The Statement of Cash Flows
Revisited
Chapter 21
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
21-2
Cash Inflows and Outflows
Cash Inflows
Operating Activities
Cash received
from revenues
Investing Activities
Sale of operational assets
Sale of investments
Collections of loans
Financing Activities
Issuance of stock
Issuance of bonds
and notes
Business
Cash paid for
expenses
Purchase of operational
assets
Purchase of investments
Loans to others
Cash Outflows
Payment of dividends
Repurchase of stock
Repayment of debt
21-3
Role of the Statement of Cash Flows
Helps users assess . . .




a firm’s ability to generate cash.
a firm’s ability to meet its obligations.
the reasons for differences between
income and associated cash flows.
the effect of cash and noncash
investing and financing activities on a
firm’s financial position.
21-4
Role of the Statement of Cash Flows
Lists all cash inflows and
all cash outflows by
category: operating,
investing, and financing
Explains the change in
cash during the period
Required by GAAP
Cash is King!
Especially during
an economic
downturn.
21-5
Cash and Cash Equivalents

Resources
immediately
available to pay
obligations.



Short-term, highly liquid
investments.
Readily converted into cash,
with little or no risk of loss.
Examples: money market
funds Treasury bills
Maturity date must not be
longer than 3 months from
date of purchase.
Primary Elements of the Statement of
Cash Flows
Operating Activities
Investing Activities
Financing Activities
Reconciliation of the Net
Increase or Decrease in
Cash with the Change in
the Balance of the Cash
Account
Noncash Investing
and Financing
Activities
21-6
Primary Elements of the Statement of
Cash Flows
Operating
Activities
Reports the cash effects of the
elements of net income.
Investing
Activities
Reports the cash effects of the
acquisition and disposition of assets
(other than inventory and cash
equivalents).
Financing
Activities
Reports the cash effects of the sale
or repurchase of shares, the
issuance or repayment of debt
securities, and the payment of cash
dividends.
21-7
21-8
Cash Flows from Operating Activities
Inflows from:


customers.
interest and dividends.
+
Outflows to:




suppliers of goods.
salaries and wages.
interest on debt.
income taxes.
_
Cash
Flows
from
Operating
Activities
Direct Method or Indirect Method of Reporting
Cash Flows from Operating Activities
21-9
Two Formats for Reporting Operating
Activities
Direct Method
Indirect Method
Reports the cash
effects of each
operating
activity
Starts with
accrual net
income and
converts to cash
basis
Note that no matter which format is used, the same amount
of net cash flows from operating activities is generated.
21-10
Direct Method
Under the direct method, the cash effect of each
operating activity is reported directly in the
statement.
21-11
Indirect Method
By the indirect method, we arrive at net cash flow from operating
activities indirectly by starting with reported net income and working
backwards to convert that amount to a cash basis.
21-12
Cash Flows from Investing Activities
Inflows from:



Sale of long-term assets used in
the business.
Sale of investment securities
(stocks and bonds).
Collection of nontrade
receivables.
+
Outflows to:

Purchase of long-term assets
used in the business.
 Purchase of investment
securities (stocks and bonds).
 Create nontrade receivables.
_
Cash
Flows
from
Investing
Activities
21-13
Cash Flows from Financing Activities
Inflows from:


Sale of shares to owners.
Borrowing from creditors
through notes, loans,
mortgages, and bonds.
+
Outflows to:

