includes transactions that involve the
acquisition or disposal of noncurrent assets.
13-29
Financing Activities
Add:
Proceeds from borrowings
Proceeds from issuing capital
stock
Proceeds from sale of bonds
Less:
Principal payments on
borrowed funds
Payments related to bond
maturities
Dividend payments
Net Cash Flows from Financing Activities
$ XXX
XXX
XXX
(XXX)
(XXX)
(XXX)
$ XXX
Includes transactions involving receipts
from or payments to creditors and owners.
13-30
Cash Flows: Gross or Net?
For investing and
financing activities,
items on the
statement of cash
flows should be
presented in gross
amounts rather
than in net
amounts.
Example:
• Assume Macy’s
purchases $50 million
in property during the
year and sells other
property for $30
million.
• Instead of showing the
net change of $20
million, the company
must report the gross
amounts of both
transactions.
13-31
Operating Activities: Direct or Indirect Method?
Two Formats for Reporting Operating Activities
Direct Method
Indirect Method
Reports the
cash effects of
each operating
activity
Starts with accrual
net income and
adjusts it to the
cash basis
No matter which format is used, the same amount of net
cash provided by operating activities is generated.
13-32
Learning Objective 3
Prepare a statement of cash
flows using the indirect method
to determine the net cash
provided by operating activities.
13-33
Statement of Cash Flows: Indirect Method
Ed's Pizza Hut
Comparative Balance Sheet Account Balances
Cash
Accounts Receivable
Inventory
Land
Equipment
Accumulated Depr.
Accounts Payable
Salaries Payable
Note Payable - Joe Doe
Common Stock
Retained Earnings
3/31/2009
3/31/2008
Change
DR (CR)
DR (CR)
Incr. (Decr.)
$
71,000 $
90,000 $
(19,000)
23,000
40,000
(17,000)
322,000
300,000
22,000
68,000
100,000
(32,000)
112,000
84,000
28,000
(45,000)
(39,000)
6,000
(38,000)
(27,000)
11,000
(9,000)
(14,000)
(5,000)
(50,000)
(50,000)
(500,000)
(450,000)
50,000
(4,000)
(34,000)
(30,000)
$
- $
-
Let’s revisit the
comparative
balance sheet
account balances
for Ed’s Pizza Hut.
13-34
Statement of Cash Flows: Indirect Method
Refresh your memory regarding the
following additional information.
 There was a net loss for the year of $27,000.
 Depreciation charges for the year were $6,000.
 During the year, Ed sold land originally costing
$32,000 for $32,000.
 During the year, Ed purchased equipment for
$28,000.
 During the year, Ed paid dividends of $3,000 to
the stockholders.
 Ed issued $50,000 of common stock to settle the
note due to Joe Doe.
13-35
Step 1 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustChange
or Use?
Effect
ments
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
Inventory
Noncurrent assets
Land
Equipment
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
Current liabilities
Accounts payable
Salaries payable
Noncurrent liabilities
Notes payable
Stockholders' equity
Common stock
Retained earnings
Net loss
Dividends
Total (net cash flow)
Adjusted
Effect
Classification
List each account
appearing on the
comparative balance
sheets except for cash
and cash equivalents
and retained earnings.
13-36
Step 2 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustChange
or Use?
Effect
ments
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
$
(17,000)
Inventory
22,000
Noncurrent assets
Land
(32,000)
Equipment
28,000
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
6,000
Current liabilities
Accounts payable
11,000
Salaries payable
(5,000)
Noncurrent liabilities
Notes payable
(50,000)
Stockholders' equity
Common stock
50,000
Retained earnings
Net loss
(27,000)
Dividends
3,000
Total (net cash flow)
Adjusted
Effect
Classification
Compute the change
from the beginning
balance to the ending
balance for each
account.
13-37
Step 3 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustAdjusted
ClassifiChange
or Use?
