Days 21-23 Statement of
Cash Flows
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
1
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
2
1. Accrual vs. Cash Basis Accounting
Accrual Basis of
Accounting
Cash Basis of
Accounting
Revenue is
recognized
When earned (generally when a
service is performed, or goods
are delivered), regardless of
whether cash has been received
When cash is received
Expense is
recognized
When incurred to generate
revenue (generally when a
service is used, or goods are
consumed), regardless of
whether cash has been paid
When cash is paid
3
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
4
2. Accrual to Cash Basis Accounting
Cash item
Item on accrual
basis statement of
income
Associated statement of
financial position item(s)
Collections from
customers
Sales revenue
Account receivable;
Deferred revenue
Collections from customers=Sales rev +/- change in Account
receivable +/- change in Deferred Revenue
What is the cash collected from customers if sales revenue is $5,000,
Accounts receivable increased by $1000 and deferred revenue decreased by $500 ?
5
Accrual to Cash Basis Accounting
Cash item
Payments to
suppliers
Item on accrual
basis statement of
income
Cost of goods sold
Associated statement of
financial position item(s)
Inventory;
Accounts payable
Payments to suppliers= - COGS +/- change in inventory
+/- change in accounts payable
What is the cash paid to suppliers if the cost of goods sold is $4,000 and there
Was a decrease of Inventory by $ 1200 and increase in A/P by $300 ?
6
Accrual to Cash Basis Accounting
Cash item
Item on accrual
basis statement of
income
Associated statement of
financial position item(s)
Salaries paid
Salaries expense
Salaries payable
Salaries paid= - Salaries expense +/- change in salary payable
Calculate the salaries paid if salaries expense was $10,000 and there was a
decrease in salaries payable by $ 1,000 ?
7
Accrual to Cash Basis Accounting
Cash item
Item on accrual
basis statement of
income
Associated statement of
financial position item(s)
Payments to
landlord
Rent expense
Prepaid rent;
Rent payable
Payments to landlord= - Rent expense +/- change in Prepaid rent
+/- change in Rent payable
Calculate the rent paid if the rent expense is $3,000 and the prepaid rent decreased by
$1000 ?
Accrual to Cash Basis Accounting
Cash item
Item on accrual
basis statement of
income
Associated statement of
financial position item(s)
Collections from
customers
Sales revenue
Account receivable;
Deferred revenue
Payments to
suppliers
Cost of goods sold
Inventory;
Accounts payable
Salaries paid
Salaries expense
Salaries payable
Payments to
landlord
Rent expense
Prepaid rent;
Rent payable
9
Accrual to Cash Basis Accounting
Cash basis inflows and outflows can be derived from their
accrual basis counterparts in the income statement, and
their associated balance sheet accounts, according to the
following formulae:
Cash collection = Sales revenue
from customers - Increase (+decrease) in Accounts receivable
+increase (-decrease) in Deferred revenue
Cash payment
related to an
expense
= Expense item
+increase (-decrease) in associated asset
- Increase (+decrease) in associated liability
10
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
11
3. RedRiver Limited Example
Statement of Financial Position at December 31
Assets
2019 2018 Liabilities 2019 2018
Cash
$24
$1 Def. Rev.
$14
$19
A/R
67
50 A/P
25
18
Inventory
30
25 Sal. pay.
22
25
Ppd. rent
10
15 S/E
70
29
Total
$131
$91 Total
$131
$91
Statement of Income For the year ended December 31, 2019
Sales revenue
Cost of goods sold
Salaries expense
Rent expense
Net income
$545
230
200
80
$35
12
RedRiver Limited Example
Required: Determine the following amounts for the year
ended December 31, 2019:
 Cash collected from customers
 Cash paid to suppliers (of inventory)
 Salaries paid to employees
 Cash paid for rent
13
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
14
4. SCF: Definition and Objectives
The Statement of Cash Flows shows the changes in Cash
and Cash Equivalents arising from the operating,
financing and investing activities of the enterprise.
This information is useful for:
understanding the effects of operating, financing and
investing activities on cash and cash equivalents;
assessing the liquidity and solvency;
assessing the quality of earnings (how closely net
income is associated with cash flow); and
assessing the firm’s ability to generate cash from
internal sources (to repay debt, to reinvest, to pay
dividends).
15
Cash and Cash Equivalent
Cash is a medium of exchange which a bank will
accept for deposit (e. g., currency, deposits in bank
account).
