Chapter 13
The Statement of Cash Flows
13–1
Amazon.com
 Founded in 1995, Amazon largest on-line
merchandising company in the world
one of the 500 largest companies in the US
Strong cash flows to maintain growth and
liquidity
Cash provided by operations more than
doubled from 2006 to 2007
Copyright © Cengage Learning. All rights reserved.
13–2
LO1 Statement of Cash Flows
 Shows how a company’s operating, investing, and
financing activities have affected cash during an
accounting period
 Explains the net increase or decrease in cash
Cash may include:
Cash
Cash equivalents
 Money market accounts
 Commercial paper
 U.S. Treasury bills
© Royalty Free PhotoDisc/ Getty Images
Copyright © Cengage Learning. All rights reserved.
13–3
How Is the Statement of Cash
Flows Used?
Managers
Assess liquidity
Investors and creditors assess the
company’s ability to
Manage cash flows
Determine dividend policy Generate positive future cash
flows
Evaluate investment
decisions
Pay its liabilities
Evaluate financing
decisions
Pay dividends and interest
Copyright © Cengage Learning. All rights reserved.
13–4
Classification of Cash Flows
The statement of cash flows classifies cash
receipts and cash payments into categories
Operating
Activities
Investing
Activities
Copyright © Cengage Learning. All rights reserved.
Financing
Activities
13–5
Operating Activities
Involve the cash inflows and outflows from
activities that enter into the determination of
net income
Cash Inflows
 collect from customers
 Interest and dividends
Copyright © Cengage Learning. All rights reserved.
Cash Outflows
Payments for:
 Purchase inventory
 Other expenses
 interest
 taxes
13–6
Investing Activities
purchase and sale of property, plant, and equipment
and other long-term assets, including investments
(short-term and long-term), and the making and
collecting of loans
Cash Inflows
 sell investments
 Sell long-term assets
 Collections on loans
Copyright © Cengage Learning. All rights reserved.
Cash Outflows
 purchase assets
 Purchase investments
 lend to borrowers
13–7
Financing Activities
Sell stock and provide stockholders with a
return on their investments, and obtaining
resources from creditors and repaying the
amounts borrowed
Cash Inflows
sell stock issues
Cash Outflows
Repayments of loans
(excluding interest)
 borrowing
cash dividends paid
Sale of treasury stock
Purchase of treasury
stock
Copyright © Cengage Learning. All rights reserved.
13–8
Noncash Investing and Financing
Transactions
Significant transactions that involve only long-term
assets, long-term liabilities, or stockholders’ equity
Noncash examples:
 Exchange long-term
asset for long-term
liability
 convert debt to stock
 Purchase long-term
asset with long-term
debt
Copyright © Cengage Learning. All rights reserved.
Not reflected on the
statement of cash flows;
no cash inflows or
outflows
Future cash flows are
affected, so required to
disclose these
transactions in a
separate schedule or at
the bottom of the
statement
13–9
Format of the Statement of Cash Flows
1
Operating Activities section Indirect method starts with net
income and ends with cash flows
from operating activities
2
Investing Activities section Cash transactions involving
3
Financing Activities section
4
Reconciliation of beg. and
end. balances of cash
Copyright © Cengage Learning. All rights reserved.
capital expenditures
Debt, cash stock transactions, dividends,
and treasury stock transactions
Ties to cash balances of the
balance sheet
13–10
Ethics and Cash Flows
Managers are are often tempted to manipulate the presentation
of certain transactions to make cash flow look better.
How might
companies
misrepresent
cash flows?
By classifying payments of operating
expenses as investments on the statement of
cash flows, a company can show an
improvement in cash flows from operations
By not disclosing the financing of accounts
receivables on the statement of cash flows,
the company makes collections of account
receivables look better than they actually are
Copyright © Cengage Learning. All rights reserved.