Effect
ments
Effect
cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
$
(17,000) Source
Inventory
22,000
Use
Noncurrent assets
Land
(32,000) Source
Equipment
28,000
Use
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
6,000 Source
Current liabilities
Accounts payable
11,000 Source
Salaries payable
(5,000)
Use
Noncurrent liabilities
Notes payable
(50,000)
Use
Recall that the transaction
Stockholders' equity
involving the Notes Payable and
Common stock
50,000 Source
Common Stock was noncash.
Retained earnings
Net loss
(27,000)
Use
Dividends
3,000
Use
Total (net cash flow)
Code each entry on
the worksheet as a
source or use of
cash.
{
13-38
Step 4 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustChange
or Use?
Effect
ments
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
$
(17,000) Source $
17,000
Inventory
22,000
Use
(22,000)
Noncurrent assets
Land
(32,000) Source
32,000
Equipment
28,000
Use
(28,000)
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
6,000 Source
6,000
Current liabilities
Accounts payable
11,000 Source
11,000
Salaries payable
(5,000)
Use
(5,000)
Noncurrent liabilities
Notes payable
(50,000)
Use
(50,000)
Stockholders' equity
Common stock
50,000 Source
50,000
Retained earnings
Net loss
(27,000)
Use
(27,000)
Dividends
3,000
Use
(3,000)
Total (net cash flow)
$ (19,000)
Adjusted
Effect
Classification
Code sources
of cash as
positive
numbers and
uses of cash
as negative
numbers.
13-39
Step 5 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustAdjusted
ClassifiChange
or Use?
Effect
ments
Effect
cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
$
(17,000) Source $
17,000
$
17,000
Inventory
22,000
Use
(22,000)
(22,000)
Noncurrent assets
Land
(32,000) Source
32,000
32,000
Equipment
28,000
Use
(28,000)
(28,000)
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
6,000 Source
6,000
6,000
Current liabilities
Accounts payable
11,000 Source
11,000
11,000
Salaries payable
(5,000)
Use
(5,000)
(5,000)
Noncurrent liabilities
Notes payable
(50,000)
Use
(50,000)
50,000
We -need to make an adjustment
Stockholders' equity
for the noncash transaction
Common stock
50,000 Source
50,000
(50,000)
relating
to Notes Payable and
Retained earnings
Net loss
(27,000)
Use
(27,000)
(27,000) Common Stock.
Dividends
3,000
Use
(3,000)
(3,000)
Total (net cash flow)
$ (19,000) $
$ (19,000)
{
Make any
necessary
adjustments,
including
adjustments
for gains and
losses. The
net effect of
these should
equal zero.
13-40
Step 6 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow
AdjustAdjusted
Change
or Use?
Effect
ments
Effect
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
$
(17,000) Source $
17,000
$
17,000
Inventory
22,000
Use
(22,000)
(22,000)
Noncurrent assets
Land
(32,000) Source
32,000
32,000
Equipment
28,000
Use
(28,000)
(28,000)
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation
6,000 Source
6,000
6,000
Current liabilities
Accounts payable
11,000 Source
11,000
11,000
Salaries payable
(5,000)
Use
(5,000)
(5,000)
Noncurrent liabilities
Notes payable
(50,000)
Use
(50,000)
50,000
Stockholders' equity
Common stock
50,000 Source
50,000
(50,000)
Retained earnings
Net loss
(27,000)
Use
(27,000)
(27,000)
Dividends
3,000
Use
(3,000)
(3,000)
Total (net cash flow)
$ (19,000) $
$ (19,000)
Classification
Operating
Operating
Investing
Investing
Operating
Operating
Operating
Operating
Financing
Classify
each
entry as
operating,
investing,
or
financing
activity.
13-41
Step 7 of 8
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss
$ (27,000)
Add: Decrease in A/R
17,000
Increase in A/P
11,000
Increase in Depr. Charges
6,000
Less: Increase in Inventory
(22,000)
Decrease in Salaries Payable
(5,000)
Net Cash Provided by Operating Activities
(20,000)
Investing Activities
Proceeds from sale of Land
32,000
Purchase of equipment
(28,000)
Net Cash Provided by Investing Activities
4,000
Financing Activities
Dividends paid
(3,000)
Net change in cash
$ (19,000)
Copy the data
from the
worksheet into
the Statement of
Cash Flows
section by
section.
