Purpose of the Statement
of Cash Flows
 Explains changes in cash over a period of time
 Summarizes cash inflows and outflows from:
Operating
Activities
Investing
Activities
Financing
Activities
LO1
Cash Equivalents
 Readily convertible
to cash
Examples:
 Commercial paper
 Little risk of price
 U.S. Treasury bills
change
 Certain money market funds
 Original maturity to
investor of three
months or less
LO2
Statement of Cash Flows Format
inflows
Beginning
Cash and
Cash
Equivalents
Cash
Classified by:
Operating activities
Investing activities
Financing activities
+
Increase or decrease in
cash and cash
equivalents
outflows
=
= Ending
Cash and
Cash
Equivalents
LO3
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows
Outflows
Net cash provided (used) by operating activities
Cash flows from investing activities:
Inflows
Outflows
Net cash provided (used) by investing activities
Cash flows from financing activities:
Inflows
Outflows
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$ xxx
(xxx)
$
xxx
$ xxx
(xxx)
xxx
$ xxx
(xxx)
from balance sheets
xxx
$xxx
xxx
$xxx
Operating Activities
Collection of
customer accounts
Cash
transactions
concerned with
acquiring and
selling products
and services
Payment to suppliers
for inventory
Payment of wages
Payment of taxes
Investing Activities
Cash transactions
concerned with
acquiring and
disposing of longterm assets
Sale of property, plant
and equipment
Capital
expenditures
Purchase/sale of
another company
Financing Activities
Issuance/repurchase
of stock
Issuance/repayment
of bank note
Cash
transactions
concerned with
the raising and
repayment of
funds in the
form of debt
Issuance/retirement
and equity
of bonds
Payment of dividends
Categorizing Cash Flow Activities
Operating Activities
Investing Activities
Long-term
assets
Current
assets
and
current
liabilities
Financing
Activities
Long-term
liabilities
or
stockholders’
equity
Noncash Investing and
Financing Activities
Disclose important financing and investing
activities which do not require cash
Exchange stock for assets
Buy assets through debt financing
from supplier
Methods to Report Cash from
Operating Activities
 Direct Method
• Reports major classes of
gross cash receipts and
cash payments
Indirect Method
The amount of
cash provided by
operating
activities is the
same under both
methods
• Adjusts net income to
remove the effect of all
accruals and deferrals
LO4
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows
$ xxx
Outflows
(xxx)
Net cash provided (used) by operating activities
$xxx
Cash flows from investing activities:
Inflows
$ xxx
Outflows
(xxx)
Net cash provided (used) by investing activities
xxx
Cash flows from financing activities:Only section of
Inflows
statement that differs $ xxx
Outflows
in form between direct (xxx)
Net cash provided (used) by financing activities
xxx
and
indirect
method
Net increase (decrease) in cash and cash equivalents
$xxx
(net cash
flow total is
Cash and cash equivalents at beginning
of year
xxx
Cash and cash equivalents at end of yearthe same)
$xxx
Preparing the Statement Cash
Flows: Direct Method
 Step 1: Set up 3 schedules with the following headings:
Cash Flows from
Operating Activities
Cash Flows from
Investing Activities
Cash Flows from
Financing Activities
 Step 2: Determine the cash flows from operating activities
 Step 3: Determine the cash flows from investing activities
 Step 4: Determine the cash flows from financing activities
LO5
Direct Method
Operating Activities
Consider each of the items on the Income
Statement and any related current assets or
liabilities from the Balance Sheet:
Accounts Receivable, January 1
+ Sales revenue
-Cash
- Cash collections
collections
= Accounts Receivable, Dec 31
From Balance
Sheet
$ 57,000
670,000
( ?????)
?????
$ 63,000
Direct Method
Operating Activities
Accounts Receivable, Jan. 1 $ 57,000
+ Sales on account
670,000
- Accounts Receivable, Dec 31 ( 63,000)
Cash collections
$664,000
Direct Method
Operating Activities
Inventory, Jan. 1
= Cost of goods sold
+ Purchases on account
- Inventory, Dec. 31
From Balance
Sheet
$ 92,000
$ 390,000
????