Owners in the form of dividends
or other distributions.
 Owners for the reacquisition of
shares previously sold.
 Creditors as repayment of the
principal amounts of debt.
_
Cash
Flows
from
Financing
Activities
Reconciliation with Change in Cash
Balance
The net amount of cash inflows and
outflows reconciles the change in the
company’s beginning and ending cash
balances.
For example, assume that UBC’s net increase in cash
is $9 million and the cash beginning balance is $20
million. The cash reconciliation would be as follows:
21-14
21-15
UBC’s Statement of Cash Flows
Noncash Investing and Financing
Activities
Significant investing and financing transactions not involving
cash also are reported (usually in a disclosure note).
1.
2.
3.
4.
Acquiring an asset by incurring a debt payable to the seller.
Acquiring use of an asset by entering into a lease agreement.
Converting debt into common stock or other equity securities.
Exchanging noncash assets or liabilities for other noncash
assets or liabilities.
21-16
21-17
U.S. GAAP and IFRS
The FASB and IASB are working together on a project, Financial
Statement Presentation, to establish a common standard for presenting
information in the financial statements.
21-18
U.S. GAAP and IFRS
Based on the joint FASB and IASB Financial Statement
Presentation project, the statement of cash flows is
slated to change in several ways.
•Operating and Investing cash flows would be categorized as
“business” activities and some cash flows may switch
categories.
•The statement would have three additional groupings: income
taxes, discontinued operations, and equity (if needed).
•Direct method would be required.
•The concept of “cash equivalents” would be eliminated in
favor of cash only.
Preparation of the
Statement of Cash Flows
Reconstructing the events and transactions that
occurred during the period helps identify the
operating, investing, and financing activities to be
reported.
A spreadsheet can be used to ensure that
no reportable activities are inadvertently
overlooked.
21-19
21-20
Comparative Balance Sheets
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30
50
6
60
75
(20)
221
29
32
12
46
3
80
81
(16)
267
Liabilities:
Accounts payable
Salaries payable
Income tax payable
Notes payable
Bonds payable
Less: Discount on bonds payable
20
1
8
50
(3)
26
3
6
20
35
(1)
Shareholders' Equity:
Common stock
100
130
Paid-in capital
20
29
Retained earnings
25
221
19
267
We begin by entering
the beginning and
ending balances for
each account on the
spreadsheet.
The changes columns
will be used later to
explain the increase or
decrease in each
account balance.
21-21
Comparative Income Statements
Changes
Dec. 31,
2012
Debits
Dec. 31,
Credits
2013
Income Statement
Revenues:
Sales revenue
Investment revenue
Gain on sale of land
100
3
8
Expenses:
Cost of good sold
Salaries expense
Depreciation expense
Bond interest expense
Insurance expense
Loss on sale of equipment
Income tax expense
Net income
(60)
(13)
(3)
(5)
(7)
(2)
(9)
12
The beginning balances for income
statement accounts always are zero.
21-22
Statement of Cash Flows
Changes
Dec. 31,
2012
Statement of Cash Flows
Operating Activities:
Investing Activities:
Financing Activities:
Debits
Dec. 31,
Credits
2013
Spreadsheet
entries duplicate
the actual journal
entries used to
record the
transactions as
they occurred
during the year.
They are entered
on the
spreadsheet only
and are not
recorded in the
accounting
records.
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30
50
6
60
75
(20)
Dec. 221
31,
2012
29
32
12
46
3
80
81
Changes
(16)
Dec. 267
31,
Debits
Credits
2013
Liabilities:
Income Statement
Accounts payable
20
Revenues:
Salaries
payable
1
Sales
revenue
Income tax revenue
payable
8
Investment
Accounts
Noteson
payable
- Receivable
Gain
sale of land
Bonds payable Beg. bal.
3050
Less: Discount
on bonds
payable
Expenses:
Credit
sales
100(3)
?
Cash
Cost of good sold
End. bal.
Shareholders'
Equity:
Salaries
expense
Common stock
Depreciation
expense
Bond interest expense
Insurance
expense
Paid-in capital
Loss on sale of equipment
Income
expense
Retainedtax
earnings
Net income
32
100
20
25
221
received
26
1003
36
20
8
35
(1)
(60)
(13)
(3)
130
(5)
(7)
(2)
29
(9)
12
19
267
Let’s start by
analyzing sales
revenue and its
related account
accounts
receivable by
looking at the
relationship in a Taccount format.
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30
50
6
60
75
(20)
Dec. 221
31,
2012
29
32
12
46
3
80
81
Changes
(16)
Dec. 267
31,
Debits
Credits
2013
Liabilities:
Income Statement
Accounts payable
20
Revenues:
Salaries
payable
1
Sales
revenue
Income tax revenue
payable
8
Investment
Accounts
Noteson
payable
- Receivable
Gain
sale of land
Bonds payable Beg. bal.
3050
Less: Discount
on bonds
payable
Expenses:
Credit
sales
100(3) 98
Cash
Cost of good sold
End. bal.
Shareholders'
Equity:
Salaries
expense
Common stock
Depreciation
expense
Bond interest expense
Insurance
expense
Paid-in capital
Loss on sale of equipment
Income
expense
Retainedtax
earnings
Net income
32
100
20
25
221
received
26
1003
36
20
8
35
(1)
(60)
(13)
(3)
130
(5)
(7)
(2)
29
(9)
12
19
267
We can see from
this analysis that
cash received from
customers must
have been $98
million.
Let’s see how to
post this entry to
the spreadsheet.
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
29
30 (1)
2
32
12
50
46
6
3
60
80
75
81
(20)
(16)
Changes
221
267
Dec. 31,
Dec. 31,
Liabilities:
2012
Debits
Credits
2013
Accounts payable
20
26
Income Statement
Salaries payable
1
3
Revenues:
Income tax payable
8
6
Sales revenue
(1)
100
100
Notes payable
20
Investment revenue
3
Bonds payable
50
35
Gain on sale of land
8
Less: Discount on bonds payable
(3)
(1)
Accounts Receivable
Expenses: Beg. bal.
Shareholders'
Equity:
Cost of goodCredit
