Chapter 16
Statement of Cash Flows
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. SummarizeAfter
the studying
types of this
cash flow
activities reported
in the
statement of
chapter, you
should
cash flows. be able to:
2. Prepare a statement of cash flows,
using the indirect method.
3. Prepare a statement of cash flows,
using the direct method.
4. Calculate and interpret the free cash
flow.
Reporting Cash Flows
The statement of cash flows reports cash flows
by three types of activities:
1. Cash flows from operating activities
– transactions that affect net income.
2. Cash flows from investing activities –
transactions that affect noncurrent
assets.
3. Cash flows from financing activities –
transactions that affect equity and debt
of the entity.
Reporting Cash Flows
Increases in Cash
Decreases in Cash
Operating
Operating
(receipts from
revenues)
Investing
(receipts from sales of
noncurrent assets)
Financing
(receipts from issuing
equity and debt securities)
(payments for
expenses)
Investing
(payments for acquiring
noncurrent assets)
Financing
(payments for treasury stock,
dividends, and redemption of debt
securities)
Cash Flows from Operating Activities
Typical cash inflows
What are some of the
typical cash inflows from
operating activities?`
Typical cash outflows
What are some of the
typical cash outflows from
operating activities?
Sales of goods
and services
Merchandise
purchases
Interest
revenue
Payments of
wages and
other expenses
Dividend
revenue
Tax payments
Cash Flows from Investing Activities
Typical cash inflows
What are some of the typical
cash inflows from investing
activities?
Sales of fixed
assets
Sale of longterm
investments
Typical cash outflows
What are some of the
typical cash outflows
from investing
activities?
Purchase of
fixed assets
Purchase of
long-term
investments
Cash Flows from Financing Activities
Typical cash inflows
What are some of the
typical cash inflows from
financing activities?
Typical cash outflows
What are some of the
typical cash outflows from
financing activities?
Issuing bonds
and long-term
notes payable
Paying cash
dividends
Issuing
preferred and
common stock
Repaying debt
Acquiring
treasury stock
Noncash Investing and
Financing Activities
 Issuing bonds to acquire land
 Issuing common stock for
convertible preferred stock
 Issuing a long-term note to
acquire equipment
 Issuing a stock dividend
No cash flow per share is reported in
the financial statements because the user
might incorrectly interpret this as the
amount available for dividends.
The Indirect Method
Balance Sheet
Cash
Liabilities
Noncash
Assets
Stockholders’
Equity
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
The Indirect Method
Balance Sheet
Cash
Liabilities
Noncash
Assets
Stockholders’
Equity
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
1
2
3
The cash flows are determined by analyzing liabilities,
stockholders’ equity, and noncash assets.
The Indirect Method
Start with the accrual basis net income
(shown in the income statement, the
Retained Earnings account, or the
statement of stockholders’ equity).
The Indirect Method
Find the net income.
ACCOUNT Retained Earnings
Date
2006
Jan.
1 Balance
Dec. 31 Net income
31 Cash dividends
Item
ACCOUNT NO. 32
Debit
Credit
Balance
Debit Credit
To statement
108,000
28,000
202,300
310,300
282,300
Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement
$108,000
Add:
Depreciation
$ 7,000
Decrease in inventories
8,000
Increase in accrued expenses
2,200 17,200
Deduct:
$125,200
Inc. in accounts receivable
$ 9,000
Dec. in accounts payable
3,200
Dec. in income taxes payable
500
Gain on sale of land
12,000 24,700
Net cash flow from operating activity
$100,500
The Indirect Method
Next, we need to determine depreciation expense
for the year. If it isn’t given on the income
statement, sometimes it can be found by analyzing
the Accumulated Depreciation account.
The Indirect Method
Determine depreciation expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17
Date
Item
Debit
Credit
Balance
Debit Credit
2006
Jan.
1 Balance
Dec. 31 Depreciation for year
7,000
to statement
58,300
65,300
Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement
$108,000
Add:
Depreciation
$ 7,000
Decrease in inventories
8,000
Increase in accrued expenses
2,200 17,200
Deduct:
$125,200
Depreciation
Inc.Because
in accounts
receivable Expense
$ 9,000
Dec.reduced
in accounts
3,200
net payable
income but did
not
Dec.require
in income
taxes
payable
500
an outflow of cash, it is
Gain on sale of land
12,000 24,700
added
back
to
net
income.
Net cash flow from operating
activities
$100,500
The Indirect Method
Select current assets and current
liabilities that impact cash flow and
determine the increases and decreases.
Changes in Current Accounts
Accounts
Accounts receivable (net)
Inventories
Accounts payable (mdse.)
Accrued expenses payable
Income taxes payable
2006
$74,000
172,000
43,500
26,500
7,900
2005
$65,000
180,000
46,700
24,300
8,400
Change
Debit Credit
9,000
8,000
3,200
2,200
500
Determine the debit or
credit change of each
item above.
