INTERMEDIATE ACCOUNTING
TENTH CANADIAN EDITION
Kieso • Weygandt • Warfield • Young • Wiecek • McConomy
CHAPTER 22
Statement of Cash
Flows
Prepared by:
Lisa Harvey, CPA, CA
Rotman School of Management,
University of Toronto
CHAPTER 22
STATEMENT OF CASH FLOWS
After studying this chapter, you should be able to:
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Understand the importance of cash flows from a business perspective.
Describe the purpose and uses of the statement of cash flows.
Define cash and cash equivalents.
Identify the major classifications of cash flows and explain the significance
of each classification.
Prepare the operating activities section of a statement of cash flows using
the direct versus the indirect method.
Prepare a statement of cash flows using the direct method.
Prepare a statement of cash flows using the indirect method.
Identify the financial presentation and disclosure requirements for the
statement of cash flows.
Read and interpret a statement of cash flows.
Identify differences in ASPE and IFRS, and explain what changes are
expected to standards for the statement of cash flows.
Copyright © John Wiley & Sons Canada, Ltd.
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Statement of Cash Flows
Introduction to
the Statement
of Cash Flows
•Cash flows from
a business
perspective
•Purpose and
usefulness of the
statement
•What is cash?
•Classification of
cash flows
•Format of the
statement
Preparing a
Statement of
Cash Flows
Presentation,
Disclosure, and
Analysis
•First illustration
using the direct
method – Tax
Consultants Inc.
•Second illustration
using the indirect
method – Eastern
Window Products
Limited
•Third illustration
using both methods
– Yoshi Corporation
•Disclosure
requirements
•Presentation
•Illustrative
example
•Interpreting the
statement of
cash flows
•Free cash flow
Copyright © John Wiley & Sons Canada, Ltd.
IFRS/ASPE
Comparison
•Comparison
of IFRS and
ASPE
•Looking
ahead
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Cash Flows from a Business
Perspective
• A lack of cash flow is one of the main
causes of bankruptcy
– A sign of a healthy company is positive cash
flows from operations
• Over the years, the statement of cash
flows has grown in importance
– Helps users answer many questions such as:
• Will the company be able to pay dividends?
• How was the acquisition of the new subsidiary
financed?
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Purpose and Usefulness of the
Statement of Cash Flows
• The information helps users (investors,
creditors, and others) assess the
following:
1. Liquidity and solvency – i.e., the entity’s ability
to generate future cash flows and its needs for
cash resources
2. The amounts, timing, and uncertainty of future
cash flows
3. The reasons why net income and net cash
flow from operating activities differ
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Cash and Cash Equivalents
Cash
• Cash on hand
• Demand deposits
Cash Equivalents
• Investments that are
All references to Cash
include Cash Equivalents
when discussing the
Statement of Cash Flows
– Short term,
– Highly liquid, and
– Easily converted to a
known amount of cash
– Subject to an
insignificant risk of
change in value
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The Cash Flow Statement
• The cash flow statement provides
information about:
• the cash receipts (cash inflows), and
• uses of cash (cash outflows) during the year
• Inflows and outflows are reported for:
• operating activities
• investing activities, and
• financing activities during the year
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Classification of Cash Flows
1. Operating Activities
• The cash flows resulting from the primary revenueproducing activities of the business such as:
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Collections from customers
Payments to suppliers
Payments to Canada Revenue Agency (CRA) for tax
Payments to employees
• Cash flow provided by operating activities is
necessary for long term sustainability of the business
(i.e. to take advantage of new investment
opportunities, to pay dividends without seeking
external financing etc.)