84,000
Direct Method
Operating Activities
Inventory, Jan. 1
- Cost of Goods Sold
- Inventory, Dec 31
$ 92,000
(390,000)
(84,000)
= Purchases on account
$ 382,000
Direct Method
Operating Activities
Accounts Payable, Jan 1
+ Purchases
- Accounts Payable, Dec 31
= Cash payments for Purchases
$ 31,000
382,000
38,000
$ 375,000
Direct Method
Operating Activities
Review entries recorded during period:
Balance Sheet
Assets = Liabilities + Stockholders’
Equity
Accumulated
Depreciation
(40,000)
(40,000)
Income Statement
Revenues - Expenses = Net
Income
Depreciation
Expense
(40,000) (40,000)
There is no effect on cash flow from depreciation.
Direct Method
Operating Activities
Prepaid Insurance, Jan 1
$18,000
+ Cash payments
-Insurance Expense
= Prepaid Insurance, Dec 31
?????
(12,000)
$12,000
From Balance
Sheet
Direct Method
Operating Activities
Prepaid Insurance, Jan 1
- Insurance Expense
- Prepaid Insurance, Dec 31
$18,000
12,000
12,000
= Cash payments for Insurance
$ 6,000
Schedule of Cash Flows
from Operating Activities
Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
Interest
15,000
Cash payments for:
375,000
62,000
6,000
15,000
47,000
Inventory purchases
Salaries and wages
Insurance
Interest
Taxes
Net Cash Inflows from Operating Activities
$174,000
Preparing the Statement of
Cash Flows: Direct Method
 Step 3: Determine the cash flows from
investing activities
Direct Method
Investing Activities
LT Investments , Jan 1
+ LT Investments purchased for cash
- LT Investments sold
= LT Investments, Dec 31
From Balance
Sheet
$ 90,000
?????
(
0)
$120,000
Direct Method
Investing Activities
LT Investment, Jan 1
- LT Investments sold
- LT Investments, Dec 31
$ 90,000
0
120,000
= Cash payments for LT Investments
$ 30,000
Direct Method
Investing Activities
Review entries recorded during period:
Balance Sheet
Income Statement
Assets =
Liabilities + Stockholders’ Revenues - Expenses = Net
Equity
Income
Land = Notes Payable
50,000
50,000
No cash was involved in this transaction so it should be
reported in a separate schedule instead of directly on the
statement of cash flows.
Direct Method
Investing Activities
Property and Equipment , Jan 1
+ Property and Equipment purchased
$280,000
75,000
- Property and Equipment sold
?????
=Property and Equipment, Dec 31
$320,000
From Balance
Sheet
Direct Method
Investing Activities
Property and Equipment, Jan 1
+Property and Equipment purchased
- Property and Equipment, Dec 31
= Property and Equipment Sold
$280,000
75,000
(320,000)
$ 35,000
Direct Method
Investing Activities
Accumulated Depreciation , Jan 1
+ Depreciation Expense
$ 75,000
40,000
- Accumulated Depreciation on assets sold
= Accumulated Depreciation, Dec 31
From Balance
Sheet
?????
$100,000
Direct Method
Investing Activities
Accumulated Depreciation, Jan 1
+ Depreciation Expense
- Accumulated Depreciation, Dec 31
= Accumulated Depreciation on
Equipment Sold
$ 75,000
40,000
(100,000)
$ 15,000
Schedule of Cash Flows
from Investing Activities
Cash Flows from Investing Activities
Cash receipts from:
Cash payments for:
Sale of machine
30,000 Purchase of
investments
75,000 Purchase of
property and
equipment
25,000
Net Cash Outflows from Investing Activities
$80,000
Preparing the Statement of Cash
Flows: Direct Method
 Step 4: Determine the cash flows
from financing activities
Direct Method – Financing
Activities
Review entries recorded during period:
Balance Sheet
Income Statement
Assets =
Liabilities + Stockholders’ Revenues - Expenses = Net
Equity
Income
Land = Notes Payable
50,000
50,000
No cash was involved in this transaction so it
should be reported in a separate schedule instead
of directly on the statement of cash flows.
