Learning Objectives

Reporting and 1. Explain the purpose and importance of

Analyzing cash flow information. (LO1)
Cash Flows
2. Distinguish among operating,
investing, and financing activities.
(LO2)
CHAPTER
3. Identify and disclose non-cash
16 investing and financing activities.
PowerPoint Slides to accompany
(LO3)
Fundamental Accounting Principles, 15ce
Prepared by
Betty Young, Red River College 4. Describe and prepare the statement of
12-1 © 2016 McGraw-Hill Education 16-2 cash flows. (LO4)
© 2016 McGraw-Hill Education

Learning Objectives Vignette Video

5. Calculate cash flows from operating
https://www.facebook.com/ButterAvenueCo
activities using the indirect method.
(LO5)
6. Determine cash flows from both
investing and financing activities.
(LO6)
7. Calculate cash flows from operating
activities using the direct method.
(LO7)
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Statement of Cash Flows Statement of Cash Flows

• Reports detailed information about the Helps users answer questions such as:
major cash receipts (inflows) and cash 1. How does a company obtain its cash?
payment (outflows) during a period. 2. Where does a company spend its cash?
• Cash flows are classified as operating, 3. What is the change in the cash
investing, and financing activities. balance?
• Helps users to evaluate the liquidity and
solvency of an enterprise and its ability
to generate cash from internal sources.

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 Statement of Cash Flows
Details the difference between the
beginning and ending balances of cash
and cash equivalents.
It is an analytical tool used to assess,
evaluate, and analyze performance for
decision making.
Cash Equivalents
Are investments that must be:
1. Readily convertible to a known amount
of cash, and
2. Have a maturity of three months or
less from its date of acquisition.

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Cash Flows From

Classification of Cash Flows
Operating Activities
1. Operating Activities
The principal revenue producing EXHIBIT 16.1

activities of the entity.

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Cash Flows From

Classification of Cash Flows
Investing Activities
1. Operating Activities
2. Investing Activities EXHIBIT 16.2

The acquisition and disposal of plant,

property and equipment, loans and
other investments that are not
classified as cash equivalents.

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 Classification of Cash Flows Cash Flows From
Financing Activities
1. Operating Activities
2. Investing Activities EXHIBIT 16.3

3. Financing Activities
Those activities that affect a
company’s owners and creditors.

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Examples of Non-Cash Investing Statement of Cash Flows Format

and Financing Activities
EXHIBIT 16.5

EXHIBIT 16.4

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Preparing the Statement of Cash

Flows Operating Activities
Steps: • Cash flows may be calculated using
1. Calculate net increase or decrease in either the direct method or the indirect
cash and cash equivalents. method.
2. Calculate and report net cash inflows • IFRS encourages the direct method.
(outflows) from:
• However, the indirect method is used
• Operating activities.
more frequently.
• Investing activities.
• Financing activities.
3. Reconcile change in cash balance.
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Cash Flows from Operating Activities-
Indirect Method
This method:
• Yields the same net cash inflows
(outflows) from operating activities as the
direct method.
• Reports the necessary adjustments to
reconcile net income to net cash
inflows(outflows) from operating
activities.
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Adjustments
Non-cash Current Assets
• Decreases are added to income.
• Increases are subtracted from income.
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Adjustments
Current Liabilities
• Increases are added to income.
• Decreases are subtracted from income.
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Indirect Method
This method begins with net income and
makes adjustments for:
1. Changes in non-cash current assets and
current liabilities.
2. Operating activities that do not affect
cash inflows or outflows during the
period.
3. Gains and losses resulting from
investing and financing activities.
LO 5 16-20 © 2016 McGraw-Hill Education LO 5
Illustration: Changes in Non-cash
Current assets
A review of a company’s year-end financial statements
revealed that Accounts Receivable was $40,000 in 2016
and $60,000 in 2017. Merchandise Inventory was
$70,000 in 2016 and $84,000 in 2017. Income for 2017
was $38,000.
This would be reported as:
Cash flows from operating activities:
Income……………..………………………… $38,000
Adjustments:
Increase in accounts receivable…………...(20,000)
Increase in merchandise inventory ……….(14,000)
LO 5 16-22 © 2016 McGraw-Hill Education LO 5
Illustration: Changes in Non-cash
Current Liabilities
A review of a company’s year-end financial statements
revealed that Accounts Payable was $40,000 in 2016
and $35,000 in 2017. Interest payable was $4,000 in
2016 and $3,000 in 2017. Income for 2017 was $38,000.
This would be reported as:
Cash flows from operating activities:
Income……………..………..……………… $38,000
Adjustments:
Decrease in accounts payable…………..….(5,000)
Decrease in interest payable………………..(1,000)
LO 5 16-24 © 2016 McGraw-Hill Education LO 5
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 Illustration: Operating items not
Adjustments providing or using cash
Depreciation expense is an non-cash expense that is
Operating Items Not Providing or Using
used in the computation of net income. In order to
Cash compute cash from operating activities we must add it
• Expenses with no cash outflows are added to income. Assume a company has an income of $38,000
back to income. and depreciation expense of $24,000.
This would be reported as:
• Revenues with no cash inflow are
Cash flows from operating activities:
subtracted from income. Income…… ………..…………………………$38,000
Adjustments:
Depreciation expense………..…………..… ..24,000

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Illustration: Non-operating Items

Adjustments
Income may include gains or losses that are not
operating activities. These items are removed from the
Non-Operating Items operating section. Assume a company reported income
• Non-operating losses are added back to of $38,000 which included a $6,000 loss on the sale of a
income. piece of equipment.

