Statement of Cash Flow
(Go through the reference books for details)
 The Concept of Cash Flow Statement (Kieso, 4th Ed., p-732)
The statement of cash flows reports the cash receipts, cash payments, and net change in cash and cash
equivalent resulting from the operating, investing, and financing activities of an enterprise during a
particular period. The main aim to prepare the statement is to identify and analyze the causes of
differences between cash amount in the beginning and ending balance sheet. The Financial Accounting
Standards Board (FASB) and International Accounting Standards -7 say the same purpose for preparing
the statement of cash flows. It provides the answer of three questions, such as:
 Where did the cash come from during the period?
 What was the cash used for during the period?
 What was the change in the cash balance during the period?
Cash equivalents are short-term highly liquid investments that are both readily convertible into known
amount of cash and which are subject to an insignificant risk of changes in value. Generally, only
investments with original maturities of three months or less qualify under this definition. Examples of cash
equivalents are Treasury bills, commercial paper and money market funds.
 Classification of Cash flows
The statement of cash flows classifies cash receipts and cash payments by operating, investing, and
financing activities. Transactions and other events of each kind of activity are as follows:
1. Operating Activity: Operating activities include the transactions that create revenues and expenses
and thus enter into the determination of net income. It is the principal revenue producing activities.
Cash received from
sales of goods and
services
-
Cash paid for
operating goods
=
and services
Cash flow
from
operations
Cash inflows:
 From sale of goods or services
 From return on loans (interest received) and on equity securities (dividends received)
Cash outflows:
 To suppliers for inventory
 To employees for services
 To government for taxes
 To lenders for interest
 To others for expenses
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2. Investing Activity: Investing activity means the acquiring and disposing activities of long term assets
and investments i.e. (i) acquiring and disposing of investments and productive long lived assets and (ii)
lending money and collecting the loans.
Cash received
from sales of
investments,
property, plant and
equipment, etc.
Cash inflows:



-
Cash paid for acquisition of
investments, property, plant
and equipment, etc.
Cash flow
from
investing
=
From sale of property, plant, and equipment
Dividend Received from share of other country
From collection of principal on loans to other entities
Cash outflows:
 To purchase property, plant, and equipment
 To purchase debt or equity securities of other entities
 To pay loans to other entities
3. Financing Activity: Financing activities include cash from issuing debt and borrowing, repaying the
amounts borrowed, obtaining cash from stockholders and providing them with a return on their
investment.
Cash received
Cash paid for dividend,
from issue of
repaying short and long-term
share capital or
borrowing and reacquisition
debt and
of debt or capital stock.
borrowing.
Cash inflows:
 From sale of equity securities (company's own stock)
 From issuance of debt (bonds and notes)
=
Cash
flow
from
financin
g
Cash outflows:
 To pay stockholders as dividends
 To reduce/redeem long-term debt or reacquire capital stock
The category of operating activities is the most important because it shows the amount of cash provided by
company operations. This source of cash is generally considered to be the best measure of a company’s
ability to generate sufficient cash to continue as a going concern and to repay the bank loan.
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 Summary of Cash Flows
 Steps to prepare the Statement of Cash Flows
1. Determine the net increase / decrease in cash: The difference between the beginning and ending cash
balances can be easily computed from comparative balance sheets.
2. Determine net cash provided/ used by operating activities: This step involves analyzing not only the
current year's income statement but also comparative balance sheets and selected additional data.
3. Determine net cash provided/ used by investing and financing activities: This step involves analyzing
comparative balance sheet data and selected additional information for their effects on cash.
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 Usefulness of the Statement of Cash Flows
The information in a statement of cash flows should help bankers, investors, creditors and others to assess
various aspects of the firm’s financial position:
1. The entity’s ability to generate future cash flows: A banker and others can make predictions of the
amounts, timing, and uncertainty of future cash flows by examining relationships between items such as
net cash provided by operating activities and increases or decreases in cash.
2. The entity’s ability to repayment of bank loan, dividends and meet obligations: Loan repayment,
employee payment, debt settlement, dividend payment depend on the company's adequate cash flow.
Bankers should be particularly interested in this statement, because it alone shows the flows of cash in
a business.
The information in the statement of cash flows is useful in answering the following questions:

How did cash increase when there was a net loss for the period?

