Preparing a Statement of Cash Flows
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 To show how the business acquired its cash during the current year
 To show how the business spent its cash during the current year
This information is crucial for decision makers predict future cash flows of the business.
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What Is Considered “CASH” For
The Statement Of Cash Flows?
 Cash includes cash and cash equivalents for purpose of the statement.
 Cash Equivalents are
 Short-term, highly liquid investments.
 Easily convertible into known amounts of cash.
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Categories are based on activities related to cash flows:
1.
Operating the business.
2.
Investing in productive assets.
3.
Financing the business.
These are the sections of the
Statement of Cash Flows.
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Cash inflows and outflows that are directly related to income from normal operations.
Inflows include:
 Receipts from customers.
 Interest on receivables.
 Dividends received.
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Cash inflows and outflows that are directly related to income from normal operations.
Outflows include:
 Payments to suppliers.
 Interest paid on liabilities.
 Income taxes paid.
 Salary and wages payments to employees.
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 Cash inflows and outflows that are related to the purchase and sale of productive assets.
 Inflows include proceeds from:
 Sales of property, plant, and equipment.
 Sales of investments in securities.
 Collection of principal on loans made to others.
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 Cash inflows and outflows that are related to the purchase and sale of productive assets.
 Outflows include payments for:
 The purchase of property, plant and equipment.
 The purchase of long-term investments.
 Loans to others.
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Cash inflows and outflows that are related to how cash was obtained to finance the enterprise.
Inflows include:
 Proceeds from sale of stock.
 Proceeds from sale of bonds and from borrowings.
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Cash inflows and outflows that are related to how cash was obtained to finance the enterprise.
Outflows include:
 Payments to purchase treasury stock.
 Principal payments to retire bonds and loans.
 Dividends paid to owners.
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The face of the statement includes:
Net Cash Flows from Operating Activities
+Net Cash Flows from Investing Activities
+Net Cash Flows from Financing Activities
=Net Cash Flows for the period
+ Beginning Cash Balance
=End of period Cash Balance
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Indirect Method
 Shows net cash inflow (outflow) from operations as an adjustment of net income.
 Used by 97% of companies.
Direct Method
 Reports the components of cash from operations as gross receipts and payments.
 Recommended by the FASB, but rarely used.
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 Net cash flows from operating activities are determined by . . .
•
•
Starting with net income , then . . .
Adding and subtracting items that reconcile net income to operating cash flows.
 Requires an analysis of changes in all current asset and current liability accounts, except cash.
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 Noncash additions to net income:
 Depreciation, depletion, and amortization.
 All losses.
 Noncash deductions from net income:
 All gains.
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Summary of Differences Between
Direct and Indirect Methods
 The direct method provides more detail about cash from operating activities.
 Shows individual operating cash flows.
 Shows reconciliation of operating cash flows to net income in a supplemental schedule.
 The investing and financing sections for the two methods are identical.
 Net cash flow is the same for both methods.
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 It is crucial to the presentation of a complete picture of the financial status of a business.
 Many businesses with great ideas and potential have failed due to their failure to manage their cash flows.
 Remember, the statement is
REQUIRED by GAAP.
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