sold
sales
Common
stock
Salaries expense
bal.
DepreciationEnd.
expense
Paid-in
capitalexpense
Bond interest
Insurance expense
Retained
earnings
Loss on sale
of equipment
Income tax expense
Net income
30
100 100 98
32
20
25
221
Cash received
(60)
(13)
130
(3)
(5)
29
(7)
(2)
19
(9)
267
12
First, $2 million is
debited to
accounts
receivable to
account for the
total change in
the account.
Then, $100
million is credited
to sales revenue
to account for the
total change in
the account.
Changes
Dec. 31,
2012
Statement of Cash Flows
Operating Activities:
Cash Inflows:
From customers
Debits
(1)
Dec. 31,
Credits
2013
98
Investing Activities:
Accounts Receivable
Beg. bal.
30
Credit sales
100
98
Cash received
Financing Activities:
End. bal.
32
The final part
of this entry is
a $98 million
entry on the
statement of
cash flows
under cash
inflows from
customers.
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30 (1)
(12)
50
6
60
75
(20)
221
2
12
Liabilities:
Accounts payable
20
Short-term Investments
Salaries payable
1
Income tax payable
Beg. bal.
0 8
Notes payable
Purchases
12 Bonds payable
50
End.
bal.
12
Less: Discount on bonds payable
(3)
Shareholders' Equity:
Common stock
29
32
12
46
3
80
81
(16)
267
26
3
6
20
35
(1)
100
130
Paid-in capital
20
29
Retained earnings
25
221
19
267
The $12 million
increase in the
short-term
investments
account is due to
the purchase of
short-term
investments
during the year.
Note that in the
textbook, entry
number 12 illustrates
the analysis of the
short-term investment
account.
Changes
Dec. 31,
2012
Statement of Cash Flows
Operating Activities:
Cash Inflows:
From customers
Dec. 31,
Credits
2013
Debits
(1)
The final part
of this entry is
a $12 million
entry on the
statement of
cash flows
under
investing
activities.
98
Investing Activities:
Purchase of S-T investment
Financing Activities:
Short-term Investments
Beg. bal.
0
Purchases
12
End. bal.
12
(12)
12
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30 (1)
(12)
50
6
60
75 (14)
(20)
221
Liabilities:
Accounts payable
Salaries payable
Income tax payable
Notes payable
Bonds payable
Less: Discount on bonds payable
20
1
8
50
(3)
Shareholders' Equity:
Common stock
100
29
32
12
46
3
80
81
(16)
267
2
12
20x
(14)
20x
26
3
6
20
35
(1)
130
Paid-in capital
20
29
Retained earnings
25
221
x denotes a noncash transaction
19
267
In entry number 14, we
find that a note
payable was issued as
payment for a building.
Investing in a new
building is a
significant investing
activity and financing
the acquisition with
long-term debt is a
significant financing
activity.
UNITED BRANDS CORPORATION
Spreadsheet for the Statement of Cash Flows
Changes
Dec. 31,
Dec. 31,
2012
Debits
Credits
2013
Balance Sheet
Assets:
Cash
Accounts receivable
Short-term investments
Inventory
Prepaid insurance
Land
Buildings and equipment
Less: Accumulated depreciation
20
30
50
6
60
75
(20)
221
(19)
(1)
(12)
(13)
(14)
(9)
Liabilities:
Accounts payable
Salaries payable
Income tax payable
Notes payable
Bonds payable
Less: Discount on bonds payable
20
1
8 (10)
50 (15)
(3)
Shareholders' Equity:
Common stock
100
Paid-in capital
Retained earnings
20
25 (16)
(18)
221
9
2
12
(4)
(8)
(3)
(9)
(6)
4
3
10
14
3
(4)
(5)
6
2
(14)
20x
(7)
2
(16)
(17)
(16)
(17)
10
20
3
6
13
5 (11)
12
30
20x
7
2
15
29
32
12
46
3
80
81
(16)
267
26
3
6
20
35
(1)
130
29
19
267
After entering all
the transactions,
this is what the
balance sheet
portion of the
spreadsheet looks
like.
Changes
Dec. 31,
2012
Debits
Income Statement
Revenues:
Sales revenue
Investment revenue
Gain on sale of land
Expenses:
Cost of good sold
Salaries expense
Depreciation expense
Bond interest expense
Insurance expense
Loss on sale of equipment
Income tax expense
Net income
Dec. 31,
Credits
2013
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
60
13
3
5
7
2
9
12
100
3
8
100
3
8
(60)
(13)
(3)
(5)
(7)
(2)
(9)
12
After entering all the transactions, this is what
the income statement portion of the
spreadsheet looks like.
Changes
Dec. 31,
2012
Statement of Cash Flows
Operating Activities:
Cash Inflows:
From customers
From investment revenue
Cash Outflows:
To suppliers of goods
To employees
To bondholders
For insurance expense
For income taxes
Net cash flows
Investing Activities:
Sale of land
Sale of equipment
Purchase of S-T investment
Purchase of land
Net cash flows
Financing Activities:
Retirement of bonds payable
Sale of common stock
Payment of cash dividends
Net cash flows
Net increase in cash
Totals
Dec. 31,
Credits
2013
Debits
(1)
(2)
98
3
(4)
(5)
(7)
(8)
(10)
50
11
3
4
11
22
(3)
(9)
18
5
(12)
(13)
12
30
(19)
(17)
(15)
15
(18)
5
26
(19)
376
9
376
6
9
After entering
all the
transactions,
this is what
the statement
of cash flows
portion of the
spreadsheet
looks like.
Here is the
statement of
cash flows
prepared using
the direct
method.
UNITED BRANDS CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2013
($ in millions)
Cash Flows from Operating Activities:
Cash Inflows:
From customers
$
98
From investment revenue
3
Cash Outflows:
To suppliers of goods
(50)
To employees
(11)
To bondholders
(3)
For insurance expense
(4)
For income taxes
(11)
Net cash flows from operating activities
$
Cash Flows from Investing Activities:
Sale of land
(30)
Sale of equipment
(12)
Purchase of S-T investment
18
Purchase of land
5
Net cash flows from investing activities
Cash Flows from Financing Activities:
Retirement of bonds payable
26
Sale of common stock
(15)
Payment of cash dividends
(5)
Net cash flows from financing activities
Net increase in cash
Cash balance, January 1
Cash balance, December 31
$
22
(19)
6
9
20
29
21-34
U.S. GAAP vs. IFRS
Consistent with U.S. GAAP, cash flows are classified as
operating, investing, or financing.
Typical Classification of Interest and Dividends

