Chapter 11
Statement of Cash Flows
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Part A
Formatting the Statement of
Cash Flows
11-2
Statement of Cash Flows
Provides a summary of cash inflows and cash outflows
during the reporting period
E-GAMES, INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash Flows from Operating Activities
Net income
$42,000
Adjustments for noncash effects:
Depreciation expense
9,000
Loss on sale of land
4,000
Increase in accounts receivable
(7,000)
Decrease in inventory
10,000
Increase in prepaid rent
(2,000)
Decrease in accounts payable
(5,000)
Increase in interest payable
Decrease in income tax payable
Net cash flows from operating activities
1,000
(2,000)
$50,000
11-3
Statement of Cash Flows (continued)
Cash Flows from Investing Activities
Purchase of investment
Sale of land
(35,000)
6,000
Net cash flows from investing activities
(29,000)
Cash Flows from Financing Activities
Issuance of common stock
5,000
Payment of cash dividends
(12,000)
Net cash flows from financing activities
(7,000)
Net increase (decrease) in cash
14,000
Cash at the beginning of the period
48,000
Cash at the end of the period
$62,000
Note: Noncash Activities
Purchased equipment by issuing a note payable
$20,000
11-4
LO1 Classification of Transactions
Categories of Cash Flows
Operating
activities
Investing
activities
Financing
activities
Include cash receipts
and cash payments for
transactions relating
to revenue and
expense activities
Include cash
transactions involving
the purchase and sale
of long-term assets
and current
investments
Inflows and outflows
of cash resulting from
the external financing
of a business
11-5
Part B
Preparing the Statement of
Cash Flows
11-6
Steps in Preparing the Statement of
Cash Flows
Step 1. Calculate net cash flows from operating activities, using
information from the income statement and changes in current
assets (other than cash) and current liabilities from the
comparative balance sheets.
Step 2. Determine the net cash flows from investing activities, by
analyzing changes in long-term asset accounts from the
comparative balance sheets.
Step 3. Determine the net cash flows from financing activities, by
analyzing changes in long-term liabilities and stockholders’
equity accounts from the comparative balance sheets.
Step 4. Combine the operating, investing, and financing activities, and
make sure the total agrees with the net increase (decrease) in
cash.
11-7
LO2 Operating Activities – Indirect
Method
o
Both net income and cash flows from operating activities
represent the same operating activities.
o
The income statement reports net income on an accrual basis.
On the other hand, the statement of cash flows reports the very
same activities on a cash basis.
o
We remove the noncash components from net income so that
what’s left is cash flows from operating activities.
We can classify the noncash components as:
(a) revenues and expenses that don’t affect cash at all (adjustments
for noncash components of net income), and
(b) revenues and expenses that do affect cash, but not by the amount
reported as the revenue or expense (adjustments for changes in
current assets and current liabilities).
11-8
Summary of All Adjustments
Cash Flows from Operating Activities
Net income
Adjustments for noncash effects:
For noncash components of income
+ Depreciation expense
+ Loss on sale of assets
– Gain on sale of assets
For 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
= Net cash flows from operating activities
11-9
LO3 Investing Activities
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash
Outflow
Cash
Inflow
Cash Flows from Investing Activities
Purchase of investment
Sale of land
Net cash flows from investing activities
Note: Noncash Activities
Purchased equipment by issuing a note payable
($35,000)
6,000
($29,000)
$20,000
Noncash
activity
disclosed in
the footnote
11-10
LO3 Financing Activities
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash
Inflow
Cash
Outflow
Cash Flows from Financing Activities
Issuance of common stock
Payment of cash dividends
Net cash flows from financing activities
$5,000
(12,000)
($7,000)
Retained earnings, beg. Balance $41,000
+ Net income
42,000
– Dividends
(12,000)
Retained earnings, ending balance $71,000
11-11
Analysis
Cash Flow Analysis
11-12
LO4 Cash Flow Analysis
Analysis based on net cash flows from operating activities
(CFFO)
($ in millions)
Apple
Net sales
Net income
Net cash flows from operating activities (CFFO)
Total assets
Dell
Net sales
Net income
Net cash flows from operating activities (CFFO)
Total assets
2009
2008
$36,537
5,704
10,159
53,851
$32,479
4,834
9,596
39,572
$61,101
2,478
1,894
26,500
$61,133
2,947
3,949
27,561
11-13
Cash Return on Assets
Return on Assets
($ in millions)
Net
Income
÷
Average
Total Assets
=
Return on Assets
Apple
$5,704
÷
($53,851 + $39,572)/2
=
12.2%
Dell
$2,478
÷
($26,500 + $27,561)/2
=
9.2%
Cash Return on Assets
is higher than the
Return on Assets
Cash Return on Assets
CFFO
÷
Average
Total Assets
Apple
$10,159
÷
($53,851 + $39,572)/2
=
21.8%
Dell
$ 1,894
÷
($26,500 + $27,561)/2
=
7.0%
($ in millions)
=
Cash Return
on Assets
11-14
Appendix
Operating Activities-Direct Method
11-15
LO5 Operating Activities-Direct
Method
o We report the cash inflows and cash outflows
directly on the statement of cash flows. For
instance, we report cash received from
customers as the cash effect of sales activities,
and cash paid to suppliers as the cash effect of
cost of goods sold.
o Income statement items that have no cash
effect—such as depreciation expense or gains
and losses on the sale of assets—are simply not
reported under the direct method.
11-16
Operating Activities-Direct Method
Cash Flows from Operating Activities
Cash Inflows:
Cash received from customers
$
Cash received from interest
Cash received from dividends
Cash Outflows:
Cash paid to suppliers
Cash paid for operating expenses
Cash paid for interest
Cash paid for income taxes
Net cash flows from operating activities
$ x,xxx
11-17
End of chapter 11
11-18