Changes in Current Accounts
Accounts
Accounts receivable (net)
Inventories
Accounts payable (mdse.)
Accrued expenses payable
Income taxes payable
2006
$74,000
172,000
43,500
26,500
7,900
2005
$65,000
180,000
46,700
24,300
8,400
Change
Debit Credit
9,000
8,000
3,200
2,200
500
These debit changes are subtracted from net
income in the operating activities section of
the statement of cash flows. Think of these
debits as deductions from net income in
arriving at net cash flow from operations.
Changes in Current Accounts
Accounts
Accounts receivable (net)
Inventories
Accounts payable (mdse.)
Accrued expenses payable
Income taxes payable
2006
$74,000
172,000
43,500
26,500
7,900
2005
$65,000
180,000
46,700
24,300
8,400
Change
Debit Credit
9,000
8,000
3,200
2,200
500
These credit changes are added to net income in the
operating activities section of the statement of cash
flows. Think of these credits as additions to net
income in arriving at net cash flow from operations.
Operating Activities—Indirect Method
Cash flows from operating activities:
Net income per income statement
$108,000
Add:
Depreciation
$ 7,000
Decrease in inventories
8,000
Increase in accrued expenses
2,200 17,200
$125,200
Inc. in accounts receivable
$ 9,000
Dec. in accounts payable
3,200
Dec. in income taxes payable
500
Gain on sale of land
12,000 24,700
Net cash flow from operating
activities
$100,500
The Indirect Method
Analyze the income statement to determine
if there are any gains or losses from selling
investments, equipment, etc.
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
Cost of merchandise sold
Gross profit
Operating expenses:
Depreciation expense
Other operating expenses
Total operating expenses
Income from operations
Other income:
Gain on sale of land
Other expense:
Interest expense
Income before income tax
Income tax
Net income
$1,180,000
790,000
$ 390,000
$ 7,000
196,000
203,000
$ 187,000
$12,000
8,000
4,0000
$ 191,000
83,000
$ 108,000
Operating Activities—Indirect Method
Cash flows from operating activities:
Net income, per income statement
$108,000
Add:
Depreciation
$ 7,000
ThisDecrease
gain was
in included
inventoriesin net income,
8,000 but did
Increase
in accrued
expenses cash
2,200
not represent
an operating
flow.17,200
$125,200
Inc. in accounts receivable
$ 9,000
Dec. in accounts payable
3,200
Dec. in income taxes payable
500
Gain on sale of land
12,000 24,700
Net cash flow from operating
activities
$100,500
The Indirect Method
If there had been a loss on this
sale, the loss would have been
added to net income.
Cash Flows from
Financing Activities
Dividends
ACCOUNT Dividends Payable
Date
Item
ACCOUNT NO. 23
Debit
Credit
Balance
Debit Credit
2006
Jan.
1
10
June 20
July 10
Dec. 20
Balance
Cash paid
Dividends declared
Cash paid
Dividends declared
Total cash paid
10,000
-14,000
14,000
--
14,000
$24,000
10,000
-14,000
-14,000
Cash Flows from
Financing Activities
Because paying of dividends
affects equity, it is a negative
$24,000 cash flow from financing
activities transaction.
Cash Flows from
Financing Activities
Sale of Common Stock
ACCOUNT
Date
Common Stock
Item
ACCOUNT NO. 33
Debit
Credit
Balance
Debit Credit
2006
Jan.
Nov.
1 Balance
1 4,000 shares issued for cash
8,000
16,000
24,000
Cash Flows from
Financing Activities
Sale of Common Stock
ACCOUNT
Date
Paid-In Capital in Excess of Par--Common ACCT. NO. 34
Item
Debit
Credit
Balance
Debit Credit
2006
Jan.
Nov.
1 Balance
1 4,000 shares issued for cash
40,000
80,000
120,000
Cash Flows from
Financing Activities
Issuing common stock affects equity;
therefore, we have a total positive cash
flow of $48,000 from this financing
activities transaction.
Cash Flows from
Financing Activities
Retirement of Bonds Payable
ACCOUNT
Date
Bonds Payable
Item
ACCOUNT. NO. 25
Debit
Credit
Balance
Debit Credit
2006
Jan.
1 Balance
June 30 Retired by payment of cash
at face amount
150,000
50,000
100,000
Cash Flows from
Financing Activities
This transaction is a negative
cash flows from financing
activities item because longterm debt is involved.
Cash Flows from
Investing Activities
Purchased a Building
ACCOUNT
Date
Building
Item
ACCOUNT NO. 18
Debit
Credit
Balance
Debit Credit
2006
Jan.
