STATEMENT OF CASH FLOWS
- Provides information about the sources and utilization (i.e., historical changes) of cash
and cash equivalents during the period
- Can only be prepared on a cash basis
Classifications of Cash Flows
1. Operating activities – affect profit or loss
2. Investing activities – affect noncurrent assets and other investments
3. Financing activities – affect borrowings and equity
Presentation
Operating Acitivities
(1) Direct Method – shows each major class of gross cash receipts and gross cash
payments
Example:
Cash flows from operating activities:
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
xx
(xx)
xx
(xx)
(xx)
xx
(2) Indirect Method – profit or loss is adjusted for the effects of non-cash items and changes
in operating assets and liabilities.
Example:
Cash flows from operating activities:
Profit before tax
Adjustments for:
Depreciation
Foreign exchange loss
Investment income
Interest expense
Increase in trade and other receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash from operating activities
xx
xx
xx
xx
xx
xx
(xx)
xx
xx
xx
(xx)
(xx)
xx
General Guidelines in Converting Accrual Basis Profit to Cash Basis Profit
1. Non-cash income
• Unrealized gains recognized in profit or loss, amortization of discount on
notes receivables and investments in bonds, and amortization of premium on
bonds payable are deducted from accrual basis profit because these items
increased accrual basis profit but they do not affect cash
• Gains on sale of non-operating assets (e.g., PPE and investments other than
held for trading securities) are deducted from accrual basis profit but they
pertain to investing activity
2. Non-cash expenses
• Unrealized losses recognized in profit or loss, amortization or premium on
investments in bonds, amortization of discount on bonds payable,
depreciation and amortization expense, and impairment losses are added to
accrual basis profit because these items decreased accrual basis profit but
do not affect cash
• Losses on sale of non-operating assets (e.g., PPE and investments other
than held for trading securities) are added to accrual basis profit because
these items decreased accrual basis profit but they pertain to investing
activity
3. Increases in operating current assets, except cash and cash equivalents, (e.g., trade
accounts and notes receivables, inventory and prepayments) are deducted from
accrual basis profit.
4. Decreases in operating current assets, except cash and cash equivalents are added
to accrual basis profit
5. Increases in operating current liabilities (e.g., trade account and notes payables,
accrued expenses, and unearned income) are added to accrual basis profit
6. Decreases in operating current liabilities are deducted from accrual basis profit
CASH FLOWS Q AND A
Q1.
Which one of the following items could be identified on the cash flow statement prepared using
the indirect method?
a. The payment of interest expense of $200,000.
b. A change in unrealized holding gains of $50,000.
c. A settlement of a lawsuit that was previously accrued.
d. Depreciation related to buildings and equipment.
A1: D
Q2.
Consider the following financial data for a company that is preparing its cash flow statement.
Amortization expense = $150,000
Cash dividends paid to common shareholders = $75,000
Net income = $1,500,000
Work-in-process inventory increase over the prior year = $300,000
Gain on sale of equipment = $50,000
Using the indirect method, cash flow from operating activities would be
a. $1,225,000.
b. $1,300,000.
c. $1,350,000.
d. $1,375,000.
A2: B
Net income + Amortization expense – inventory increase - Gain on sale of equipment
b. $1,500,000 + 150,000 - 300,000 - 50,000 = $1,300,000
Q3:
Dividends paid to company shareholders would be shown on the statement of cash flows as
a. operating cash inflows.
b. operating cash outflows.
c. cash flows from investing activities.
d. cash flows from financing activities.
A3: D
The payment of dividends is a financing activity and should be presented as a
cash outflow in that section of the Cash Flow Statement.