Prepared by
Debby Bloom-Hill
CMA, CFM
CHAPTER 13
Statement of Cash Flows
Slide 13-2
Need for a Statement of Cash
Flows
 Stakeholders want to know how a
company generates and spends cash
 Can the company
 Generate enough cash to pay its wages
and bills, including debt payments
 Generate cash in order to earn a
reasonable return and pay dividends
 Generate enough cash to avoid
bankruptcy
Slide 13-3
Learning objective 1: Explain the need for
the statement of cash flows
Need for a Statement of Cash
Flows
 Cash flow is not the same as net
income
 Under GAAP, income is calculated
using the accrual method
 The income statement does little to
inform managers and other company
stakeholders of the sources and uses
of cash
Slide 13-4
Learning objective 1: Explain the need for
the statement of cash flows
Need for a Statement of Cash
Flows
 For the purposes of the cash flow
statement, cash includes both cash
and cash equivalents
 Cash equivalents are short term
investments that can be readily
converted into cash
 Examples include 90 day US Treasury
Bills and money market funds
Slide 13-5
Learning objective 1: Explain the need for
the statement of cash flows
Types of Business Activities
 Operating activities
 Cash flows related to production and
delivery of goods and services
 Reflect the day to day profit oriented
activities of a business
 Principal cash inflows are cash sales and
collection of accounts receivable
 Major sources of cash outflows include
payments to suppliers, employees and
taxing authorities
Slide 13-6
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Examples of Operating Activities
Slide 13-7
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Types of Business Activities
 Investing activities
 Cash flows related to buying and selling
of long-term assets
 Examples include collections from long
term loans, collections from the sale of
equipment no longer in use, payments to
buy securities of other companies,
buying a building and buying a business
Slide 13-8
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Examples of Investing
Activities
Slide 13-9
Learning objective 2: Identify the three types
of business activities presented in a statement
of cash flows
Types of Business Activities
 Financing activities
 Cash inflows related to issuing stock
and issuing long-term debt
 Cash outflows related to
repurchasing stock, paying off loans
and making dividend payments
Slide 13-10
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Examples of Financing
Activities
Slide 13-11
objective 2: Identify the three types of business
activities presented in a statement of cash flows
Learning
Which of the following would be a cash
outflow from operating activities?
a.
b.
c.
d.
Acquisition of operating equipment
Retirement of bonds
Collection of accounts receivable
Payments to suppliers for raw
materials
Answer: d
Payments to suppliers for raw materials
Slide 13-12
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Which of the following would be a cash
outflow from investing activities?
a.
b.
c.
d.
Payments to suppliers
Payments to employees
Purchase of land
Payment of dividends
Answer: c
Purchase of land
Slide 13-13
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Which of the following would be a cash
outflow from financing activities?
a.
b.
c.
d.
Payment of dividends
Payments to taxing authorities
Purchase of land
Cash sales
Answer: a
Payment of dividends
Slide 13-14
Learning objective 2: Identify the three types of business activities
presented in a statement of cash flows
Statement of Cash Flows General
Format
Slide 13-15
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows
 Two acceptable methods
 Direct method
 Like an income statement prepared
using the cash basis
 Indirect method
 Reconciles net income to cash flow from
operations
 Preferable under GAAP
 Most used in financial statements
Slide 13-16
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows
 Cash flows from operating activities
 Cash collected on sale of merchandise
 Cash received (paid) related to interest
income (expense)
 Cash received related to dividend
income
 Cash paid to purchase merchandise
 Cash paid for general and
administrative expenses
 Cash paid for income taxes
Slide 13-17
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows
 Cash flows from investing activities
 Cash received on the sale of a machine
no longer in use
 Cash paid to buy a machine
 Cash paid to buy a building
 Cash received from selling a building
 Cash paid to buy a business
Slide 13-18
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows
 Cash flows from financing activities
 Cash received from selling bonds
 Cash received from using a line of
credit
 Cash received from issuing common
stock
 Cash paid to retire long term debt
 Cash dividends paid
Slide 13-19
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows
 Direct method
 Lists specific cash inflows and outflows
from operating activities
 Similar to cash-basis income statement
within the operating activities section
 FASB requires separate schedule to
reconcile cash flows from operating
activities and net income
Slide 13-20
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 To determine cash flows using the
direct method
 Analyze all balance sheet accounts,
other than cash, to determine how their
changes were affected by cash flows
 This analysis will involve information
from the income statement
Slide 13-21
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability
accounts
 The first account is cash received from
customers
 Solving the following equation yields
cash receipts of $10,004,825
Beginning balance receivables
Plus sales
$879,053
10,548,640
Less cash collected
Equals ending balance receivables
?