1 Balance
Dec. 27 Purchased for cash
60,000
200,000
260,000
Cash Flows from
Investing Activities
Purchased a Building
Purchasing a building involves a
noncurrent asset, so this is a
negative cash flows from investing
activities item.
Cash Flows from
Investing Activities
Land Transactions
ACCOUNT
Date
Land
ACCOUNT NO. 16
Item
Debit
Credit
Balance
Debit Credit
2006
Jan.
1 Balance
June 8 Sold for $72,000 cash
Oct. 12 Purchased for $15,000 cash
125,000
60,000 65,000
15,000
80,000
Cash Flows from
Investing Activities
Land Transactions
The first transaction, the sale of
land, results in a positive cash flow
from investing activities because
land is a noncash asset.
Cash Flows from
Investing Activities
Land Transactions
The $12,000 gain was recorded earlier on Slide
29 as an operating activity. The purchase of
land also is an investing activity.
Click here to return to
Slide 29. To return to
this slide, type “43” and
press the “Enter” key.
Refer to Exhibit 6 in your
textbook to see the formal
statement of cash flows using
the indirect approach.
Rundell Inc.
Statement of Cash Flows
For the Year Ended December 31, 2006
Cash flows from operating activities:
Net income
$108,000
Add: Depreciation
$ 7,000
Decrease in inventor.
8,000
Increase in accrued exp. 2,200
17,200
$125,000
Deduct: Increase in A/R
$9,000
Decrease in accts. Pay. 3,200
Decrease in ITP
500
Gain on sale of land
12,000
24,700
Net cash flow from operating act.
$100,500
Cash flows from investing activities:
Cash from sale of land
$72,000
Less: Cash paid to pur. land $15,000
Cash paid for bldg.
60,000
75,000 (3,000)
Cash flows from financing activities:
Cash received from sale of c.s.
$48,000
Less: Cash paid to retire b. $50,000
Cash paid for divid.
24,000
74,000
Net cash flow for financing
(26,000)
Increase in cash
$71,500
Cash at beginning of year
26,000
Cash at end of year
$97,500
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Cash Basis
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses 196,000
Total operating expenses
203,000
Income from operations
$ 187,000
Other income:
Gain on sale of land
$12,000
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
This
is
an
accrual
basis
income
statement.
Income tax
83,000
The
direct method of reporting cash
flows will
Net
income
$ 108,000
essentially convert this to a cash basis statement.
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Cash Basis
Sales
$1,180,000
Cost of merchandise sold
790,000
Cash collected
Gross profit
$ 390,000
Changes
from customers
Operating expenses:
Debit
Credit
Depreciation expense
$ 7,000
Sales
1,180,000
Other operating expenses
196,000
Receivables
9,000 203,000
Total operating
expenses
Income from operations
$ 187,000
Other income:
Note: The changes in$12,000
the current balance
Gain on sale of land
Other expense: sheet accounts are determined by
Interest expense
8,000
4,000ending
comparing the beginning
and
Income before income tax
$ 191,000
balances. Receivables increased
by
Income tax
83,000
Net income
$ 108,000
$9,000 during the period.
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Cash collected
Gross profit
$390,000
Changes
from customers
Operating expenses:
Debit
Credit
Depreciation expense
$ 7,000
Sales
1,180,000
Other operating expenses
196,000
Receivables
9,000 203,000
Total operating
expenses
Cash
1,171,000 $187,000
Income from operations
Other income:
Gain on sale of
landincrease $12,000
The
in receivables
Other expense:
represents a reduction
in4,000
cash
Interest expense
8,000
inflowtax
relative to the $accrual
Income before income
191,000
Income tax revenue reported on the income
83,000
Net income
$ 108,000
statement.
Cash Basis
$1,171,000
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$390,000
Cash payments for
Operating expenses:
Changes
merchandise
Depreciation expense
$ 7,000
Debit Credit
Other operating
196,000
Cost of expenses
mdse. sold
790,000
Total operating expenses
203,000
Inventories
8,000
Income from operations
$187,000
Accounts payable
3,200
Other income:
Cashof land
Gain on sale
$12,000
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Cash Basis
Sales
$1,180,000
$1,171,000
Cost of merchandise sold
790,000
(785,200)
Gross profit
$390,000
Cash payments for
Operating expenses:
Changes
merchandise
Depreciation expense
$ 7,000
Debit Credit
Other operating
196,000
Cost of expenses
mdse. sold
790,000
Total operating expenses
203,000
minus
Inventories
8,000
Income from operations
$187,000
Accounts payable
3,200
plus
Other income:
Cashof land
Gain on sale
$12,000 785,200
Other expense:
A
decrease
in
Inventories
(credit
Interest expense
8,000
4,000
change)
in Accounts
Income before income
taxand an decrease
$ 191,000
Income tax
Payable (debit change)83,000
have the
Net income
$ 108,000
opposite effects.
