Statement of Cash Flows
Chapter 13
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Purpose of the Statement
Provides information about the cash
receipts and cash payments of a business
entity during the accounting period.
Helps investors with questions about the company’s
•
•
•
•
Ability to generate positive cash flows.
Ability to meet its obligations and to pay dividends.
Need for external financing.
Investing and financing transactions for the period.
13-2
Company Name
Statement of Cash Flows
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash from (used in) operating activities
$ #####
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash from (used in) investing activities
#####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash from (used in) financing activities
#####
Net increase (decrease) in Cash
$ #####
Cash (and equivalents) balance at beginning of period
Cash (and equivalents) balance at end of period
#####
$ #####
13-3
Classification of Cash Flows
The Statement of Cash Flows must
include the following three sections:
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities
13-4
Operating Activities
Inflows from:
• Interest and dividends
•
•
•
•
•
received
Sales to customers
+
Outflows to:
Suppliers of goods and
services
Employees
Lenders for interest
Governments for taxes
Cash
Flows from
Operating
Activities
_
13-5
Investing Activities
Inflows from:
• Sale of investments and PPE
•
•
•
•
assets
Collection of principal on
loans
+
Cash
Flows from
Investing
Activities
Outflows to:
Purchase investments and
PPE assets
Purchase debt or equity
investments
Make loans
_
13-6
Financing Activities
Inflows from:
• Short-term and long-term
•
•
•
•
borrowing
+
Owners (for example, from
issuing shares)
Outflows to:
Make payments on borrowed
funds
Owners for dividends
Purchase treasury shares
Cash
Flows from
Financing
Activities
_
13-7
Cash and Cash Equivalents
Cash
Cash Equivalents
•
•
•
Currency
Short-term, highly liquid investments.
Readily convertible into cash.
So near maturity that market value is unaffected
by interest rate changes.
13-8
The operating cash flows
section can be prepared
using either the direct
method or the indirect
method.
Let’s look at the direct
method for preparing the
Statement of Cash Flows.
13-9
Direct Method: Cash Receipts
from Customers
• Accrual basis revenue includes sales that did
not result in cash inflows.
• Can be computed as:
+
Decrease in
receivables
=
Cash Receipts
from
Customers
Net Sales
–
Increase in
receivables
=
13-10
Direct Method: Cash Receipts
from Customers
The accounts receivable balance was $80,000
on 31/12/09 and $110,000 on 31/12/10. If
accrual sales revenue for 2010 was $900,000,
what was cash basis revenue?
Net Sales
$900,000
$870,000
Cash Receipts from
Customers
–
$30,000
Increase in
receivables
=
13-11
Direct Method: Interest and
Dividends Received
Interest
Received
Interest
=
Revenue
Dividends
Dividends
=
Received
Revenue
+ Decrease in
interest receivable
- Increase in interest
receivable
+ Decrease in
dividends receivable
- Increase in dividends
receivable
13-12
Direct Method: Cash Paid for
Purchases of Goods
Step 1
Purchases = COGS
+ Increase in inventory
- Decrease in inventory
Step 2
Cash paid for
goods
= Purchases
+ Decrease in A/P
- Increase in A/P
13-13
Direct Method: Cash Payments
for Expenses
After deducting depreciation and other
noncash expenses, the cash paid for
expenses is affected by
(1) whether the expense was prepaid, and
(2) whether the expense was accrued.
Cash Paid for
Expenses
= Expenses
+ Increase in
prepaid expenses
- Decrease in
prepaid expenses
+ Decrease in
accrued liabilities
- Increase in
accrued liabilities
13-14
Direct Method
Martin Co.
Martin
Co.