13-42
Step 8 of 8
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss
$
Add: Decrease in A/R
Increase in A/P
Increase in Depr. Charges
Less: Increase in Inventory
Decrease in Salaries Payable
Net Cash Provided by Operating Activities
Investing Activities
Proceeds from sale of Land
Purchase of equipment
Net Cash Provided by Investing Activities
Financing Activities
Dividends paid
Net change in cash
Cash, beginning
Cash, ending
$
(27,000)
17,000
11,000
6,000
(22,000)
(5,000)
(20,000)
32,000
(28,000)
4,000
(3,000)
(19,000)
90,000
71,000
Prepare a cash
reconciliation at
the bottom of the
statement.
13-43
Statement of Cash Flows: Indirect Method
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss
$
Add: Decrease in A/R
Increase in A/P
Increase in Depr. Charges
Less: Increase in Inventory
Decrease in Salaries Payable
Net Cash Provided by Operating Activities
Investing Activities
Proceeds from sale of Land
Purchase of equipment
Net Cash Provided by Investing Activities
Financing Activities
Dividends paid
Net change in cash
Cash, beginning
Cash, ending
(27,000)
17,000
11,000
6,000
(22,000)
(5,000)
(20,000)
32,000
(28,000)
4,000
(3,000)
(19,000)
90,000
$71,000
In addition, on the
face of the
statement or in a
supplemental
schedule, disclose
the issuance of
$50,000 of stock
to a creditor, a
noncash financing
activity.
13-44
Interpretation of the Statement of Cash Flows
Examine the operating activities
section carefully.
▫ Ed’s Pizza Hut generated a negative
net cash provided by operating
activities of $20,000. This is usually a
sign of fundamental difficulties.
▫ Ultimately, a positive cash flow is
necessary to avoid liquidating assets
or borrowing money to pay for day-today activities.
13-45
Learning Objective 4
Compute free cash flow.
13-46
Free Cash Flow
Free cash flow measures a company’s
ability to fund its capital expenditures and
dividends from its net cash provided by
operating activities.
Free Cash Flow =
Net Cash Provided by
Operating Activities
-
Capital
Expenditures
-
Dividends
13-47
Free Cash Flow
Using the equation shown on the prior slide,
the free cash flow for Ed’s Pizza Hut of
($51,000) is computed like this . . .
Net Cash Provided by
Capital
Free Cash Flow =
- Expenditures - Dividends
Operating Activities
$
(51,000) = $
(20,000) - $
28,000 - $ 3,000
Appendix 13A
The Direct Method of Determining
the Net Cash Provided by
Operating Activities.
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
13-49
Learning Objective 5
Use the direct method to
determine the net cash
provided by operating
activities.
13-50
Computing Net Cash Provided by
Operating Activities
The direct method computes net cash provided
by operating activities by reconstructing the
income statement on the cash basis from top to
bottom.
However
The amount of net cash provided by operating
activities under the direct method will always
agree with the amount computed using the
indirect method.
13-51
Similarities and Differences
in Handling Data
Revenue or Expense Item
Sales revenue (as reported)
Adjustments to a cash basis:
1 Increases in accounts receivable
2 Decreases in accounts receivable
Cost of goods sold (as reported)
Adjustments to a cash basis:
3 Increase in merchandise inventory
4 Decrease in merchandise inventory
5 Increase in accounts payable
6 Decrease in accounts payable
Operating expenses (as reported)
Adjustments to a cash basis:
7 Increase in prepaid expenses
8 Decrease in prepaid expenses
9 Increase in accrued liabilities
10 Decrease in accrued liabilities
11 Period's depreciation, depletion and
amortization charges
Income tax expense (as reported)
Adjustments to a cash basis:
12 Increase in accrued taxes payable
13 Decrease in accrued taxes payable
14 Increase in deferred income taxes
15 Decrease in deferred income taxes
Add (+) or
Deduct (-) to
Adjust to a
Cash Basis
+
+
+
+
+
-
+
+
Adjustments for accounts that
affect revenue are the same in
the direct method and indirect
methods.