• Non-operating gains are subtracted from This would be reported as:

income. Cash flows from operating activities:
Income……………..………..………………….$38,000
Adjustments:
Loss on the sale of equipment…………..…...6,000

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Mini-Quiz Mini-Quiz
The following information for 2017 is extracted from Income $64,700 + $64,700
Montreux Ltd.:
Decrease in accounts receivable 1,800 + 1,800
Income $64,700
Decrease in accounts receivable 1,800 Increase in merchandise inventory 8,600 - 8,600
Increase in merchandise inventory 8,600 Increase in prepaid expenses 200 - 200
Increase in prepaid expenses 200 Decrease in accounts payable 400 - 400
Decrease in accounts payable 400
Gain on sale of equipment 1,400 - 1 ,400
Gain on sale of equipment 1,400
Payment of cash dividend 7,000 Payment of cash dividends 7,000 0

Calculate the cash provided (or used) _______ Cash inflow from operating activities $55,900
from operating activities.
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 Cash Flows from Investing Illustration: Cash Flows from
Activities Investing Activities
A company sells equipment costing $30,000 with
Steps: accumulated depreciation of $12,000 at a loss of $6,000.
1. Identify changes in investing-related What is the cash receipt from the sale?
accounts.
Loss on
2. Explain these changes using = Net Book Value - Proceeds
Disposal
reconstruction analysis.
$6,000 = ($30,000 - $12,000) - Proceeds
3. Report cash flow effects.
Proceeds = $12,000

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Illustration: Cash Flows from Illustration: Cash Flows from

Investing Activities Investing Activities
A company sells equipment costing $30,000 with This would appear in the investing section as follows:
accumulated depreciation of $12,000 at a loss of $6,000.
What is the journal entry to record this transaction and Cash flows from investing activities:
how would this be reported on the statement of cash Cash received from sale of equipment……$12,000
flows?
Cash 12,000
Accumulated Depreciation 12,000
Loss on Sale of Equipment 6,000
Equipment
30,000

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Cash Flows from Financing Illustration: Cash Flows from

Activities Financing Activities
An review of the common share account reveals an
Steps: increase from $80,000 to $95,000. It is determined
that the $15,000 increase was due to the sale of
1. Identify changes in financing-related common shares for cash.
accounts.
This would appear as follows:
2. Explain these changes using Cash flows from financing activities:
reconstruction analysis. Cash received from issuing shares…….……$15,000
3. Report cash flow effects.

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 Illustration: Cash Flows from Cash Flows from Operating
Financing Activities Activities-Direct Method
An review of the retained earnings account reveals an
increase from $88,000 to $112,000. It is determined
that retained earnings was increased by income of Cash flows from operating activities are
$38,000 and decreased by $14,000 from cash calculated by adjusting accrual based
dividends.
income statement items to a cash basis.
The cash dividends would be reported as:
Cash flows from financing activities:
Cash paid for dividends………………………$14,000
Note: Income is not reported in this section since it is
not a financing activity.

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Cash Received from Customers Cash Received from Customers

Question:
The balance in A/R was $40,000 on 12/31/16
and the balance was $60,000 on 12/31/17. If
total sales revenue for 2017 was $590,000,
then how much cash was received from
EXHIBIT 16.10 customers?
a. $590,000
b. $610,000
c. $550,000
d. $570,000

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Cash Received from Customers Cash Received from Customers

Question:
The balance in A/R was $40,000 on 12/31/16 This would appear in the operating section as
and the balance was $60,000 on 12/31/17. If follows:
total sales revenue for 2017 was $590,000,
then how much cash was received from Cash flows from operating activities:
customers? Cash received from customers……………$570,000
a. $590,000 A/R increased $20,000 during 2017.
b. $610,000 2017Subtract increases in A/R during
from total revenues to arrive at
c. $550,000 cash collected from customers.
d. $570,000 $590,000 - $20,000 = $570,000

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 Cash Paid for Merchandise Cash Paid for Merchandise
Inventory Inventory
Question:
EXHIBIT 16.11
How much did the company pay for
merchandise inventory in 2017?
Inventory, 12/31/16 $70,000 A/P, 12/31/16 $40,000
Inventory, 12/31/17 $84,000 A/P, 12/31/17 $35,000
COGS, 12/31/17 $300,000
a. $319,000
b. $309,000
c. $314,000
d. $291,000

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Cash Paid for Merchandise Cash Paid for Merchandise

Inventory Inventory
Question:
How much did the company pay for
merchandise inventory in 2014? This would appear in the operating section as
Inventory, 12/31/16 $70,000 A/P, 12/31/16 $40,000 follows:
Inventory, 12/31/17 $84,000 A/P, 12/31/17 $35,000 Cash flows from operating activities:
COGS, 12/31/17 $300,000
Cash paid for merchandise inventory…$319,000
a. $319,000 Purchases for 2017 were $314,000.
b. $309,000 Purchases = $300,000 + $14,000
c. $314,000 Cash Paid for Merchandise in 2017 was
$319,000.
d. $291,000 Cash Paid = $314,000 + $5,000

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Wages and Operating Expenses Cash Paid for Interest and Taxes

EXHIBIT 16.13
EXHIBIT 16.12

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 EXHIBIT 16.14

Other Operating Expenses

The following items are not reported on

the statement of cash flows using the
direct method.
• Depreciation expense

• Gains and losses on sale of assets

• Gains and losses on retirement of

bonds

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© 2016 McGraw-Hill Education

Summary – Chapter 16 Summary – Chapter 16

1. Explain the purpose and importance of 5. Calculate cash flows from operating
cash flow information. activities using the indirect method.
2. Distinguish among operating, 6. Determine cash flows from both
investing, and financing activities. investing and financing activities.
3. Identify and disclose non-cash 7. Calculate cash flows from operating
investing and financing activities. activities using the direct method
4. Describe and prepare the statement of
cash flows.

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End of Chapter

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