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Cash Basis
Sales
$1,180,000
$1,171,000
Cost of merchandise sold
790,000
(785,200)
Gross profit
$ 390,000
Operating expenses:
0
Depreciation expense
$ 7,000
Other operating expenses
196,000
Depreciation
Changes
Total operating
expenses
203,000
Debit $ Credit
Income from operations
187,000
Depreciation expense
7,000
Other income:
Accumulated
7,000
Gain on sale
of land depreciation
$12,000
Other expense:
cash flow
Interest expense There is no8,000
4,000for
Income before income tax
$ 191,000
depreciation
expense.
Income tax
83,000
Net income
$ 108,000
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Total operating
expenses
203,000
Cash payments
for
Changes
Income fromoperating
operations
$ 187,000
expenses
Changes
Debit
Credit
Other income:
expenses
196,000
Gain onOperating
sale of land
$12,000
Other expense:
Accrued expenses
2,200
minus
InterestCash
expense
8,000 193,800
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Changes
Gain
on
sale
of
Operating expenses:
investments
Debit Credit
Depreciation expense
$ 7,000
Cash
72,000
Other operating
expenses
196,000
60,000
TotalInvestments
operating expenses
203,000
Gain
on sale of invest.
Income from
operations
$ 12,000
187,000
Other income:
Gain on sale of land
$12,000
Other expense:
InterestThe
expense
8,000 will
4,000
cash inflow of $72,000
Income before income tax
$ 191,000
be
shown
in
the
investing
section
Income tax
83,000
of the statement of cash flows
and
Net income
$ 108,000
the gain is ignored.
Cash Basis
$1,171,000
(785,200)
0
(193,800)
0
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Cash paid
for
Changes
Other operating
expenses
196,000
interest expense
Debit Credit
Total operating
expenses
203,000
Interest
expense
Income from
operations
8,000 $ 187,000
Cash
Other income:
Gain on sale of land
$12,000
Other expense:
Interest expense
8,000
4,000
Income before income tax
$ 191,000
There is no interest payable
Income tax
83,000
Net income
$ 108,000
account at the end of the
year.
Cash Basis
$1,171,000
(785,200)
0
(193,800)
0
(8,000)
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales
$1,180,000
Cost of merchandise sold
790,000
Gross profit
$ 390,000
Operating expenses:
Depreciation expense
$ 7,000
Other operating expenses
196,000
Total operating
expenses
203,000
Cash paid
for
Changes
Income from operations
$ 187,000
income taxes
Debit Credit
Other income:
Income tax expense
83,000
Gain on sale of land
$12,000
Income tax payable plus
500
Other expense:
InterestCash
expense
8,000 (83,500)
4,000
Income before income tax
$ 191,000
Income tax
83,000
Net income
$ 108,000
Cash Basis
$1,171,000
(785,200)
0
(193,800)
(8,000)
(83,500)
Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Cash Basis
Sales
$1,180,000
$1,171,000
Cost of merchandise sold
790,000
(785,200)
Gross profit
$ 390,000
Two different
Operating expenses:
Depreciation expense
$ 7,000 viewpoints
0
Other operating expenses
196,000
(193,800)
Total operating expenses
203,000 from
of income
Income from operations
$ 187,000
operations
Other income:
Gain on sale of land
$12,000
0
Accrual
Cash
Other expense:
Basis
Basis
Interest expense
8,000
4,000
(8,000)
Income before income tax
$ 191,000
Income tax
83,000
(83,500)
Net income
$ 108,000
$ 100,500
Operating Activities—Direct Method
Cash flows from operating activities:
Cash inflows:
Cash received from customers
$1,171,000
Cash outflows:
Cash payments for merchandise
$785,200
Cash payments for operating expenses 193,800
Cash payments for interest
8,000
Cash payments for income tax
83,500 1,070,500
Net cash flow from operating activities
$ 100,500
Financial Analysis and Interpretation
Free Cash Flow
Dell Corporation
Cash flow from operations
Less: Cash used to purchase fixed
assets to maintain productive
capacity used up in producing
income during the period
Less: Cash used for dividends
Free cash flow
Free cash flow as a percent of cash
flow from operating activities
$4,195,000
(482000)
—–
$3,713,000
89%
Financial Analysis and Interpretation
Free Cash Flow
Dell Corporation
Cash
operations
$4,195,000
Use:flow
To from
measure
the financial strength
of a
Less: Cash
used toApurchase
fixed
business.
company
that has positive
assets to maintain productive
free cash flow is able to fund internal
capacity used up in producing
growth,
retire
debt,
and
enjoy
income during the period
(482000)
financial
flexibility.
Less: Cash
used for
dividends
(—)
Free cash flow
$3,713,000
Free cash flow as a percent of cash
flow from operations
89%
Chapter 16
The End