13–11
Discussion: Ethics on the Job
Boxcar Industries, a small upstart company, was
having cash flow difficulties. Payroll was due to
employees in one week, invoices were due to
vendors, and there was not enough cash to cover
both. The CEO considered telling employees that
payroll would be late or slowing down payments to
vendors. He also considered a more aggressive
collection effort on the company’s accounts
receivables.
Q. What do you think of the options? Do any of
the options strike you as more or less ethical
than others?
Copyright © Cengage Learning. All rights reserved.
13–12
Stop & Review
Q. The proceeds from trading securities should
be categorized in which section of the
statement of cash flows?
A. Operating activities
Copyright © Cengage Learning. All rights reserved.
13–13
Stop & Review
Q. In which section of the statement of cash
flows would the payment of dividends be
classified?
A. Financing activities
Copyright © Cengage Learning. All rights reserved.
13–14
Stop & Review
Q. What are the three classifications of cash
flows?
A. Operating activities, investing activities,
financing activities
Copyright © Cengage Learning. All rights reserved.
13–15
LO2 Cash-Generating Efficiency (CGE)
Shows the company’s ability to generate cash
from its current or continuing operations
used to calculate CGE:
Cash flow yield
Cash flows to sales
Cash flows to assets
Copyright © Cengage Learning. All rights reserved.
13–16
Cash Flow Yield
Shows how much of net income actually results
in operating cash inflows
Net Cash Flows from Operating Activities
Cash Flow Yield 
Net Income
$1,405

 3.0 times
$476
Amazon.com’s operating activities were generating
about $3 of cash for every dollar of net income
Copyright © Cengage Learning. All rights reserved.
13–17
Cash Flows to Sales
Shows how much of net sales actually results in
cash inflows
Cash Flows to Sales 
Net Cash Flows from Operating Activities
Net Sales

$1,405
 9.5%*
$14,835
* Rounded
Amazon.com generated positive cash flows to
sales of 9.5 percent or in other words that every dollar
of sales generates 9.5 cents in cash
Copyright © Cengage Learning. All rights reserved.
13–18
Cash Flows to Assets
Shows how much cash is being generated by
operations for each dollar of assets
Amazon.com's 2007 Annual Report (in millions)
2007
2006
2005
Total Assets
Cash Flows to Assets 
6,485
4,363
3,696
Net Cash Flows from Operating Activities
Average Total Assets
$1405
*

 25.9%
($6,485  $4,363)  2
*Rounded
Copyright © Cengage Learning. All rights reserved.
13–19
Free Cash Flow
Amount of cash that remains after deducting the
funds a company must commit to continue operating
at its planned level
Net Cash Flows from Operating Activities
– Dividends
– Purchases of Plant Assets
+ Sales of Plant Assets
Free Cash Flow
Copyright © Cengage Learning. All rights reserved.
13–20
Free Cash Flow analysis
• If positive, the company
– Has met all of its planned cash commitments
– Has cash available to reduce debt or expand
• If negative, to continue at its planned level of
operation, the company will have to
– Sell investments
– Borrow money
– Issue stock in the short term
Copyright © Cengage Learning. All rights reserved.
13–21
Stop & Review
Q. What does the cash flow yield ratio show?
How is it calculated?
A. Shows how much of net income actually
results in operating cash inflows. Divide net
cash flows from operating activities by net
income.
Copyright © Cengage Learning. All rights reserved.
13–22
Stop & Apply
Q. Trentco Company demonstrated a cash flow
to sales ratio of 9.4 percent. What does this
mean? What amounts were needed to
calculate this ratio?
A. The company generated positive cash flows
to sales of 9.4 percent. Net sales and net cash
flows from operating activities were needed
to make the calculation.
Copyright © Cengage Learning. All rights reserved.
13–23
Stop & Review
Q. Why is positive free cash flow important?
A. The company has demonstrated that it can
meet all planned cash commitments and has
cash available to reduce debt or to expand.
Copyright © Cengage Learning. All rights reserved.