Adjustments for accounts that
affect expenses are handled in
opposite ways for the direct and
indirect methods.
13-52
Direct Method: Gains and Losses
Regarding gains and
losses on sale of assets,
no adjustments are
needed at all under the
direct method.
13-53
The Direct Method
Ed's Pizza Hut
Comparative Balance Sheet Account Balances
Cash
Accounts Receivable
Inventory
Land
Equipment
Accumulated Depr.
Accounts Payable
Salaries Payable
Note Payable - Joe Doe
Common Stock
Retained Earnings
3/31/2009
3/31/2008
Change
DR (CR)
DR (CR)
Incr. (Decr.)
$
71,000 $
90,000 $
(19,000)
23,000
40,000
(17,000)
322,000
300,000
22,000
68,000
100,000
(32,000)
112,000
84,000
28,000
(45,000)
(39,000)
6,000
(38,000)
(27,000)
11,000
(9,000)
(14,000)
(5,000)
(50,000)
(50,000)
(500,000)
(450,000)
50,000
(4,000)
(34,000)
(30,000)
$
- $
-
Let’s revisit the
comparative
balance sheet
account
balances for
Ed’s Pizza Hut.
13-54
The Direct Method
Ed's Pizza Hut
Income Statement
For the Year Ended 3/31/2009
Sales
$
1,000,000
Cost of goods sold
750,000
Gross margin
250,000
Operating expenses
277,000
Net loss
$
(27,000)
Let’s assume
that Ed’s Pizza
Hut prepared
this income
statement.
13-55
The Direct Method
Step 1: Translate sales revenue into cash
collected from customers.
Sales (as reported)
Add: Decrease in accounts receivable
Cash collected from customers
$
$
1,000,000
17,000
1,017,000
13-56
The Direct Method
Step 2: Translate cost of goods sold into
cash disbursements for purchases.
Cost of goods sold (as reported)
$
Add: Increase in inventory
Less: Increase in accounts payable
Cash paid for purchases
$
750,000
22,000
(11,000)
761,000
13-57
The Direct Method
Step 3: Translate operating expenses into cash
paid for operating expenses.
Operating expenses (as reported)
Add: Decrease in salaries payable
Less: Increase in depreciation
Cash paid for operating expenses
$
$
277,000
5,000
(6,000)
276,000
There is not an adjustment needed for
income taxes because Ed’s Pizza Hut has
a net loss of $27,000.
13-58
The Direct Method
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Cash received from customers
$ 1,017,000
Cash paid for purchases
(761,000)
Cash paid for operating expenses
(276,000)
Net cash flow from operations
(20,000)
Investing Activities
Proceeds from sale of land
32,000
Purchase of equipment
(28,000)
Net cash flow from investing activities
4,000
Financing Activities
Dividends paid
(3,000)
Net change in cash
(19,000)
Cash, beginning
90,000
Cash, ending
$
71,000
Notice that the
net cash
provided by
operating
activities agrees
with that
computed using
the indirect
method.
Appendix 13B
The T-Account Approach to Preparing
the Statement of Cash Flows
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
13-60
T-Account Approach: Statement of Cash Flows
Ed's Pizza Hut
Comparative Balance Sheet Account Balances
Cash
Accounts Receivable
Inventory
Land
Equipment
Accumulated Depr.
Accounts Payable
Salaries Payable
Note Payable - Joe Doe
Common Stock
Retained Earnings
3/31/2009
3/31/2008
Change
DR (CR)
DR (CR)
Incr. (Decr.)
$
71,000 $
90,000 $
(19,000)
23,000
40,000
(17,000)
322,000
300,000
22,000
68,000
100,000
(32,000)
112,000
84,000
28,000
(45,000)
(39,000)
6,000
(38,000)
(27,000)
11,000
(9,000)
(14,000)
(5,000)
(50,000)
(50,000)
(500,000)
(450,000)
50,000
(4,000)
(34,000)
(30,000)
$
- $
-
13-61
T-Account Approach: Statement of Cash Flows
Additional Information:
 There was a net loss for the year of $27,000.