Cash-equivalent assets are very secure (value is
certain, i.e. fixed rate of return) liquid (easily
convertible to cash) investments that have a short
maturity (typically 90 days or less), such as
Government of Canada treasury bills or Guaranteed
Investment Certificates (GICs)
16
Cash and Other Items
Assets = Liabilities + Shareholders’ Equity
Cash + Other Assets = Liability + Share Capital +
Retained Earnings
Cash = Liability + Share Capital + Retained Earnings Other Assets
∆ Cash = ∆ Liabilities + ∆ Share Capital + ∆ Retained
Earnings - ∆ Other Assets
17
Ways to Increase Cash
∆ Cash = ∆ Liabilities + ∆ Share Capital + ∆ Retained
Earnings - ∆ Other Assets
1. Increase liabilities (e. g., borrow cash).
2. Increase share capital (e. g., issue stock for cash).
3. Increase retained earnings: run business so it generates
profits and cash.
4. Reduce other assets (e. g., sell equipment for cash).
18
Ways to Decrease Cash
∆ Cash = ∆ Liabilities + ∆ Share Capital + ∆ Retained
Earnings - ∆ Other Assets
1. Decrease liabilities (i. e., pay off debts with cash).
2. Decrease share capital (i. e., repurchase and retire
shares with cash).
3. Decrease retained earnings: run business at a loss
(negative profits and negative cash flow),or pay cash
dividends.
4. Increase other assets (e. g., buy equipment with cash).
19
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
20
5. SCF: Classification
 Cash Flow from Operating Activities
 Cash Flow from Investing Activities
 Cash Flow from Financing Activities
21
Cash Flow from Operating Activities
Definition
Cash flows related to central
revenue-generating activities
Inflow examples
Cash collected from customers
Outflow examples
Cash paid to suppliers, salaries
paid, rent paid, etc.
22
Cash Flow from Investing Activities
Definition
Cash flows related to acquisition
or disposal of long-lived assets
and non-cash investments
Inflow examples
Cash from sale of non-cashequivalent investments and longlived assets
Outflow examples
Cash paid for non-cash-equivalent
investments, and long-lived assets
23
Cash Flow from Financing Activities
Definition
Cash flows related to debt and
shareholders’ equity
Inflow Examples
Cash from issue of debt and shares
Outflow Examples
Repurchase of shares, repayment
of debt
24
SCF: Classification Choices within IFRS
Interest paid
Dividends paid
Interest received
Operating or Financing
Operating or Financing
Operating or Investing
Dividends received
Income taxes paid
Operating or Investing
Operating, but should be in investing or
financing if clearly associated with
investing or financing transaction
Underlined options are the traditional choices in Canada.
25
Format of the SCF
Operating activities
Net cash flows from operations
Investing activities
Acquisitions of long-lived assets
Dispositions of long-lived assets
Net cash from (used by) investing activities
Financing activities
Issues of shares/debt
Repurchase of share/debt repayment
Payment of cash dividends
Net cash from (used by) financing activities
Net change in cash and cash equivalents
26
$
($)
$
$
$
($)
($)
($_
$
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
27
6. SCF: Direct and Indirect Methods
There are two methods of presentation of the SCF: the direct
and indirect methods. Both give the same overall result. The
only difference is in the presentation of cash from operating
activities.
Direct method
Cash inflows from operations
Cash outflows related to operations
Net cash from operations
Indirect method
Net income
+/- differences between accrual
and cash acct
28
Net cash from operations
$
$
$
$
$
$
Indirect Method
1. The starting point here is accrual basis net income.
2. Net income is adjusted to expenses that do not use cash
(e. g., +depreciation exp).
3. Net income is adjusted to non-operating activity loss or
gain (e. g., +loss, and -gain).