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Classification of Cash Flows
2.Investing Activities
• The acquisition and disposal of long term
assets and long-term investments such as:
• Making and collecting loans
• Acquiring and disposing of investments
• Purchase/disposal of long-lived assets
• Cash flow generated by investing activities
shows if the business is investing in additional
long term assets that will generate profits and
increase cash flows in the future
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Classification of Cash Flows
3.Financing Activities
• Changes in long-term debt or equity capital
such as:
• Issuing or repayment of debt
• Issuing new shares or repurchase of currently
outstanding shares
• Provides information to assess potential for
future claims to entity’s cash and major
changes in the form of financing
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Statement of Cash Flows: Concept
Operating
activities
Inflows
Investing
activities
Financing
activities
Cash
Pool
Operating
activities
Investing
activities
Outflows
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Financing
activities
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Classification of Cash Flows
• IFRS requirements relating to
classification of cash flows are similar to
ASPE except for the following:
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Classification of Cash Flows
• Income statement gains and losses on
disposal of long-term assets must be
adjusted in determining cash flows from
operations
– These result from investing activities, not
operating activities
– The amount of the cash flow is the proceeds
on disposal not the gain or loss included in
income
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Classification of Cash Flows
• Income statement gains and losses on
redemption of long-term debt must be
adjusted in determining cash flows from
operations
– These result from financing activities, not
operating activities, and
– The amount of the cash flow is the amount
paid to redeem the debt not the gain or loss
included in income
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Significant Non-Cash Transactions
• Transactions that do not involve the direct receipt or
disbursement of cash in the period such as:
– Asset purchased and paid for by assuming debt, or
issuance of shares
– Exchanges of non-monetary assets
– Conversion of debt to equity
– Issuance of shares to retire debt
• Non-cash transactions are not reported on the
Statement of Cash Flows
• If material, they are reported as notes to the
statement or in a supplementary schedule to the
financial statements
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Format of the Statement of Cash
Flows
• Two methods of preparing the operating cash
flow section of the Statement of Cash Flows:
1. Indirect method
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Derives operating cash flows from accrual basis income
statement
2. Direct method
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Determines operating cash flows directly for each operating
source or use of cash
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The Indirect Method
Earned
Revenues
+
Eliminate
non-cash revenues
Operating
cash flow
Net Income
Expenses
Incurred
-
Eliminate
non-cash charges
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The Indirect Method
Accrual Basis Statements
Cash Flow Statement
Income Statement items
and changes in Current
Assets and Current Liabilities
Operating activities:
Adjust net income for accruals,
non-cash charges and nonoperating gains/losses
Balance Sheet:
Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
outflows for purchases of assets
Balance Sheet:
Changes in Non-Current
Liabilities and Equity
Financing activities:
Inflows and outflows from loan
and equity transactions
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Format of the Statement of
Cash Flows (Indirect Method)
Cash flows from operating activities:
Net Income (Loss)
Adjustments (List individual adjustments)
Net cash flow from operating activities
$ XXX
$ XX
$ XXX
Cash flows from investing activities:
(List individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Change in cash
$ XXX
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The Direct Method
Inflows
Outflows
• Received from
customers for cash
sales and on
account
• Cash receipts from
other revenue
sources
• Paid to suppliers
for cash purchases
and payments on
account
• Paid to employees
for salaries and
wages
• Paid to
government for
taxes
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Format of the Statement of Cash
Flows (Direct Method)
Cash flows from operating activities:
Cash receipts (separately): inflows
Cash payments (separately): outflows
Net cash flow from operating activities
$ XXX
($ XXX)
$ XXX
Cash flows from investing activities:
(List individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Change in cash
$ XXX
Copyright © John Wiley & Sons Canada, Ltd.
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Format of the Statement of Cash
Flows
• Both IFRS and ASPE encourage the use of the
direct method as it provides additional
information
– Is more consistent with the objective of the statement
of cash flows
– Information about specific sources of cash inflows and
purposes of cash outflows helps in estimating future
cash flows
• Lending officers and other investors also prefer
the direct method
Copyright © John Wiley & Sons Canada, Ltd.
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22
Statement of Cash Flows
Introduction to
the Statement
of Cash Flows
•Cash flows from
a business
perspective
•Purpose and
usefulness of the
statement
•What is cash?
•Classification of
cash flows
•Format of the
statement
Preparing a
Statement of
Cash Flows
Presentation,
Disclosure, and
Analysis
•First illustration
using the direct
method – Tax
Consultants Inc.
•Second illustration
using the indirect
method – Eastern
Window Products
Limited
•Third illustration
using both methods
– Yoshi Corporation
•Disclosure
requirements
•Presentation
•Illustrative
example
•Interpreting the
statement of
cash flows
•Free cash flow
Copyright © John Wiley & Sons Canada, Ltd.