 Depreciation charges for the year were $6,000.
 During the year, Ed sold land originally costing
$32,000 for $32,000.
 During the year, Ed purchased equipment for
$28,000.
 During the year, Ed paid dividends of $3,000 to the
stockholders.
 Ed issued $50,000 of common stock to settle the
note due to Joe Doe.
13-62
T-Account Approach
Here is a summary of the sources
of cash for Ed’s Pizza Hut.
Ed's Pizza Hut
Sources of Cash
Decrease in A/R
$
Decrease in Land
Increase in A/P
Depreciation charges
Total sources of cash
$
17,000
32,000
11,000
6,000
66,000
13-63
T-Account Approach
Here is a summary of the uses of
cash for Ed’s Pizza Hut.
Ed's Pizza Hut
Uses of Cash
Net loss
$
Increase in Inventory
Decrease in Salaries Payable
Increase in Equipment
Dividends paid
Total uses of cash
$
27,000
22,000
5,000
28,000
3,000
85,000
The net cash flow for Ed’s Pizza Hut is ($19,000):
$66,000 in sources minus $85,000 in uses.
13-64
T- Account Approach
Cash
Provided
Used
27,000 Net loss
3,000 Cash dividends paid
13-65
T-Account Approach
Cash
Provided
Decrease in accounts receivable
Used
17,000
27,000 Net loss
22,000 Increase in inventory
3,000 Cash dividends paid
13-66
T-Account Approach
Cash
Provided
Decrease in accounts receivable
Used
17,000
27,000 Net loss
22,000 Increase in inventory
Sale of land
32,000
3,000 Cash dividends paid
13-67
T-Account Approach
Cash
Provided
Decrease in accounts receivable
Depreciation charges
Proceeds from sale of land
Used
17,000
6,000
27,000 Net loss
22,000 Increase in inventory
32,000
28,000 Purchase of equipment
3,000 Cash dividends paid
13-68
T-Account Approach
Cash
Provided
Decrease in accounts receivable
Depreciation charges
Increase in accounts payable
Proceeds from sale of land
Used
17,000
6,000
11,000
27,000 Net loss
22,000 Increase in inventory
5,000 Decrease in salaries payable
32,000
28,000 Purchase of equipment
3,000 Cash dividends paid
13-69
T-Account Approach
What about the $50,000 issuance of common
stock to settle the note payable to Joe Doe?
No Effect in the Cash
Account.
However, this transactions would be disclosed in
a supplemental schedule that accompanies the
statement of cash flows.
13-70
T-Account Approach
Cash
Provided
Decrease in accounts receivable
Depreciation charges
Increase in accounts payable
Used
17,000
6,000
11,000
Proceeds from sale of land
32,000
27,000
22,000
5,000
20,000
28,000
3,000
19,000
Net loss
Increase in inventory
Decrease in salaries payable
Net cash used in operations
Purchase of equipment
Cash dividends paid
Net decrease in cash
The net effect of these transactions on the
cash account is as shown.
Notice, the net decrease in cash is $19,000.
13-71
The Statement of Cash Flows
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss
Add: Decrease in A/R
Increase in A/P
Increase in Depr. Charges
Less: Increase in Inventory
Decrease in Salaries Payable
Net Cash Provided by Operating Activities
Investing Activities
Proceeds from sale of Land
Purchase of equipment
Net Cash Provided by Investing Activities
Financing Activities
Dividends paid
Net change in cash
Cash, beginning
Cash, ending
$ (27,000)
17,000
11,000
6,000
(22,000)
(5,000)
(20,000)
32,000
(28,000)
4,000
(3,000)
(19,000)
90,000
$ 71,000
In addition, on the
face of the
statement or in a
supplemental
schedule, disclose
the issuance of
$50,000 of stock
to a creditor, a
noncash financing
activity.
13-72
End of Chapter 13