Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 23: Statement of Cash
Flows
Chapter 23: Statement of Cash
Flows
After studying this chapter, you should
be able to:
1. Describe the purpose of the statement of
cash flows.
2. Identify the major classifications of cash
flows.
3. Differentiate between net income and
net cash flows from operating activities.
4. Contrast the direct and the indirect
methods of calculating net cash flow
from operating activities.
Chapter 23: Statement of Cash
Flows
5. Determine net cash flows from investing
and financing activities.
6. Prepare a statement of cash flows.
7. Identify sources of information for a
statement of cash flows.
8. Identify special problems in preparing a
statement of cash flows.
9. Explain the use of a work sheet in
preparing a statement of cash flows.
Usefulness of the Statement of
Cash Flows
The information may help users assess
the following aspects:
• The entity’s ability to generate future cash
flows
• The entity’s ability to pay dividends and
meet obligations
• The reasons as to why net income and net
cash flow from operating activities differ
• Cash and non-cash investing and financing
activities during the year
The Cash Flow Statement
The cash flow statement provides
information about:
the cash receipts (cash inflows), and
• uses of cash (cash outflows) during the
period
•
Inflows and outflows are reported for:
• operating activities,
• investing activities, and
• financing activities during the period
Statement of Cash Flows: Concept
Operating
activities
Investing
activities
Financing
activities
inflows
Cash
Pool
Operating
activities
Investing
activities
outflows
Financing
activities
Preparing a Statement of Cash
Flows
There are two methods of preparing
the statement of cash flows:
1. the indirect method and
2. the direct method
The indirect method derives cash
flows from accrual basis statements.
The direct method determines cash
flows directly for each source or use
of cash.
Statement of Cash Flows: Indirect
Method: Concept
Earned
Revenues
+
Eliminate
Non-cash revenues
Net Income
Expenses
Incurred
-
Operating
cash flow
Eliminate
Non-cash charges
The Statement of Cash Flows:
Indirect Method
Accrual Basis Statements
Cash Flow Statement
Income Statement
items & Changes in
Current Assets and
Current Liabilities
Operating activities:
Adjust net income for accruals
and non-cash charges to get
cash flows
Balance Sheet: Changes
In Non-Current Assets
Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets
Balance Sheet: Changes in
Non-Current Liabilities
and Equity
Financing activities:
Inflows and outflows
from loan and equity
transactions
Direct Method: Operating
Activities
Inflows
• From sales of goods
or services
• From returns on loans
(interest) and returns
on equity securities
(dividends)
Outflows
• To suppliers for
inventory
• To employees for
services
• To government for
taxes
• To lenders for interest
• To others for expenses
Investing and Financing Activities
• For the direct and indirect methods
the sections reporting investing and
financing activities are the same.
• The net inflows or outflows for each
section (under the two methods) are
identical.
• The operating activities are reported
differently.
Format of the Statement of Cash
Flows: Indirect Method
Cash flows from operating activities:
Net Income
Adjustments (to arrive at cash flow from operations)
(List of individual inflows and outflows)
Net cash flow from operating activities
$ XXX
$ XX
$ XXX
Cash flows from investing activities:
(List of individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List of individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Major Classes of Cash Receipts
and Payments
Formula to Compute Cash
Receipts from Customers
Formula to Compute Cash
Payments for Operating Expenses
Indirect Method: Special Items
Note the following adjustments to net
income in deriving operating cash flow:
• Loss on sale of assets is added to net income
• Gain on sale of assets is deducted from net
income
• Discount on bonds payable (as amortized) is
added to net income
• Premium on bonds payable (as amortized) is
deducted from net income
Format of the Statement of Cash
Flows: Direct Method
Cash flows from operating activities:
Cash receipts (individually): Inflows
Cash payments to suppliers (separately): outflows
Net cash flow from operating activities
$ XXX
($ XXX)
$ XXX
Cash flows from investing activities:
(List of individual inflows and outflows)
Net cash flow from investing activities
$ XX
$ XXX
Cash flows from financing activities:
(List of individual inflows and outflows)
Net cash flow from financing activities
$ XX
$ XXX
Direct Method: Concept
Cash Receipts
Cash Payments
From sale of
goods and
services to
customers
To suppliers
From receipts
of interest and
dividends
To employees
less
For operating exp equals
For interest
For taxes
Cash
flow
from
operations
Cash Flow Statement: Direct
Method
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/Rec balances
- Increase in A/Rec balances
Cash Flow Statement: Direct
Method
Cash payments to suppliers:
= Cost of goods sold + Increase in inventory
- Decrease in inventory
+ Decrease in accounts payable
- Increase in accounts payable
Cash Flow Statement: Direct
Method
Cash payments for operating and other expenses:
= Operating expenses + Increase in prepaid expenses
- Decrease in prepaid expenses
+ Decrease in accrued expenses payable
- Increase in accrued expenses payable
Reporting Significant Non-Cash
Transactions
• Transactions not involving cash inflows or
cash outflows are non-cash transactions.
• They are not reported in the body of the
cash flow statement.
• If material, they are reported as notes to the
statement or in a supplementary schedule to
the financial statements.
• Example: Issue of bonds (payable) for
purchase of land.
Worksheet
• A work sheet may be useful when a
number of adjustments are needed.
• Involves three steps:
1. Enter beginning and ending balance sheet
data.
2. Enter the data that explains the changes in
balance sheet accounts (other than cash).
3. Enter the increase or decrease in cash on cash
line and at the bottom of the work sheet. This
entry results in the totals of the reconciling
items to agree.
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