13–24
LO3 Cash Flows from
Operating Activities
There are two methods of converting the income
statement from an accrual basis to a cash basis:
1. The direct method
• Adjusts each item on the income statement to its
cash equivalent
• More easily understood by the average reader
2. The indirect method
• Lists adjustments to net income to net cash flows
• Superior from an analyst’s perspective
• Used by most companies
Both methods produce the same net figure
Copyright © Cengage Learning. All rights reserved.
13–25
Depreciation Expense
Depreciation expense appears on the income
statement, but involves no outlay of cash
Cash flows from operating activities
Adjustment:
Depreciation
expense added
back to net
income
for the period
Net income
Adjustments to reconcile net income to
net cash flows from operating activities
Depreciation
Gain on sale of investments
Loss on sale of plant assets
Changes in current assets and current
liabilities
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Decrease in income taxes payable
Net cash flows from operating activities
Copyright © Cengage Learning. All rights reserved.
16,000.00
37,000.00
(12,000.00)
3,000.00
8,000.00
(34,000.00)
4,000.00
7,000.00
3,000.00
(2,000.00)
14,000.00
$30,000
13–26
Gains and Losses
Do not affect cash flows from operating
activities; should be removed from net income
Cash flows from operating activities
Adjustments:
Gain/Losses
subtracted and
added to net
income
for the period
Net income
Adjustments to reconcile net income to
net cash flows from operating activities
Depreciation
Gain on sale of investments
Loss on sale of plant assets
Changes in current assets and current
liabilities
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Decrease in income taxes payable
Net cash flows from operating activities
Copyright © Cengage Learning. All rights reserved.
$16,000
$37,000
(12,000)
3,000
8,000
(34,000)
4,000
7,000
3,000
(2,000)
14,000
$30,000
13–27
Treatment of Noncash Items
Noncash Item
Depreciation Expense
Add to or Deduct
from Net Income
Add
Amortization Expense
Add
Depletion Expense
Add
Losses
Add
Gains
Deduct
Copyright © Cengage Learning. All rights reserved.
13–28
Changes in Current Assets
Example: Laguna Corporation’s Accounts Receivable
decreased by $8,000 as illustrated below.
Accounts Receivable
Beg. Bal.
Sales to
Customers
698,000
End. Bal.
Cash Receipts
from Customers
55,000
706,000
47,000
The $8,000 decrease in Accounts Receivable
should be added to net income on the statement of cash flows.
Changes Sales to collections from customers
Copyright © Cengage Learning. All rights reserved.
13–29
Change net income into cash income
Decreases in
current assets are
added to net
income
+
Decreases in
current liabilities
are subtracted
from net income
< >
Increases in
current assets are
subtracted from net
income
< >
Increases in
current liabilities are
added to net income
+
13–30
Changes in Current Liabilities
Example: Laguna Corporation’s accounts payable
increased by $7,000 as illustrated below.
Accounts Payable
Cash Payments to
Suppliers
547,000
Beg. Bal.
43,000
554,000
End. Bal.
Purchases
50,000
The $7,000 increase in Accounts Payable should
be added to net income on the statement of cash flows
because more money was paid out than COGS.
Copyright © Cengage Learning. All rights reserved.
13–31
Net Income versus Cash Flows from
Operating Activities
Cash flows from operating activities
A net income of
$16,000, after
adjustments,
actually yielded
$30,000 in
positive cash
flows from
operating
activities
Net income
Adjustments to reconcile net income to
net cash flows from operating activities
Depreciation
Gain on sale of investments
Loss on sale of plant assets
Changes in current assets and current
liabilities
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Decrease in income taxes payable
Net cash flows from operating activities
Copyright © Cengage Learning. All rights reserved.
