Statement of Cash Flows
I.
II.
III.
IV.
General
a. Required by GAAP as a part of a full set of financial statements
b. Purpose: Provide information about
i. Sources of cash and cash equivalents (cash receipts)
ii. Uses of cash and cash equivalents (cash disbursements),
specifically information about:
1. Operating cash flows: the cash effects of the line items that
make up the calculation of net income and current assets
and current liabilities (excluding current notes payable and
the current portion of LT debt, which are reported in
financing cash flows).
2. Investing cash flows: the cash effects from noncurrent
assets.
3. Financing cash flows: the cash effects of borrowing,
paying back, and buying or selling the equity of the
company.
Cash and Cash Equivalents—The statement of cash flows reconciles cash and
cash equivalents amount presented on the beginning balance sheet to the cash
and cash equivalents amount presented on the ending balance sheet
a. Definitions
i. Cash—actual cash; currency and demand deposits
ii. Cash equivalents—short-term, liquid investments that are
1. Quickly convertible into specific amounts of cash AND
2. So near maturity that the risk of changes in the value
because of interest rate changes is insignificant.
b. Purpose—Investors, creditors, etc. need information about the entity’s
available cash and cash needs (ability to pay obligations, dividends, etc.)
Methods of Presenting the Statement of Cash Flows—Regardless of method
used, the presentation of investing and financing activities is the same. Only
the operating activities section changes.
a. Direct Method—the entity shows major classes of operating cash receipts
and disbursements. A reconciliation of net income and net cash flows
from operating activities is required to be provided in a separate schedule
(for GAAP; reconciliation not required for IFRS).
b. Indirect Method—the entity reports the same amount of net cash flows
from operating activities indirectly, by adjusting the net income to
reconcile it to net cash flows from operating activities.
Sections of the Statement of Cash Flows
a. Operating Activities: Involve producing goods and delivering services to
customers. Operating activities is also a residual category in that all
transactions not categorized as investing or financing activities are
categorized as operating activities. (For U.S. GAAP, regardless of the
method used—direct or indirect—the reconciliation of net income to net
cash provided by operating activities must be calculated. If the direct
method is chosen, the reconciliation will appear in a separate schedule to
the statement. If the indirect method is chosen, this reconciliation is part
of the body of the statement.)
i. Direct Method: Major classes of cash receipts and disbursements
are presented in their gross amounts and totaled to arrive at “net
cash flow provided by (used in) operating activities.
1. Categories Reported Separately:
a. Cash received from customers (+)
b. Interest received (+)
c. Dividends received (+); dividends paid—financing
d. Other operating cash receipts such as the receipt of
insurance proceeds and lawsuit settlements (+)
e. Cash received from sales of trading securities (+)
f. Cash paid to supplies and employees (-)
g. Interest paid (-)
h. Income taxes paid (-)
i. Other operating cash payments (-)
j. Cash paid to buy trading securities (-)
2. Determination of Cash Received/Disbursed
a. Cash Collections: Cash collected from current
year’s sales and prior years’ sales
Sales to customers
+
Interest income
+
Dividend income
Increase in receivables
+
Decrease in receivable
+
Increase in unearned revenue
Decrease in unearned revenue
Cash Collections
b. Cash Paid to Supplies and Employees: Defined broadly and may include
cash paid for insurance, advertising, and most general, selling, and
administrative expenses.
Cost of goods sold
+
Increase in inventory
Decrease in inventory
+
Expenses
+
Increase in prepaid
Decrease in prepaid
Increase in accounts payable or other liability
+
Decrease in accounts payable or other liability
Cash Paid to Suppliers and Employees
ii.
Indirect Method: Net income is adjusted to arrive at net cash flows from
operating activities
a. Adjustment to Net Income: removes the effects on net income of the
following items:
1. Deferrals of past operating cash receipts and disbursements
2. Accruals of expected future operating cash receipts and
disbursements
3. All items that are included in net income that do not affect
operating cash receipts and disbursements
b. Determination of Effect on Cash Flow
1. An increase to an asset or debit balance accounts will have
the effect on the statement of cash flows as a decrease to
cash.
2. A decrease to an asset or debit balance account will have the
effect on the statement of cash flows as an increase to cash
3. An increase in a liability, equity, or credit balance account
will have the effect on the statement of cash flows as an
increase to cash.