How was the expansion in the plant and equipment financed?

Why were dividends not increased?

How was the retirement of debt accomplished?

How much money was borrowed during the year?

Is cash flow greater or less than net income?
3. The reasons for the difference between net income and net cash provided by operating
activities: A banker wants to know the reasons for the difference between net income and net cash
provided by operating activities, which he can know from this statement.
4. The cash investing and financing transactions during the period: A banker can understand why
assets and liabilities increased or decreased during the period by examining a company’s investing
activities and its financing transactions,
 Sources of Information for preparation of SCF
Information to prepare this statement usually comes from three sources:
1) Comparative balance sheet.
2) Current income statement.
3) Additional information.
The SCF deals with cash receipts and payments, so the accrual concept is not used in the preparation of
the SCF.
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 Methods for Preparing SCF
There are two methods of preparing the statement of cash flows:
a) The indirect method
The indirect method derives cash flows from accrual basis statements. Indirect method starts from net
operating profit. Net cash provided by operating, financing and investing activities are adjusted with the
profit. The indirect is favored by companies for two reasons:


It is easier to prepare and
It focuses on the differences between net income and net cash flow from operating activities.
b) The direct method
The direct method determines cash flows directly for each source or use of cash. This method shows main
receipts and payments starting from cash receive from customer under cash from operating activities
heading.
The only distinctive area between direct method and indirect method is Cash Flow from Operating
Activities. In indirect method increase in current liabilities and decrease in current assets are added with
net operating profit, increase in current assets and decrease in current liabilities are deducted from net
operating profit. The indirect method is used extensively in practice.
 Non Cash Transactions
That do NOT affect cash are NOT reported in the body of the statement of cash flows. They are reported:


In a separate schedule at the bottom of the statement of cash flows or
In a separate note or supplementary schedule to the financial statements.
Examples of not cash transaction:
1. Issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
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 Specimen Form for Cash Flow Statement (Indirect Method)
XYZ COMPANY
Cash Flow Statement (Indirect Method)
For the year ended December 31, 200X
Tk.
Cash Flows from Operating Activities:
Net Income
Add: Non-cash Expenses
Loss on Sale of Assets
Decrease Current Assets
Increase Current Liability
Tk.
XXX
XXX
XXX
XXX
XXX
Less: Non-cash Revenue
Gain on Sale of Assets
Increase Current Assets
Decrease Current Liability
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Add: Sale of Fixed Assets
Sale of Investment
XXX
XXX
XXX
XXX
Less: Purchase Fixed Assets
New Investment
Net Cash Provided by Investment Activities
Cash Flows from Financing Activities:
Add: Issuance of Shares in Cash
Issuance of Bonds in Cash
(XXX)
(XXX)
Less: Cash Payment for Dividend
Redemption of Shares
Redemption of Bonds
Net Cash Provided by Financing Activities
Net Change in Cash
Cash at the Beginning of the Period
Cash at the End of the Period
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
XXX
XXX
(XXX)
XXX
XXX
XXX
XXX
Note:
1. Indirect Method Start with Net Income and Net Cash Flows from Operating, Investing and
Financing will adjust with Net Income
2. There is inverse relationship between Cash and Other Assets
3. There is positive relationship between Cash and Other Assets
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 Specimen Form for Cash Flow Statement (Direct Method)
XYZ COMPANY
Cash Flow Statement (Direct Method)
For the year ended December 31, 200X
Tk.
Cash Flows from Operating Activities:
Cash Received From Customer
Add: Interest Received
Dividend Received
XXX
XXX
XXX
Less: Paid to Suppliers
Paid to Lenders as Interest
Paid to Employees
Paid to Government
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Add: Sale of Fixed Assets
Sale of Investment
(XXX)
(XXX)
(XXX)
(XXX)
Less: Purchase Fixed Assets
New Investment
Net Cash Provided by Investment Activities
Cash Flows from Financing Activities:
Add: Issuance of Shares in Cash
Issuance of Bonds in Cash
(XXX)
(XXX)
Less: Cash Payment for Dividend
Redemption of Shares
Redemption of Bonds
Net Cash Provided by Financing Activities
Net Change in Cash
Cash at the Beginning of the Period
Cash at the End of the Period
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
XXX
Tk.
XXX
(XXX)
XXX
XXX
(XXX)
XXX
XXX
(XXX)
XXX
XXX
XXX
XXX
Note:
1. Only difference in Cash Flows from Operating Activities, and Investing and Financing Activities are
same as Indirect Method
2. Direct Method start with cash received from customer
3. Cash received from others should be added
4. Cash paid to various suppliers should be deducted
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 Exercise 1 (Kieso, 4th edi., p.762)
Presented below is information related to Teynolds Company. Use it to prepare a statement of cash flows
using the direct method and indirect method.
REYNOLDS COMPANY
Comparative Balance Sheet
December 31
1997
1996
Assets
Tk.
Tk.
Cash
54,000
37,000
Accounts Receivable
68,000
26,000
Inventories
54,000
-0Prepaid Expenses
4,000
6,000
Land
45,000
70,000
Buildings
200,000
200,000
Accumulated Depreciation-Buildings
(21,000)
(11,000)
Equipment
193,000
68,000
Accumulated Depreciation-Equipment
(28,000)
(10,000)
Totals
569,000
386,000
Liabilities and Stockholders’ Equity
Accounts Payable
23,000
40,000
Accrued Expenses Payable
10,000
-0Bonds Payable
110,000
150,000
Common Stock (Tk. 1 Par)
220,000
60,000
Retained Earnings
206,000
136,000
Totals
569,000
386,000
REYNOLDS COMPANY
Income Statement
For the year ended December 31, 1997
Tk.
Sales Revenue
Cost of Goods Sold
Operating Expenses
Interest Expenses
Loss on sale of Equipment
Income from Operation
Income Tax Expense
Net Income
465,000
221,000
12,000
2,000
Tk.
890,000
700,000
190,000
65,000
125,000
Additional Information
1. Operating expenses include depreciation expense of Tk. 33,000 and charges from prepaid
expenses Tk. 2,000.
2. Cash dividends of Tk. 55,000 were declared and paid in 1997.
3. Equipment with a cost of Tk. 166,000 was purchase for cash. Equipment with a cost of Tk.
