Chapter 13 summary-Statement of Cash Flows

The objective of a statement of cash flows is to provide information about the cash receipts and
cash payments of a business entity during the accounting period.

In a statement of cash flows, information about cash receipts and cash payments is classified in
terms of the company’s:

◦ Operating activities.

◦ Investing activities.

◦ Financing activities.

Cash flow from operating activities

The operating activities section of the statement of cash flows includes the cash effects of those
transactions reported in the continuing operations section of the income statement.

The main items included in cash flow from operating activities are:

Cash flow from investing activities:

Cash flows relating to investing activities present the cash effects of transactions involving plant
assets, intangible assets, and investments.

They include the following.

Cash flow from financing activities
Cash flows classified as financing activities include the following items that result from debt and
equity financing transactions.

There are two ways to prepare the Cash flow from operating activities of the statement of cash
flow: The direct method and the indirect method. In this example we will prepare it using the
indirect method.

Cash flow from operating activities (Indirect method)

N e t Inco m e
A dd: Depreciat ion expense
Decrease in accounts receivable
Decrease in invent ories
Decrease in prepaid expenses
Increase in account s payable
Increase in accrued expenses payable
N onoper ating losses deduct ed in comput ing net income
D e duct: Increase in account s receivable
Increase in invent ories
Increase in prepaid expenses
Decrease in accounts payable
Decrease in accrued expenses payable
Decrease in deferred income t axes payable
N onoper ating gains added in comput ing net income
N e t Cash Pro vide d by (use d in) o pe rating activitie s
Example
 Allison Corporation
Statement of Cash Flows
For the year ended Dec. 31, 2018
Cash flow from operating activities (Explanation below)

Cash flow from Investing activities (refer to additional information given below)

Cash flow from Financing activities (refer to additional information given below)

Net increase in cash $35,000

Cash beginning of year $20,000
Cash end of year $55,000
Explanation for operating activities:
1. Accounts receivable increased by $30,000 during the year.
2. Dividend revenue is recognized on the cash basis, but interest revenue is recognized
on the accrual basis. Accrued interest receivable decreased by $1,000 during the year.
3. Inventory increased by $10,000 and accounts payable increased by $15,000 during the
year.
4. During the year, short-term prepaid expenses increased by $3,000 and accrued
expenses payable (other than for interest or income taxes) decreased by $6,000.
Depreciation for the year amounted to $40,000.
5. The accrued liability for interest payable increased by $7,000 during the year.
6. The accrued liability for income taxes payable decreased by $2,000 during the year.

Additional information related to Investing activities:

7. The company purchased Marketable Securities costing $65,000and sold Marketable
securities costing $44,000 at a loss. (No marketable securities are classified as cash
equivalents.)
8. The company loaned money to XYZ Corporation in the amount of $17,000 (N/R) and
collected $12,000 of its old notes receivables. (Collections of interest were recorded in
the Interest Revenue account and are considered cash flows from operating activities.)
9. During the year the company purchased plant assets costing $160,000 cash. The
company sold also plant assets costing $44,000 at a gain.

Additional information related to Financing activities:

10. During the year, Allison Corporation borrowed $45,000 cash by issuing short-term
notes payable to banks. Also, the company repaid $55,000 in principal amounts due
on these loans and other notes payable. (Interest payments are classified as operating
activities.)
11. The company issued bonds payable for $100,000 cash.
12. The company issued 1,000 shares of $10 par value capital stock for cash at a price of
$50 per share.
13. Cash dividends declared and paid to stockholders amounted to $40,000 during the
year.