Comparative Balance Sheets - Liabilities and Equity
Comparative Balance Sheets - Assets
31 December,
31
December,
2009
2010
Accounts Payable
$2009
15,000 $2010
12,000
Salaries Payable
7,000
5,000
Cash Payable
$ 60,000
Interest
11,950 $ 70,370
7,350
Accounts
net
27,000
35,000
Income
TaxReceivable,
Payable
20,000
17,000
Notes
Payable, 1st Bank
70,000
60,000
Inventory
230,000
200,000
Bonds Payable
250,000
150,000
Trading
Securities
25,000
Premium on Bonds Payable
5,000
4,000
Equipment, net
Ordinary
Shares
Investments
Retained Earnings
Total Assets
Total Liabilities and Equity
500,000
450,000
100,000
88,050
$ 917,000
$ 917,000
425,000
500,000
130,000
130,020
$ 885,370
$ 885,370
13-15
Direct Method
Martin Co.
Income Statement Amounts
For the Year Ending 31 December 2010
Sales Revenues
Cost of Goods Sold
Depreciation Expense
Interest Expense
Income Tax Expense
Salary Expense
Other Expenses
Amortization of Bond Premium
Gain on Sale of Equipment
Extraordinary Loss
Equity in Investee Income
$ 800,000
560,000
5,000
28,050
27,980
80,000
71,000
1,000
3,000
30,000
40,000
Profit
$
41,970
13-16
Direct Method
Additional Information
• Trading Securities were purchased during 2010 at a cost of $25,000.
• Equipment with a book value of $40,000 was sold during the year for
•
•
•
•
•
•
•
$43,000.
Equipment with a book value of $30,000 was destroyed during a freak
flood in 2010. There was no insurance.
Martin owns 25% of the ordinary shares of another company and
uses the equity method to account for this investment.
Martin’s tax rate is 40%.
The Notes Payable to the bank carry a 12% rate. The payments are
due on the first day of each month.
The Bonds Payable carry a 9% rate. Interest is payable semiannually on
1 July & 1 Jan.
Sold shares during 2010 for $50,000.
Received $10,000 dividends from its equity investment.
13-17
Direct Method
Cash Receipts from Customers
Sales Revenues
$ 800,000
Less: Increase in A/R
Cash Receipts from Customers
(8,000)
$ 792,000
Cash Paid to Employees
Salary Expense
Add: Decrease in Salary Payable
$
80,000
2000
2,000
Cash Paid to Employees
$
82,000
13-18
Direct Method
Cash Paid for Inventory
Cost of Goods Sold
$ 560,000
Add : Decrease in A/P
Less: Decrease in Inventory
Cash Paid for Inventory
3,000
(30,000)
$ 533,000
Cash Paid for Interest
Interest Expense
Add: Decrease in Interest Payable
$
28,050
2000
4,600
Cash Paid for Interest
$
32,650
13-19
Direct Method
Cash Paid for Taxes
Income Tax Expense
Add: Decrease in Taxes Payable
$
27,980
2000
3,000
Cash Paid for Taxes
$
30,980
Other Operating Cash Flows
Add : Dividends from Tiny Co.
Less: Purchase of Trading Securities
Less: Other Operating Expenses
$
10,000
(25,000)
(71,000)
Cash Flow from Other Sources
$ (86,000)
13-20
Direct Method
Cash Flows From Operating Activities
Cash Receipts from Customers
$
Cash Paid to Employees
792,000
(82,000)
Cash Paid for Inventory
(533,000)
Cash Paid for Interest
(32,650)
Cash Paid for Taxes
(30,980)
Cash Paid to Other Sources
(86,000)
Net Cash From Operating Activities
$
27,370
13-21
Martin Co.
Statement of Cash Flows
For the Period Ending 31 December 2010
Operating Cash Flows
Equipment with a book
value of $40,000 was sold
for $43,000.
$ 27,370
Investing Cash Flows
Proceeds from sale of Equipment
Financing Cash Flows
Proceeds from sale of Shares
Principal paid on Bonds
Principal paid on Notes
$ 50,000
(100,000)
(10,000)
43,000
Bonds Payable
decreased
from $250,000
to $150,000
during 2010.
(60,000)
Net Cash
Flows
for the
Period from
Notes
Payable
decreased
$ 10,370
$70,000 to $60,000
during 2010.
Add: Beginning
Cash Balance
60,000
Ending Cash Balance
$ 70,370
13-22
Martin Co.