4. A decrease in a liability, equity, or credit balance account
will have the effect on the statement of cash flows as a
decrease to cash.
c. Short-cut Flow Effects
1. Changes in debit balance accounts will have the opposite
effect on cash flows.
2. Changes in credit balance accounts will have the same effect
on cash flows.
d. Gains and Losses
1. Gains are adjusted out of the operating activities section and
into the investing activities section by subtracting their
effects from net income.
2. Losses are adjusted out of the operating activities section and
into the investing activities section by adding their effects to
net income.
Net Income
Add
Non-Cash Expenses (Depreciation, Amortization)
Less
Non-operating gains
Add
Non-operating losses
Less
Increases in current assets
Add
Decreases in current assets
Add
Increases to current liabilities
Less
Decreases in current liabilities
b. Investing Activities—change in non-current assets and some ST investments in debt
and equity
1. Making loans to other entities (-)
2. Purchasing (-) or disposing of (+) available-for-sale and held-to-maturity
investment securities.
3. Acquiring (-) or disposing of (+) PPE.
c. Financing Activities—change in cash from non-current debt and equity
1. Owner-oriented Activities
i. Obtaining resources from owners, such as issuing stock (+)
ii. Providing owners with a return on investment, such as paying
dividends (-)
2. Creditor-oriented Activities
i. Obtaining resources from creditors, such as issuing bonds, notes, etc.
(+)
ii. Payments of principal (NOT interest) on amount borrowed (-)
d. Non-Cash Investing and Financing Activities—Material information should be
provided separately in a supplemental disclosure.
V.
IFRS Differences in Reporting Cash Flows—IFRS allows more flexibility
than U.S. GAAP in classifying cash flows related to interest, dividends, and
income taxes. The following table summarizes the classification differences
between U.S. GAAP and IFRS:
Transaction
Interest Received
Interest Paid
Dividends Received
Dividends Paid
Taxes Paid
U.S. GAAP
CFO
CFO
CFO
CFF
CFO
IFRS
CFO or CFI
CFO or CFF
CFO or CFI
CFO or CFF
CFO, CFI, CFF
IFRS classifies taxes paid as CFO, but allows allocation to CFI or CFF for
portions specifically identified with investing and financing activities. IFRS also
requires disclosure of tax related cash flows separately within the statement of
cash flows. U.S. GAAP requires the disclosure of interest and taxes paid in a
footnote if not presented on the statement of cash flows.
VI.
Illustrations
a. Indirect Method
X Company
Statement of Cash Flows
For the Period Ended XX/XX/XXXX
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$760
Adjustments to reconcile N/I to net cash
provided by operating activities:
Depreciation and amortization
$445
Provision for losses on A/R
200
Gain on sale of facility
(80)
Undistributed earnings of affiliate
(25)
Payment received on installment N/R
100
for sale of inventory
Changes in Current Assets and liab:
Increase in A/R
(215)
Decrease in inventory
205
Increase in PP Expenses
(25)
Decrease in A/P
(250)
Increase in interest and taxes payable
50
Increase in deferred tax liability
150
Increase in other liabilities
50
Total Adjustments
605
Net Cash Provided by Operating Act
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility
600
Payment received on note for sale of
150
plant
Capital expenditures
(1000)
Payment for purchase of Company X
(925)
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings
300
Principal payments
(125)
Proceeds from issuance of LT debt
400
Proceeds from issuance of common stock 500
Dividends paid
(200)
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash, Beginning Balance
Cash, Ending Balance
$1365
(1175)
875
1065
600
$1665
b. Direct Method
X Company
Statement of Cash Flows
For the Period Ended XX/XX/XXXX
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers
Cash paid to suppliers and employees
Dividend received from affiliate
Interest Received
Interest Paid
Income taxes paid
Insurance proceeds received
Cash paid to settle lawsuit
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of facility
Payment received on note for sale of plant
Capital expenditures
Payment form purchase of Company X
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings
Principal payments
Proceeds from issuance of LT debt
Proceeds from issuance of common stock
Dividends paid
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash, Beginning Balance
Cash, Ending Balance
$13,850
(12,000)
20
55
(220)
(325)
15
(30)
$1365
600
150
(1000)
(925)
(1175)
300
(125)
400
500
(200)
875
1065
600
$1665
A required reconciliation of net income to net cash provide by operating
activities is required. See indirect method above.