ACG 2021
Financial Accounting
Chapter 12
Cash Flow Statement
1
Basic Concepts
Reports the entity’s cash flows
(cash receipts and cash
payments) during the period
2
Purposes of the Statement
of Cash Flows
1. Predict future cash flows
2. Evaluate management decisions
3. Determine the ability to pay
dividends to stockholders’ and
payments to creditors
4. Show the relationship of net
income to the business’s cash
flows
3
What is Cash?
 Cash on hand
 Cash in the bank
 Cash equivalents - highly liquid,
short-term investments that can be
converted into cash with little delay
 Money-market
investments
 U.S. Government Treasury bills
4
ACG 2021
Financial Accounting
Statement of Cash Flows
Sections
5
Operating, Investing, and
Financing Activities
Operating activities create
revenues, expenses, gains, and
losses.
Investing activities increase and
decrease long-term assets.
Financing activities obtain cash
from investors and creditors.
6
Two Formats for
Operating Activities
 Indirect method reconciles from net
income to net cash provided by
operating activities
 Direct method reports all cash
receipts and cash payments from
operating activities
 The two methods have no effect on
investing or financing activities.
7
Two Formats for
Operating Activities
Indirect Method
Net income
Adjustments:
Depreciation, etc.
Net income provided by operating activities
Direct Method
Collection from customers
Deductions:
Payment to suppliers, etc.
Net income provided by operating activities
$XXX
XXX
$XXX
$XXX
XXX
$XXX
ACG2 2021
Financial Accounting
The Indirect Operating
Section
9
Operating Activities
Indirect Method
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation/amortization expense
+ Loss on sale of long-term assets
Investing Activities
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
Net cash provided by operating activities
10
Depreciation, Depletion,
Amortization
Sales
CGS
Gross Profit
$
Depreciation
Net Income
10,000
3500
6500
4000
$
2,500
Depreciation, Depletion and Amortization are not Cash transactions, thus
Are ADDED back to Net Income.
11
Gain or Loss from
Long-Term Assets
 Changes to Long-term Assets
 Purchase or Sale
 Effect Cash (What’s the journal entry?)
 They appear in the Investing Section
 But... When Sold Are Reported on the
Income Statement
 Thus,
we need to reverse their effect
Add back the Loss
 Subtract out the Gain

12
Long-Term Assets
Sales
CGS
Gross Profit
Loss on Sale of Equipment
Depreciation
Net Income
$ 10,000
3,500
6,500
575
4,000
$ 1,925
Entry for Sale of Equipment:
Cash
A/D - Depreication
Loss on Sale
Equipment
Debit
Credit
4,500
1,500
575
6,575
13
Operating Activities from
Indirect Method
 Changes in current assets and current liability
accounts




Increase in another current asset decreases
cash
 Purchase of Inventory for cash
Decrease in another current asset increases
cash
 Collections of Accounts Receivable
Decrease in a current liability decreases cash
 Payment of Accounts Payable
Increase in a current liability increases cash
 Non-Cash Expense (Accrued Expense)
14
Increase in Current Assets
Decreases Cash
Sales
CGS
Gross Profit
$ 10,000
3,500
6,500
Loss on Sale of Equipment
Depreciation
575
4,000
Net Income
$ 1,925
 So $2,500 in Sales
are NOT cash
 Any increase in
Current Assets
either uses cash


Sales Journal Entries:
Cash
Sales
Accounts Receivable
Sales
Debit
Credit
7,500
7,500
2,500
2500
Increase Inventory
Decrease Cash
 Or is increased by a
non-cash
transaction