Operating Activities





Operating Activities

Investing Activities
Dividends Received
Interest Received
Interest Paid
Investing Activities



Financing Activities

Dividends Paid

Dividends Received
Interest Received
Financing Activities


Dividends Paid
Interest Paid
Preparing an SCF: The Indirect Method
Getting There through the Back Door
Net Income
Adjustments for noncash effects:
Gain on sale of land
Depreciation expense
Loss on sale of equipment
Changes in operating assets and liabilities:
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Increase in salaries payable
Discount on bonds payable
Decrease in prepaid insurance
Decrease in income tax payable
Net cash flows from operating activities
$
21-35
12
(8)
3
2
$
(2)
4
6
2
2
3
(2)
22
The indirect method derives the net cash increases or decreases from
operating activities indirectly by starting with reported net income and
“working backwards” to convert that amount to a cash basis.
Components of Net Income That Do Not
Increase or Decrease Cash
Depreciation
Expense
Loss on Sale
of Equipment
Gain on Sale
of Land
Adding these items back to net
income restores net income to
what it would have been had
depreciation and the loss not been
subtracted at all.
Subtracting the gain reverses the
effect of the gain having been
added to net income.
21-36
Components of Net Income That Do
Increase or Decrease Cash
21-37
For components of net income that increase or decrease
cash, but by an amount different from that reported on the
income statement, net income is adjusted for changes in
the balances of related balance sheet accounts to convert
the effects of those items to a cash basis.
Account
Type
Current
Assets
Current
Liabilities
Change in Account Balance During Year
Increase
Decrease
Subtract from net
Add to net income.
income.
Add to net income.
Subtract from net
income.
Note: Cash and cash equivalents, short-term investments in securities available
for sale, dividends payable, and short-term payables to financial institutions are
excluded from this category.
21-38
Comparison with the Direct Method
Appendix 21A:
Spreadsheet for the Indirect Method
A spreadsheet is equally
useful in preparing a
statement of cash flows
whether we use the direct
or the indirect method of
determining cash flows
from operating activities.
21-39
Appendix 21B: The T-Account Method of
Preparing the Statement of Cash Flows
The T-Account method
serves the same purpose
as a spreadsheet in
assisting in the
preparation of a
statement of cash flows.
21-40
Appendix 21B: The T-Account Method of
Preparing the Statement of Cash Flows
21-41
1. Draw a T-account for each income statement and
balance sheet account.
2. The T-account for cash should be drawn considerably
larger.
3. Enter each account’s net change on the appropriate side
(debit or credit) of the uppermost portion of each Taccount.
4. Reconstruct the transactions that caused changes in
each account balance during the year and record the
entries for those transactions directly in the T-accounts.
5. After all account balances have been explained by Taccount entries, prepare the statement of cash flows
from the cash T-account, being careful also to report
noncash investing and financing activities.
21-42
End of Chapter 21