Statement of Cash Flows
For the Period Ending 31 December 2010
Operating Cash Flows
$ 27,370
Investing Cash Flows
Proceeds from sale of Equipment
43,000
Financing Cash Flows
Proceeds from sale of Shares
Principal paid on Bonds
Principal paid on Notes
$ 50,000
(100,000)
(10,000)
Net Cash Flows for the Period
Add: Beginning Cash Balance
Ending Cash Balance
Notice that the Ending Cash Balance per the Statement
of Cash Flows agrees with the 31/12/10 Cash balance
on the Balance Sheet.
(60,000)
$ 10,370
60,000
$ 70,370
13-23
Reconciling Profit with
Net Cash Flows
There are two major categories of
reconciling items. They include
adjusting for:
1. Noncash Expenses.
2. Timing Differences.
Accounts receivable
Depreciation Expense
13-24
Reporting Operating Cash Flows by
the Indirect Method
Changes in current assets and current
liabilities as shown on the following table
Net Cash from
Operating
Activities
Profit
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization
13-25
Reconciling Profit with Net Cash
Flows
Current
Assets
Current
Liabilities
Change in Account Balance During Year
Increase
Decrease
Subtract from
Add to profit
profit
Add to profit
Subtract from
profit
Use this table when adjusting Profit to
Operating Cash Flows.
13-26
The Indirect Method: A Summary
Profit
Add:
Depreciation
Decrease in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued expense payable
Increase in deferred income taxes payable
Nonoperating losses deducted in computing profit
Deduct:
Increase in accounts receivable
Increase in inventories
Increase in prepaid expenses
Decrease in accrued expense payable
Decrease in deferred income taxes payable
Nonoperating gains deducted in computing profit
Net cash from (used in) operating activities
13-27
Managing Cash Flows
Cash Budgets are used by management to plan
and forecast future cash flows.
A Cash Budget can be used to:
Force management to coordinate activities.
Provide managers with advance notice of available resources.
Provide targets useful in evaluating performance.
Provide advance warnings of potential cash shortages.
13-28
Managing Cash Flows
 Increase collection of accounts receivables.
 Keep inventory low.
 Delay payment of liabilities.
 Plan timing of major expenditures.
 Invest idle cash.
13-29
Direct Method
Martin Co.
Martin Co.
Comparative Balance Sheets - Assets
Comparative Balance Sheets - Liabilities and Equity
31 December,
2009
2010
31
December,
Accounts Payable
$2009
15,000 $2010
12,000
Salaries Payable
7,000
5,000
Cash Payable
$ 60,000
Interest
11,950 $ 70,370
7,350
Income
TaxReceivable,
Payable
20,000
17,000
Accounts
net
27,000
35,000
Notes Payable, 1st Bank
70,000
60,000
Inventory
230,000
200,000
Bonds Payable
250,000
150,000
Trading on
Securities
25,000
Premium
Bonds Payable
5,000
4,000
Equipment, net
Ordinary
Shares
Investments
Retained Earnings
TotalLiabilities
Assets and Equity
Total
500,000
450,000
100,000
88,050
425,000
500,000
130,000
130,020
$ $917,000
917,000 $ $885,370
885,370
13-30
A Worksheet for Preparing a
Statement of Cash Flows
13-31
A Worksheet for Preparing a
Statement of Cash Flows
Additional Information
1. Profit for the year amounted to $250,000. Cash
dividends of $140,000 were declared and paid.
2. Auto’s only noncash expense was depreciation,
which totaled $60,000.
3. Equity securities costing $15,000 were sold for
$35,000 cash, resulting in a $20,000 non-operating
gain.
4. The company purchased PPE for $100,000, making
a $30,000 cash down payment and issuing a
$70,000 mortgage not payable for the balance of
the purchase price.
13-32
The Worksheet
13-33
The Worksheet
13-34
Statement of Cash Flows
13-35
Supplemental Information
We are required to disclose information concerning
major investing and financing activities that do not
involve cash.
13-36
End of Chapter 13
13-37