Accounts
Receivable
15
Decrease in Current Assets
Increases Cash
 If A/R decreases that means we
collected Cash
 That
cash needs to be added back to
Net Income
 If Inventory, Supplies or other current
assets decrease that means we debited
an expense but did not credit Cash
 So
we add back those decreases to Net
Income
16
Decrease in Current Liabilities
Decreases Cash
How is Accounts Payable
decreased?
 Debit Accounts Payable $1,000
 Credit Cash
$1,000
Same for all other Payables
17
Increase in Current Liabilities
Increases Cash
Sales
CGS
Gross Profit
$ 10,000
3,500
6,500
Salary Expense
Loss on Sale of Equipment
Depreciation
1,000
575
4,000
Net Income
$
925
Salary Expense Journal Entries:
Debit
Credit
Salary Expense
Cash
875
Salary Expense
Salary Payable
125
875
125
 When Payables
Increase
 They
create an
Expense
 But the expense
is a non-cash
expense
 So, Add back to
Net Income
18
The Indirect Method:
Operating Activities
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other than cash
Increases in current liabilities
Negative Items
Net loss
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current liabilities
19
The Indirect Method:
Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assets
Purchase of investments that are not cash
equivalents
Making loans to others
20
The Indirect Method:
Financing Activities
Positive Items
Issuing stock
Selling treasury stock
Borrowing money
Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of debts
21
ACG 2021
Financial Accounting
Cash Flow Statement
An Example
22
Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands)
Assets
Current:
Cash
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
Long-term receivable
Plant assets, net
Total
20x2
20x1 Inc/dec)
$ 22
93
3
135
8
11
453
$725
$ 42
80
1
138
7
–
219
$487
$ (20)
13
2
(3)
1
11
234
$238
23
Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands)
Liabilities
Current:
Accounts payable
Salary payable
Accrued liabilities
Long-term debt
Stockholders’ equity
Common stock
Retained earnings
Total
20x2
20x1 Inc/dec)
$ 91
34
1
160
$ 57 $ 34
6
(2)
3
(2)
77
83
359
110
$725
258 101
86
24
$487 $238
24
Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Revenues and gains:
Sales revenue
$284
Interest revenue
12
Dividend revenue
9
Gain on sale of plant assets
8
Total revenues and gains
$313
25
Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Expenses:
Cost of goods sold
$150
Salary and wage expense
56
Depreciation expense
18
Other operating expense
17
Interest expense
16
Income tax expense
15
Total expenses
$272
26
Income Statement
Anchor Corporation
Year Ended December 31, 20x2
(In thousands)
Total revenues and gains
$313
Total expenses
272
Net income
$ 41
27
Statement of Cash Flows:
Operating Activities
Depreciation does not affect Sales of long-term assets are
Statement of Cash Flows (Indirect Method)
cash, but it decreases net
investing
Year
Ended
20x2 (In
thousands)
income
– add December
it back in. 31,Activities
– remove
gains from
income.
Cash flows from operatingnet
activities:
Net Income
Adjustments to reconcile net income to
net cash provided by operating activities:
A Depreciation
B Gain on sale of plant
$41
18
(8)
28
Statement of Cash Flows:
Operating Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
C Increase in accounts receivable
(13)
C Increase in interest receivable
(2)
C Decrease in inventory
3
C Increase in prepaid expenses
(1)
C Increase in accounts payable
34
C Decrease is salary payable
(2)
C Decrease in accrued liabilities
(2) 27
Net cash provided by operating activities
$68
29
Changes in Current Asset and
Current Liability Accounts – C
1. An increase in a current asset other
than cash indicates a decrease in cash.
2. A decrease in a current asset other
than cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.
4. An increase in a current liability
indicates an increase in cash.
30
Statement of Cash Flows:
Investing Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Cash flows from investing activities:
Acquisition of plant assets
$(306)
Loan to another company
(11)
Proceeds from sale of plant assets
62
Net cash used for investing activities $(255)
31
Statement of Cash Flows:
Financing Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Cash flows from financing activities:
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Payment of long-term debt
Payment of dividends
Net cash provided by financing activities
$101
94
(11)
(17)
$167
32
Statement of Cash Flows
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Net cash provided by operating activities
Net cash used for investing activities
Net cash provided by financing activities
Net decrease in cash
Cash balance, December 31, 20x1
Cash balance, December 31, 20x2
$ 68
(255)
167
$ (20)
42
$ 22
33
Noncash Investing and
Financing Activities
Suppose Anchor Corporation issued
Common stock valued at $300,000
to acquire a warehouse.
Warehouse Building
Common Stock
300,000
300,000
34
Noncash Investing and
Financing Activities
Noncash Investing and Financing Activities:
Acquisition of building by issuing common
stock
Acquisition of land by issuing note payable
Payment of long-term debt by issuing
common stock
Total noncash investing and financing
activities
$300
70
100
$470