IFRS/ASPE
Comparison
•Comparison
of IFRS and
ASPE
•Looking
ahead
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Direct Method - Example
Given:
• Tax Consultants Inc. began operations on January 1,
2013
Income Statement
For the year ended December 31, 2014
Revenues
Operating expenses
Income before income taxes
Income tax expense
Net Income
$ 125,000
85,000
40,000
6,000
$ 34,000
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Direct Method - Example
Comparative Statement of Financial Position
Dec 31, 2014 Dec 31, 2013
Assets:
Cash
Accounts receivable
Total
$ 89,000
66,000
$155,000
$ 40,000
30,000
$ 70,000
Liabilities and Shareholders’ Equity:
Accounts payable
$ 35,000
Common shares
80,000
Retained earnings
40,000
Total
$155,000
$ 30,000
20,000
20,000
$ 70,000
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Direct Method – Example
Operating Cash Flows
Accounts Receivable
increased by $36,000
Cash collections are
less than revenue
recognized
Reduce revenue
from credit sales
by $36,000 to derive
cash flows from
operations
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Direct Method – Example
Operating Cash Flows
Accounts Payable
increased by $5,000
Cash paid for purchases
is less than COGS
reported
Increase COGS
by $5,000 to derive
cash flows from
operations
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Direct Method – Example
Operating Cash Flows
Cash receipts from customers:
= Revenue from credit sales – increase in A/R balance
= $125,000 – $36,000 = $89,000
Cash payments to suppliers:
= Cost of goods sold – increase in A/P balance
= $85,000 – $5,000 = $80,000
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Direct Method – Example
Operating Cash Flows
Operating Activities:
Cash received from customers
$89,000
Cash paid to suppliers
(80,000)
Cash paid for income taxes
Net cash inflow
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(6,000)
$ 3,000
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Investing and
Financing Cash Flows
Accrual Basis
Cash Flow
Financing Activities:
Common stock + $60,000
Retained earnings +$20,000
Issue of Shares: $60,000
Dividends paid: (14,000)
Inflow
46,000
Beg. Balance: $
0
Net Income:
34,000
less: Dividends (14,000)
End Balance:
$20,000
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Direct Method – Example
Summary
Cash provided by operating activities:
Cash received from customers
Cash paid to suppliers
Cash paid for income taxes
Cash used by investing activities:
Cash provided by financing activities:
Net inflow for the year
Beginning cash balance:
Cash, end of year
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$ 89,000
(80,000)
(6,000)
3,000
-046,000
49,000
40,000
$ 89,000
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Indirect Method - Example
Given:
• Same information for Tax Consultants Inc. given for the
direct method example
Determine cash flows from operating activities (cash flows
from investing and financing activities remain the same)
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Indirect Method – Example
Operating Activities
Accrual Basis
Net Income
Cash Flow
$34,000
Accounts Receivable +$ 36,000
Accounts Payable
+$ 5,000
Net Income
$34,000
Less: Increase in A/R
Add: Increase in A/P
$ 36,000
$ 5,000
Operations: Net Inflow $3,000
Copyright © John Wiley & Sons Canada, Ltd.
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Statement of Cash Flows
Introduction to
the Statement
of Cash Flows
•Cash flows from
a business
perspective
•Purpose and
usefulness of the
statement
•What is cash?
•Classification of
cash flows
•Format of the
statement
Preparing a
Statement of
Cash Flows
Presentation,
Disclosure, and
Analysis
•First illustration
using the direct
method – Tax
Consultants Inc.
•Second illustration
using the indirect
method – Eastern
Window Products
Limited
•Third illustration
using both methods
– Yoshi Corporation
•Disclosure
requirements
•Presentation
•Illustrative
example
•Interpreting the
statement of
cash flows
•Free cash flow
Copyright © John Wiley & Sons Canada, Ltd.
IFRS/ASPE
Comparison
•Comparison
of IFRS and
ASPE
•Looking
ahead
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Disclosure Requirements
•
IFRS and ASPE require similar disclosures on certain items,
including the disclosure of:
1. Significant non-cash investing and financing
transactions
2. Policy on what makes up cash and cash equivalents
3. Reconciliation of cash and cash equivalents to
balance sheet accounts
•
IFRS has more strict requirements relating to disclosure of some
items, including:
1. Income taxes
2. Interest and dividends (paid and received)
3. Restrictions on cash and cash equivalents
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Free Cash Flow
• Free cash flow (FCF) is a non-GAAP measure used
by many companies to indicate discretionary cash
available for new investments, paying dividends,
retiring debt, repurchasing shares, or improving
liquidity
• FCF is typically calculated as:
– Net operating cash flows
– Less: capital expenditures to sustain current level
operations
• As it is a non-GAAP measure, some companies
calculate FCF differently
Copyright © John Wiley & Sons Canada, Ltd.
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Statement of Cash Flows
Introduction to
the Statement
of Cash Flows
•Cash flows from
a business
perspective
•Purpose and
usefulness of the
statement
•What is cash?
•Classification of
cash flows
•Format of the
statement
Preparing a
Statement of
Cash Flows
Presentation,
Disclosure, and
Analysis
•First illustration
using the direct
method – Tax
Consultants Inc.
•Second illustration
using the indirect
method – Eastern
Window Products
Limited
•Third illustration
using both methods
– Yoshi Corporation
•Disclosure
requirements
•Presentation
•Illustrative
example
•Interpreting the
statement of
cash flows
•Free cash flow
Copyright © John Wiley & Sons Canada, Ltd.
IFRS/ASPE
Comparison
•Comparison
of IFRS and
ASPE
•Looking
ahead
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Looking Ahead
• Significant changes are expected from the
FASB-IASB Financial Statement
Presentation project
• Both IAS 1 Presentation of Financial
Statements and IAS 7 Statement of Cash
Flows are expected to be replaced with a
new standard
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