$16,000
$37,000
(12,000)
3,000
8,000
(34,000)
4,000
7,000
3,000
(2,000)
14,000
$30,000
13–32
Adjustments for Changes in Current
Assets and Liabilities
Add to
Net Income
Deduct from
Net Income
Accounts receivable
(net)
Decrease
Increase
Inventory
Decrease
Increase
Prepaid expenses
Decrease
Increase
Accounts payable
Increase
Decrease
Accrued liabilities
Increase
Decrease
Income taxes payable
Increase
Decrease
Current Assets:
Current Liabilities:
Copyright © Cengage Learning. All rights reserved.
13–33
Stop & Review
Q. If New Horizons Company had a decrease in
its Accounts Payable balance of $2,750, how
should this amount be treated in the
operating activities section of the statement
of cash flows?
A. The amount should be deducted from net
income.
Copyright © Cengage Learning. All rights reserved.
13–34
Stop & Review
Q. Why is depreciation expense added back to
net income in the operating activities section
of the statement of cash flows?
A. Depreciation expense is a noncash item
that has reduced net income. Thus, it must
be added back to arrive at a true amount
for cash flows from operating activities.
Copyright © Cengage Learning. All rights reserved.
13–35
LO4 Examining Investment Transactions
To determine cash flows from investing
activities, accounts involving cash receipts
and cash payments from investing activities
are examined individually
investments
Property, Plant & Equip
intangibles
Copyright © Cengage Learning. All rights reserved.
13–36
Investment Transactions
Cash Flows Illustrated
1. Laguna Corporation’s purchases of investments totaled
$78,000 during 2010. These transactions, caused a
$78,000 decrease in cash flows (cash paid).
2. Laguna sold investments that cost $90,000 for
$102,000. This transaction resulted in a gain of $12,000
and caused an increase in cash flows of $102,000 (cash
received) .
Investing activities section, statement of cash flows:
Purchase of investments ($78,000)
Sale of investments
102,000
Copyright © Cengage Learning. All rights reserved.
13–37
Plant Asset Transactions
Cash Flows Illustrated
1. Laguna Corporation purchased plant assets totaling
$1200,000. These transactions, caused a $120,000
decrease in cash flows (cash paid).
2. Laguna sold plant assets that cost $10,000 and that had
accumulated depreciation of $2,000 for $5,000. This
transaction resulted in a loss of $3,000 and caused an
increase in cash flows of $3,000 (cash received) .
Investing activities section, statement of cash flows:
Purchase of plant assets ($120,000)
Sale of plant assets
5,000
Copyright © Cengage Learning. All rights reserved.
13–38
Cash Flows from Investing Activities
The transactions for Laguna Corporation we have
examined are listed below on its statement of cash
flows in the investing activities section:
Cash flows from
investing activities
Purchase of investments
Sale of investments
Purchase of plant assets
Sale of plant assets
Net cash flows from
investing activities
Copyright © Cengage Learning. All rights reserved.
($78,000)
102,000
(120,000)
5,000
(91,000)
13–39
Noncash Transaction Illustrated
Laguna Corporation
issued bonds at face
value ($100,000) for
plant assets. There are
no cash inflows or
outflows, but it is a
significant transaction.
© Royalty Free/ Corbis
Schedule of Noncash Investing and
Financing Transactions:
Issue of bonds payable for plant assets $100,000
Copyright © Cengage Learning. All rights reserved.
13–40
Stop & Review
Q. What types of accounts should be examined
when determining the cash flows related to
investments?
A. Long-term investments, short-term
investments, plant assets, investment gains
or losses, depreciation accounts
Copyright © Cengage Learning. All rights reserved.
13–41
Stop & Apply
Q. If a company purchases a plant asset for
$25,000, how will this be reflected on the
statement of cash flows?
A. Investing activities section:
Purchase of plant asset
Copyright © Cengage Learning. All rights reserved.
($ 25,000)
13–42
LO5 Examining Financing Transactions
To determine cash flows from financing
activities, accounts involving cash receipts
and cash payments from financing activities
are examined individually
Short-term borrowings
Long-term liabilities
Stockholders’ equity
Copyright © Cengage Learning. All rights reserved.
