The Statement of Cash
Flows
Chapter 12
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Objective 1
Identify the purposes of the
statement of cash flows.
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Basic Concepts
Reports the entity’s cash flows
(cash receipts and cash
payments) during the period
3
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Purposes of the Statement
of Cash Flows
1. Predict future cash flows
2. Evaluate management decisions
3. Determine the ability to pay
dividends to stockholders’ and
payments to creditors
4. Show the relationship of net
income to the business’s cash
flows
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
What is Cash?
 Cash on hand
 Cash in the bank
 Cash equivalents - highly liquid,
short-term investments that can be
converted into cash with little delay
 Money-market
investments
 U.S. Government Treasury bills
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Objective 2
Distinguish among operating,
investing, and financing cash
flows.
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Operating, Investing, and
Financing Activities
Operating activities create
revenues, expenses, gains, and
losses.
Investing activities increase and
decrease long-term assets.
Financing activities obtain cash
from investors and creditors.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Two Formats for
Operating Activities
 Indirect method reconciles from net
income to net cash provided by
operating activities
 Direct method reports all cash
receipts and cash payments from
operating activities
 The two methods have no effect on
investing or financing activities.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Two Formats for
Operating Activities
Indirect Method
Net income
Adjustments:
Depreciation, etc.
Net income provided by operating activities
Direct Method
Collection from customers
Deductions:
Payment to suppliers, etc.
Net income provided by operating activities
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$XXX
XXX
$XXX
$XXX
XXX
$XXX
Objective 3
Prepare a statement of cash
flows by the indirect method.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Indirect Method:
Operating Activities
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other than cash
Increases in current liabilities
Negative Items
Net loss
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current liabilities
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Indirect Method:
Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assets
Purchase of investments that are not cash
equivalents
Making loans to others
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Indirect Method:
Financing Activities
Positive Items
Issuing stock
Selling treasury stock
Borrowing money
Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of debts
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands)
Assets
Current:
Cash
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
Long-term receivable
Plant assets, net
Total
20x2
20x1 Inc/dec)
$ 22
93
3
135
8
11
453
$725
$ 42
80
1
138
7
–
219
$487
$ (20)
13
2
(3)
1
11
234
$238
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands)
Liabilities
Current:
Accounts payable
Salary payable
Accrued liabilities
Long-term debt
Stockholders’ equity
Common stock
Retained earnings
Total
20x2
20x1 Inc/dec)
$ 91
34
1
160
$ 57 $ 34
6
(2)
3
(2)
77
83
359
110
$725
258 101
86
24
$487 $238
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Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Revenues and gains:
Sales revenue
$284
Interest revenue
12
Dividend revenue
9
Gain on sale of plant assets
8
Total revenues and gains
$313
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Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Expenses:
Cost of goods sold
$150
Salary and wage expense
56
Depreciation expense
18
Other operating expense
17
Interest expense
16
Income tax expense
15
Total expenses
$272
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Total revenues and gains
$313
Total expenses
272
Net income
$ 41
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Statement of Cash Flows:
Operating Activities
Depreciation does not affect Sales of long-term assets are
Statement of Cash Flows (Indirect Method)
cash, but it decreases net
investing
Year
Ended
20x2 (In
thousands)
income
– add December
it back in. 31,Activities
– remove
gains from
income.
Cash flows from operatingnet
activities:
Net Income
Adjustments to reconcile net income to
net cash provided by operating activities:
A Depreciation
B Gain on sale of plant
$41
18
(8)
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Statement of Cash Flows:
Operating Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
C Increase in accounts receivable
(13)
C Increase in interest receivable
(2)
C Decrease in inventory
3
C Increase in prepaid expenses
(1)
C Increase in accounts payable
34
C Decrease is salary payable
(2)
C Decrease in accrued liabilities
(2) 27
Net cash provided by operating activities
$68
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Changes in Current Asset and
Current Liability Accounts – C
1. An increase in a current asset other
than cash indicates a decrease in cash.
2. A decrease in a current asset other
than cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.
4. An increase in a current liability
indicates an increase in cash.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Statement of Cash Flows:
Investing Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Cash flows from investing activities:
Acquisition of plant assets
$(306)
Loan to another company
(11)
Proceeds from sale of plant assets
62
Net cash used for investing activities $(255)
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Statement of Cash Flows:
Financing Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Cash flows from financing activities:
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Payment of long-term debt
Payment of dividends
Net cash provided by financing activities
$101
94
(11)
(17)
$167
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Statement of Cash Flows
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Net cash provided by operating activities
Net cash used for investing activities
Net cash provided by financing activities
Net decrease in cash
Cash balance, December 31, 20x1
Cash balance, December 31, 20x2
$ 68
(255)
167
$ (20)
42
$ 22
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Computing Acquisition and
Sales of Plant Assets
Anchor had plant assets, net of
depreciation, of $219,000 at the
beginning of the year and
$453,000 at year end. The
acquisition of plant assets
amounted to $306,000 during
the year.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Computing Acquisition and
Sales of Plant Assets
The income statement shows
depreciation expense of
$18,000 and an $8,000 gain on
sale of plant assets. What is the
book value of the assets sold?
Beginning balance + Acquisitions – Depreciation
– Book value of assets sold = Ending balance
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Computing Acquisition and
Sales of Plant Assets
$219,000 + 306,000 – 18,000 – X = $453,000
X = $219,000 + 306,000 – 18,000 – 453,000
X = $54,000 (book value)
How much are the proceeds
from the sale of plant assets?