$1,422,868
Slide 13-22
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability
accounts
 The next item is cost of merchandise
sold
 The following formula yields purchases
of $8,286,993
Beginning inventory
Plus purchases
Less cost of goods sold
Equals ending balance inventory
Slide 13-23
$988,935
?
7,911,480
$1,364,448
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Current asset and current liability
accounts
 Purchases of $8,286,993 are used in the
next calculation, which solves for cash
payments for purchases of inventory of
$8,202,703
Beginning balance accounts payable
Plus purchases
$575,000
8,286,993
Less cash paid for inventory purchases
Equals ending balance accounts payable
?
$659,290
Slide 13-24
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Analyze other current asset and
liability accounts
 Use prepaid insurance and insurance
expense to solve for cash payments for
insurance
 Use accrued wages and salaries and
wages and salaries expense to solve for
cash payments for wages and salaries
 Use income taxes payable and income
tax expense to solve for cash payments
for income taxes
Slide 13-25
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Long term asset accounts
 Use accumulated depreciation,
depreciation expense, book value of
equipment sold, and loss on sale to
solve for
 Cash proceeds related to sale of
equipment, and
 Cash paid for purchases of equipment
Slide 13-26
Learning objective 3: Prepare a statement of cash
flows using the direct method
Cash Flows from Operating
Activities (Direct Method)
 Long term liabilities and stockholders’
equity
 Cash paid to reduce debt (or cash
proceeds from borrowing) is the
difference between the beginning and
ending balance of long term debt
 Use beginning and ending retained
earnings plus net income to solve for
cash payments for dividends
Slide 13-27
Learning objective 3: Prepare a statement of cash
flows using the direct method
Operating Activities – Direct
Method
RS Inc. has the following information:
 Taxes payable 12/31/2013: $171,000
 Income tax expense 2014: $585,000
 Taxes payable 12/31/2014: $150,000
Calculate cash paid for taxes in 2014
Answer:
$171,000 + ? - $150,000 = $585,000
? = 564,000
Slide 13-29
Learning objective 3: Prepare a statement of cash
flows using the direct method
Preparing the Statement of Cash
Flows (Indirect Method)
 The indirect method is much more
common
 The two methods differ only in terms of
the presentation of cash flows related
to operating activities
 There are no differences for inventing
activities and financing activities
Preparing the Statement of Cash
Flows (Indirect Method)
 5 step approach to calculate cash flows
from operating activities – indirect
1. Start with net income
2. Add non-cash expenses such as
depreciation and amortization
3. Subtract gains and add back losses
4. Subtract (add) increases (decreases)
in current assets other than cash
5. Add (subtract) increases (decreases)
in current liabilities
Preparing the Statement of Cash
Flows (Indirect Method)
 The operating activities section is a
reconciliation of net income to cash
flows from operating activities
 Current assets
 Increases in current assets indicate we
must reduce income to convert to cash
basis
 Decreases indicate we must increase
income to convert to cash basis
Preparing the Statement of Cash
Flows (Indirect Method)
 Current liabilities
 Increases in current liabilities indicate
we must increase income to convert to
cash basis
 Decreases in current liabilities indicate
we must reduce income to convert to
cash basis
Indirect Method part 1
Slide 13-34
Learning objective 4: Prepare a statement of cash
flows using the indirect method
Indirect Method part 2
Slide 13-35
Learning objective 4: Prepare a statement of cash
flows using the indirect method
Using the indirect method, changes in current
assets other than cash and current liabilities
are used to adjust net income to determine:
a. Income from operations
b. Net cash from investing activities
c. Net cash provided by operating
activities
d. None of the above
Answer: c
Net cash provided by operating activities
Slide 13-36
Learning objective 4: Prepare a statement of cash
flows using the indirect method
Interpreting the Statement of
Cash Flows
 In general, the most important part is the
cash flows from operating activities
 Unless a company is able to generate
cash from its core operations, it is
unlikely to succeed
 If cash flows in this section are low,
this implies that a company must
offset them by changes in investing
and financing decisions
Slide 13-37
Learning objective 5: Interpret information in the
statement of cash flows
Statement of Cash Flows
Slide 13-38
Learning objective 5: Interpret information in the
statement of cash flows
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Slide 13-39