41,000 and a book value of Tk. 36,000 was sold for Tk. 34,000.
4. Bonds of Tk. 10,000 were redeemed at their book value for cash; bonds of Tk. 30,000 were
concerted into common stock.
5. Common stock (Tk. 1 par) of Tk. 130,000 was issued for cash.
6. Accounts payable pertain to merchandise suppliers.
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 Exercise 2 (Kieso, 4th edi., p.778)
The Comparative Balance Sheet of Patrick Swayze Company appear below:
PATRICK SWAYZE COMPANY
Comparative Balance Sheet
December 31
2005
Tk.
Assets
2004
Tk.
Cash
19,000
Accounts Receivable
28,000
Merchandise Inventories
25,000
Property, Plant and Equipment
70,000
Accumulated Depreciation
(20,000)
Totals
122,000
Liabilities and Stockholders’ Equity
Accounts Payable
29,000
Income Tax Payable
5,000
Bonds Payable
27,000
Common Stock (Tk. 1 Par)
18,000
Retained Earnings
43,000
Totals
122,000
Additional Information
1. Net Income for 2005 was Tk. 10,000
2. During the year equipment costing Tk. 18,000 was sold at its book value Tk. 8,500
Instruction
Prepare a Cash Flow Statement for the year 2005 using indirect method.
Difference
13,000
14,000
35,000
78,000
(24,000)
116,000
+ 6000
+14000
(10000)
(8000)
*************
23,000
8,000
33,000
14,000
38,000
116,000
+6000
(3000)
(6000)
+4000
*******
 Exercise 3
Condensed Financial data of Fern Galenti, Inc. appear below:
FERN GALENTI, INC
Comparative Balance Sheet
December 31
Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Investment
Plant Assets
Accumulated Depreciation
Totals
Liabilities and Stockholders’ Equity
Accounts Payable
Accrued Expenses Payable
Bonds Payable
Common Stock
Retained Earnings
Totals
2002
Tk.
97,800
90,800
112,500
18,400
108,000
270,000
(50,000)
647,500
2001
Tk.
38,400
33,000
102,850
16,000
94,000
242,500
(52,000)
474,750
92,000
16,500
85,000
220,000
234,000
647,500
67,300
17,000
110,000
175,000
105,450
474,750
Additional Information
1. New Plant assets costing Tk. 85,000 were purchase for cash during the year.
2. Net Income for 2005 was Tk. 150,900
3. Old plant asset having an original cost of 57,500 was sold at Tk. 1,500 and the book value of this asset was
Tk. 9,000 at the time of sale.
Instruction
Prepare a Cash Flow Statement for the year 2002 using indirect method.
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 Exercise 4
The comparative balance sheet of Sean Seymor Company appear below:
SEAN SEYMOR COMPANY
Comparative Balance Sheet
December 31
2001
Tk.
26,000
18,000
38,000
Assets
Cash
Accounts Receivable
Merchandise Inventories
Property, Plant and Equipment
Accumulated Depreciation
Totals
Liabilities and Stockholders’ Equity
Accounts Payable
Income Tax Payable
Bonds Payable
Common Stock
Retained Earnings
Totals
70,000
(30,000)
40,000
122,000
29,000
15,000
20,000
25,000
33,000
112,000
2000
Tk.
13,000
14,000
35,000
78,000
(24,000)
54,000
116,000
33,000
20,000
10,000
25,000
28,000
116,000
Additional Information
1. During the year, net income was Tk. 17,000.
2. Equipment Costing Tk. 15,000 was sold at its book value for Tk. 10,000.
Instruction
Prepare a Cash Flow Statement for the year 2002 using indirect method.
 Exercise 5
Presented below is the comparative balance sheet for Cortina Company at December 31. Prepare a Cash Flow Statement for
the year 2004 using indirect method.
CORTINA COMPANY
Comparative Balance Sheet
December 31
2004
2003
Assets
Tk.
Tk.
Cash
40,000
57,000
Accounts Receivable
77,000
64,000
Inventories
132,000
140,000
Prepaid Expenses
12,140
16,540
Land
125,000
150,000
Buildings
250,000
250,000
Accumulated Depreciation-Buildings
(75,000)
(50,000)
Equipment
200,000
175,000
Accumulated Depreciation-Equipment
(60,000)
(42,000)
Totals
701,140
760,540
Liabilities and Stockholders’ Equity
Accounts Payable
33,000
45,000
Bonds Payable
235,000
265,000
Common Stock (Tk. 1 Par)
280,000
250,000
Retained Earnings
153,140
200,540
Totals
701,140
760,540
Additional Information
1. Net Income for 2004 was Tk. 26,890.
2. Equipment was purchase for Tk. 65,000 cash. In addition, equipment costing tk. 40,000 with a book value of
Tk. 13,000 was sold for Tk. 14,000.
3. Bonds were converted at face value by issuing 30,000 shares of Tk. 1 par value common stock.
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