Financial Accounting
Statement
of
Cash Flows
Chapter 11
Spiceland | Thomas | Herrmann
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-2
Learning Objectives
• Classify cash transactions as operating, investing,
or financing activities
• Prepare the operating activities section of the
statement of cash flows using the indirect method
• Prepare the investing activities section and the
financing activities section of the statement of
cash flows
• Perform financial analysis using the statement of
cash flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-3
Learning Objectives
• Prepare the operating activities section of the
statement of cash flows using the direct method
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-4
Part A
Formatting the Statement of Cash Flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-5
Learning Objective 1
Classify cash transactions as operating, investing,
or financing activities
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-6
Cash Flow Activities
• Operating activities: cash receipts and cash
payments for transactions relating to revenue and
expense activities
• Investing activities: cash transactions involving
the purchase and sale of long-term assets and
current investments
• Financing activities: inflows and outflows of
cash resulting from the external financing of a
business
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-7
Information Sources for Preparing
the Statement of Cash Flows
• Income statement
• Balance sheets
• Detailed accounting records
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-8
Noncash Activities
• Significant investing and financing activities that
do not affect cash
• Reported after the cash flow statement or in a
note to the financial statements
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-9
Operating Activities—Indirect and
Direct Methods
• Differ in presentation format for operating activities
• Both methods report investing, financing, and
noncash activities identically
Indirect Method
Direct Method
• Begin with net income
and then list adjustments
to net income in order to
arrive at operating cash
flows
• Most popular method
• Easier and less costly
• Adjust the items on the
income statement to
directly show the cash
inflows and outflows from
operations
• Conceptually better
method
• More difficult and more
costly
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-10
Part B
Preparing the Statement of Cash Flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-11
Steps in Preparing
the Statement of Cash Flows
Step 1: Calculate net cash flows from operating activities
Step 2: Calculate net cash flows from investing activities
Step 3: Calculate net cash flows from financing activities
Step 4: Combine operating, investing, and financing activities
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-12
Learning Objective 2
Prepare the operating activities section of the
statement of cash flows using the indirect method
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-13
Operating Activities—Indirect
Method
• Both net income and cash flows from operating
activities represent the same operating activities
• Net income includes both cash and noncash
components
• Net cash flows from operating activities removes
noncash components
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-14
Adjustments for Noncash Effects
• Depreciation expense
• Gain or loss on sale of an asset
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-15
Changes in Current Assets and
Current Liabilities
•
•
•
•
– Increase in a current asset
+ Decrease in a current asset
+ Increase in a current liability
– Decrease in a current liability
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-16
Learning Objective 3
Prepare the investing activities section and the
financing activities section of the statement of cash
flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-17
Investing Activities
• Increase or decrease in investments
• Increase or decrease in long-term assets
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-18
Financing Activities
• Examine changes in long-term liabilities and
stockholders’ equity accounts from the balance
sheet
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-19
Learning Objective 4
Perform financial analysis using the statement of
cash flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-20
Components of Cash Return on Assets
Cash return
on assets
=
Operating cash flows
Average total assets
Cash flow
to sales
×
Operating cash flows
=
Net sales
Asset
turnover
Net sales
×
Average total assets
• Cash return on assets measures the operating cash flow
generated per dollar of assets
• Cash flow to sales measures the operating cash flows
generated for each dollar of sales
• Asset turnover measures the sales revenue generated
per dollar of assets
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-21
Learning Objective 5
Prepare the operating activities section of the
statement of cash flows using the direct method
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-22
Operating Activities—Direct Method
• Report the cash inflows and cash outflows directly
• Converts each revenue and expense item to its
cash-basis amount
• Income statement items that have no cash effect
are not reported
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-23
End of Chapter 11
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.