4. The resulting figure is adjusted for changes in balance
sheet accounts that are associated with operating
activities (e. g., Accounts receivable, inventory, accounts
payable, etc.):
29
Indirect Method
Net income
- Non-operating activity gain (add for a loss)
+ Non-cash exp. (e.g. dep. exp., BDE & loss)
Changes in non-cash working capital
- increases in associated assets
+decreases in associated assets
+ increases in associated liabilities
- decreases in associated liabilities
$
($)
$
($)
$
$
($)
Net cash from operations
$
Working capital includes current assets and current liabilities (excludes
short-term investment )
30
Direct Method
Cash flows from operations are identified and grouped by
type (e. g., cash collected from customers, cash paid to
suppliers, etc.), and calculated according to the following
formulae:
Cash collection
from customers
= Sales revenue
- Increase (+decrease) in Accounts receivable
+increase (-decrease) in Deferred revenue
Cash payment
related to an
expense
= - Expense item
- increase (+decrease) in associated asset
+ Increase (-decrease) in associated liability
∆ Cash = ∆ Liabilities + ∆ Share Capital + ∆ Retained Earnings - ∆ Other Assets
31
Solar Company – Financial statements, 2019 (in thousand)
S. of Financial Position
Cash
Accounts receivable
Inventory
Prepaid other operating
expenses
PPE (net)
Accounts payable
Salary payable
Income tax payable
Notes payable (longterm)
Common shares
Retained earnings
2019
$56
123
52
10
152
18
5
7
120
213
30
2018 State. of income
$47 Sales
107 Cost of sales
46 Salaries
9 Depreciation
Other operating
153 expenses
11 Gain on disposal of
9 equipment
5 Interest
130 Income tax
Net income
200
7
2019
$1,339
908
230
24
116
3
14
12
$38
32
Solar Company Example
Additional Information during 2019:
1. Equipment with a historic cost of 24,000 and accumulated depreciation
of $15,000 was sold for $12,000 cash.
2. Cash dividends were paid and there were no stock dividends.
3. Notes payable were repaid as scheduled.
4. Common shares were issued for cash.
Required:
Prepare the cash flows from operating activities for Solar for the 2019
fiscal year, using both direct and indirect methods.
33
Solar: Operating-Indirect Method
Solar Company
Statement of Cash Flows – 2019 (in thousand)
Cash flows from operating activities
Net income
Net cash provided by operating activities
34
Solar: Operating-Direct Method
Solar Company
Statement of Cash Flows – 2019 (in thousand)
Cash flows from operating activities
Cash collected from customer
Cash paid to suppliers
Cash paid to employees
Cash paid for other operating expenses
Cash paid for interest expense
Cash paid for income tax expense
Net cash provided by operating activities
35
Cash flow from investing activity
• Cash paid for the acquisitions of long-lived assets
Equipment
Beg balance
Purchase
Cost of equipment sold
End balance
• A company may use non-cash payment for the purchase. SCF only
includes the cash paid for the purchase of long-lived assets
• Cash received from the disposal of long-term assets
36
Cash flow from investing activity
• Cash received from the dispositions of long-term assets
• Gain/loss on the disposal—income statement
• Accumulated depreciation of the disposed asset—Balance sheet
• Cost of equipment sold—Balance sheet
Dr. cash
Dr. Accumulated depreciation
Cr. Equipment
Cr. Gain on the sale of equipment
Cash received=equipment cost-accumulated depreciation +gain (-loss)
= carry value + gain(-loss)
37
Cash flow from financing activity
• Cash received from Issues of shares/debt
• Cash paid for repurchase of share/debt repayment
• Cash paid for dividends
Retained earnings
Dividends
declared
Dividend payable
Beg balance
Dividends
Dividends paid?
declared
End balance
Beg balance
Net income
End balance
38
Solar Company – Financial statements, 2019 (in thousand)
S. of Financial Position
Cash
Accounts receivable
Inventory
Prepaid other operating
expenses
PPE (net)
Accounts payable
Salary payable
Income tax payable
Notes payable (longterm)
Common shares
Retained earnings
2019
$56
123
52
10
152
18
5
7
120
213
30
2018 State. of income
$47 Sales
107 Cost of sales
46 Salaries
9 Depreciation
Other operating
153 expenses
11 Gain on disposal of
9 equipment
5 Interest
130 Income tax
Net income
200
7
2019
$1,339
908
230
24
116
3
14
12
$38
39
Solar Company Example
Additional Information during 2019:
1. Equipment with a historic cost of 24,000 and accumulated
depreciation of $15,000 was sold for $12,000 cash.
2. Cash dividends were paid and there were no stock
dividends.
3. Notes payable were repaid as scheduled.
4. Common shares were issued for cash.
Required:
Prepare the cash flows of investing and financing activities
for Solar for the 2019 fiscal year.
40
Solar Company Example
Cash flow from investing activities
41
Solar Company Example
Cash flow from Financing activities
42
Roadmap
1. Accrual vs. cash basis accounting
2. Accrual to cash basis accounting
3. RedRiver Limited Example
4. Statement of cash flows: definition and objectives
5. Statement of cash flows: classification
6. Direct and indirect methods
7. CDC Corporation Example
43
7. CDC Corporation Example
Open “ACC 1100 Days 21-23
CDC Example” document
44