Direct Method
Financing Activities
Bonds Payable , Jan 1
$260,000
- Bonds Payable Retired
?????
= Bonds Payable, Dec 31
$200,000
From Balance
Sheet
Direct Method
Financing Activities
Bonds Payable, Jan 1
- Bonds Payable, Dec 31
= Bonds Payable Retired
$ 200,000
(260,000)
$ 60,000
Direct Method
Financing Activities
Capital Stock , Jan 1
+ Capital Stock Sold
= Capital Stock , Dec 31
From Balance
Sheet
$ 75,000
?????
$100,000
Direct Method
Financing Activities
Capital Stock, Jan 1
- Capital Stock, Dec 31
= Capital Stock Sold
$ 75,000
(100,000)
$ 25,000
Direct Method
Financing Activities
Retained Earnings, Jan 1
+ Net income
- Cash Dividends
$193,000
120,000
?????
=Retained Earnings, Dec 31
$246,000
From Balance
Sheet
Direct Method
Financing Activities
Retained Earnings, Jan 1
+ Net income
- Retained Earnings, Dec 31
$193,000
120,000
(246,000)
= Cash Dividends
$ 67,000
Schedule of Cash Flows
from Financing Activities
Cash Flows from Financing Activities
Cash receipts from:
Cash payments for:
Issuance of stock
63,000 Retirement of bonds
67,000 Payment of cash
dividends
25,000
Net Cash Outflows from Financing Activities
$105,000
$105,000
Indirect Method
Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities
LO6
Indirect Method – Operating
Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
xx,xxx
(6,000)
Accounts Receivable
Bal. Jan. 1
57,000
+ Net increase
6,000
Bal. Dec. 31
63,000
Decrease $6,000
Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
xx,xxx
(6,000)
8,000
Inventory
Bal. Jan. 1
- Net decrease
Bal. Dec. 31
92,000
8,000
84,000
Increase $8,000
Indirect Method – Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
xx,xxx
(6,000)
8,000
7,000
Accounts Payable
Bal. Jan. 1
+Net increase
Bal. Dec. 31
$ 31,000
7,000
$ 38,000
Increase $7,000
Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Decrease in salaries and wages payable
xx,xxx
(6,000)
8,000
7,000
(2,000)
Salaries and Wages Payable
Bal. Jan. 1
- Net decrease
Bal. Dec. 31
$ 9,000
2,000
$ 7,000
Increase $2,000
Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Decrease in salaries and wages payable
Decrease in prepaid insurance
xx,xxx
(6,000)
8,000
7,000
(2,000)
6,000
Prepaid Insurance
Bal. Jan. 1
- Net decrease
Bal. Dec. 31
$18,000
6,000
$12,000
Decrease $6,000
Indirect Method –
Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Decrease in salaries and wages payable
Decrease in prepaid insurance
Increase in income taxes payable
xx,xxx
(6,000)
8,000
7,000
(2,000)
6,000
3,000
Income Taxes Payable
Bal. Jan. 1
Increase $3,000
+Net increase
Bal. Dec. 31
$5,000
3,000
$8,000
Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Decrease in salaries and wages payable
Decrease in prepaid insurance
Increase in income taxes payable
Gain on sale of machine
Depreciation expense
Loss on retirement of bonds
Add back
noncash expense
Gain is not part of
operating activities
xx,xxx
(6,000)
8,000
7,000
(2,000)
6,000
3,000
(5,000)
40,000
3,000
Report entire
outflow as a
financing activity
Cash Flow Adequacy
 Measures company’s ability to meet
principal and interest obligations
 Creditors concerned with cash available to
repay debts after company has replaced
and updated its existing base of long-term
assets
Cash Flow from Operating Activities – Capital Expenditures
Average Amount of Debt Maturing over Next Five Years
LO7
Appendix
Accounting Tools: A Work-Sheet Approach to the
Statement of Cash Flows
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Enter account
balances
LO8
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Enter net
income
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Enter noncash
revenues or
expenses
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Extend current
assets and
current
liabilities
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Total
columns
Indirect Method:
Using a Work Sheet
12/31/12
12/31/11
Determine net
cash inflow
(outflow)
End of Chapter 12