13–43
Bonds Payable Transactions
Cash Flows Illustrated
Laguna Corporation
repaid $50,000 of
bonds at face value at
maturity. This
transaction caused a
$50,000 decrease in
cash flows (cash paid).
© Royalty Free PhotoDisc/ Getty Images
Financing activities section, statement of cash flows:
Repayment of bonds
($50,000)
Copyright © Cengage Learning. All rights reserved.
13–44
Common Stock Transactions
Cash Flows Illustrated
Laguna Corporation issued 15,200 shares of $5 par
value common stock for $175,000. The Common Stock
account increased by $76,000, and the Additional Paidin Capital account increased by $99,000. This
transaction caused an $175,000 increase in cash flows
(cash received).
Financing activities section, statement of cash flows:
Issue of common stock
Copyright © Cengage Learning. All rights reserved.
$175,000
13–45
Dividend Transactions
Cash Flows Illustrated
Laguna Corporation paid cash
dividends in the amount of
$8,000. This amount decreased
Retained Earnings. This
transaction caused a $8,000
decrease in cash flows (cash
paid).
© Royalty Free PhotoDisc/ Getty Images
Only the payment of dividends appears on the statement of
cash flows, not the declaration of dividends.
Financing activities section, statement of cash flows:
Payment of dividends
($8,000)
Copyright © Cengage Learning. All rights reserved.
13–46
Treasury Stock Transactions
Cash Flows Illustrated
Laguna Corporation purchased treasury stock for $25,000. This
transaction created a cash outflow of $25,000.
Financing activities section, statement of cash flows:
Purchase of treasury stock
Copyright © Cengage Learning. All rights reserved.
($25,000)
13–47
Cash Flows from Financing Activities
The transactions of Laguna Corporation that we
have examined are presented in the financing
section of the statement of cash flows:
Cash flows from
financing activities
Repayment of bonds
Issue of common stock
Payment of dividends
Purchase of treasury stock
Net cash flows from
financing activities
Copyright © Cengage Learning. All rights reserved.
($50,000)
175,000
(8,000)
(25,000)
92,000
13–48
Statement of Cash Flows
All three sections are presented in summary form
here, followed by the net increase or decrease in cash:
Laguna Corporation
Statement of Cash Flows
For the Year Ended December 31, 2010
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Copyright © Cengage Learning. All rights reserved.
$30,000
(91,000)
92,000
$31,000
15,000
$46,000
13–49
Stop & Review
Q. Name at least three types of transactions that
would be considered financing activities.
A. Repayment of bonds payable, issuance of
stock, purchase of treasury stock, payment of
dividends
Copyright © Cengage Learning. All rights reserved.
13–50
Chapter Review Problem
Taylor Corporation had net income of $122,435 for the year
ended Dec. 31, 20x7. The following data was taken from the
company’s income statement: Depreciation expense, $1,400;
Loss on sale of plant asset, $1,500. The general ledger reflected
an increase in Accounts Payable of $4,000 and a decrease in
Accounts Receivable of $1,200 during the year. Taylor sold a
plant asset that cost $4,000 with accumulated depreciation of
$500 for $2,000. The company also issued 5,000 shares of $5
par value common stock for $32,000. Cash and cash
equivalents at the beginning of the year were $14,459.
Required: Prepare the statement of cash flows using the
indirect method.
Copyright © Cengage Learning. All rights reserved.
13–51
Taylor Corporation Statement of Cash Flows
for the Year Ended December 31, 20x7
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation
Loss on sale of plant asset
Changes in current assets and current liabilities
Decrease in accounts receivable
Increase in accounts payable
$122,435
$1,400
1,500
1,200
4,000
Net cash flows from operating activities
Cash flows from investing activities
Sale of plant asset
Net cash flows from investing activities
Cash flows from financing activities
Issue of common stock
Net cash flows from financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Copyright © Cengage Learning. All rights reserved.
8,100
$130,535
2,000
2,000
32,000
32,000
$164,535
14,459
$178,994
13–52