27
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Computing Acquisition and
Sales of Plant Assets
Book value + Gain – Loss = Sale proceeds
$54,000 + $8,000 – 0 = $62,000
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Computing Acquisition and
Sales of Plant Assets
Plant Assets (Net)
Beginning bal. 219,000 Depreciation
Acquisitions
306,000 Book val.
Ending bal.
453,000
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18,000
54,000
Computing Acquisition and
Sales of Investments
Beginning balance + Purchases
– Book value of investment sold
= Ending balance
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Computing Loans and
Their Collections
Beginning balance + New loans made
– Collections
= Ending balance
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Computing Issuances and
Payments of Long-Term Debt
Beginning balance was $77,000.
New debt amounting to $94,000
was incurred during the year.
The ending balance for the Long-Term
Debt account was $160,000.
How much was the payment?
32
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Computing Issuances and
Payments of Long-Term Debt
Long-Term Debt
Payments
11,000
Beginning bal.
New debt
Ending bal.
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
77,000
94,000
160,000
Computing Issuances of Stock:
Purchases of Treasury Stock
Beginning balance of common stock +
Issuance of new stock = Ending balance
Beginning balance of treasury stock +
Purchase of treasury stock = Ending balance
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Computing Dividend Payments
Retained earnings beginning balance +
Net income – Dividends declared
= Ending balance
$86,000 + $41,000 – X = $110,000
X = $110,000 – $86,000 – $41,000
X = $17,000
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Noncash Investing and
Financing Activities
Suppose Anchor Corporation issued
Common stock valued at $300,000
to acquire a warehouse.
Warehouse Building
Common Stock
300,000
300,000
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Noncash Investing and
Financing Activities
Noncash Investing and Financing Activities:
Acquisition of building by issuing common
stock
Acquisition of land by issuing note payable
Payment of long-term debt by issuing
common stock
Total noncash investing and financing
activities
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(000)
$300
70
100
$470
Learning Objective 4
Prepare a statement of cash
flows by the direct method.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Direct Method
The FASB has expressed a
preference for the direct method
Provides clearer information
about the sources and uses of a
company’s operating cash
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Direct Method
Statement of Cash Flows
Year Ended December 31, 20x2
(In thousands)
Cash flows from operating activities:
Receipts:
Collections from customers
$271
Interest received on notes receivable
10
Dividends received on investments in stock
9
Total cash receipts
$290
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The Direct Method
Statement of Cash Flows
Year Ended December 31, 20x2
(In thousands)
Payments:
To suppliers
$133
To employees
58
For interest
16
For income tax
15
Total payments
Net cash provided by operating
activities
222
$ 68
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Direct Method
Statement of Cash Flows
Year Ended December 31, 20x2 (In thousands)
Net cash provided by operating activities $ 68
Net cash used for investing activities
(255)
Net cash provided by financing activities 167
Net decrease in cash
$(20)
Cash balance, December 31, 20x1
42
Cash balance, December 31, 20x2
$ 22
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Cash Flows from
Operating Activities
 Cash collections from customers
 Cash receipts of interest
 Cash receipts of dividends
 Payments to suppliers
 Payments to employees
 Payments for interest and income
tax expense
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Cash Flows from
Investing Activities
Purchases of plant assets;
investments in, and loans to,
other companies
Proceeds from the sale of plant
assets and investments; and
the collections of loans
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Cash Flows from
Financing Activities
Proceeds from the issuance of
stock and debt
Payment of debt and purchases
of the company’s own stock
Payment of cash dividends
45
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Computing Cash Collections
from Customers
Beginning accounts receivable balance
+ Sales on account – Collections
= Ending accounts receivable balance
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Computing Payments
to Suppliers
Step 1: How much were the
purchases?
Beginning inventory + Purchases – Cost
of goods sold = Ending Inventory
$138,000 + X – $150,000 = $135,000
X = $150,000 – $138,000 + $135,000
X = $147,000
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Computing Payments
to Suppliers
Accounts Payable
Beg. balance
Payments for inventory Purchases
57,000
147,000
End. balance
91,000
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Computing Payments
to Suppliers
Step 2: How much did the business
pay for this inventory?
Beginning Accounts Payable + Purchases
– Payments = Ending Accounts Payable
$57,000 + $147,000 – X = $91,000
X = $57,000 + $147,000 – $91,000
X = $113,000
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Computing Payments for
Operating Expenses
Beginning prepaid expense + Payments
– Expiration of prepaid expense
= Ending balance
Beginning accrued liabilities + Accrual of
expense at year end – Payments
= Ending balance
Accrual of other operating expenses at year end
+ Expiration of prepaid expense + Payments
= Ending balance
50
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Computing Payments to
Employees
Salary Payable was $6,000 at the
beginning of the year and $4,000 at
year end. During the year, Salary
Expense was $56,000. How much
did the business pay?
$58,000
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Measuring Cash Adequacy:
Free Cash Flow
 The amount of cash available from
operations after paying for planned
investments in plant, equipment,
and other long-term assets.
Net cash flow from operating activities
–
Cash outflow earmarked for investments in
plant, equipment, and other long-term assets
52
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End of Chapter 12
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