13-1 13-5

Chapter
Operating Activities

13 STATEMENT OF
Inflows from:
CASH FLOWS • Sales to customers.
• Interest and dividends + Cash
received.
Flows
Outflows to: from
• Suppliers of merchandise Operating
and services.
• Employees.
_ Activities
• Lenders for interest.
• Governments for taxes.

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-2 13-6

Purpose of the Statement of Cash Flows Investing Activities

Provides information about the cash receipts Inflows from:
and cash payments of a business entity  Selling investments and plant
during the accounting period. assets.
 Collecting of principal on loans. + Cash
Helps investors with questions about the company’s:
Flows
 Ability to generate positive cash flows.
from
 Ability to meet its obligations and to pay dividends. Outflows to:
 Need for external financing.
Investing
 Purchase of investments and
plant assets. _ Activities
 Investing and financing transactions for the period.
 Purchase debt or equity
investments.
 Make loans.
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

Company Name 13-3 13-7

Statement of Cash Flows

Period Covered Financing Activities
Cash flows from operating activities:
[List of individual inflows and outflows] Inflows from:
Net cash provided (used) by operating activities $ #####  Short-term and long-term
Cash flows from investing activities: borrowing.
[List of individual inflows and outflows]  Owners (for example, from + Cash
Net cash provided (used) by investing activities ##### issuing stock).
Flows
Cash flows from financing activities: from
[List of individual inflows and outflows]
Outflows to: Financing
Net cash provided (used) by financing activities #####
 Make payments on borrowed _
Net increase (decrease) in Cash $ ##### funds. Activities
 Owners for dividends.
Cash (and equivalents) balance at beginning of period #####
$ #####
 Purchase treasury stock.
Cash (and equivalents) balance at end of period
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-4 13-8

Classification of Cash Flows Cash and Cash Equivalents

The Statement of Cash Flows must Cash Cash

include the following three sections: Equivalents Currency
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities
 Short-term, highly liquid investments.
 Readily convertible into cash.
 So near maturity that market value is unaffected by
interest rate changes.
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU
 13-9 13-13

Company Name
Statement of Cash Flows
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows] Let’s look at some
Net cash provided (used) by operating activities $ #####
simplified
The operating Let’s look at formulas for
cash flows section the Direct
can be prepared Method for
computing direct
using either the preparing the method cash
direct method or
the indirect
Statement of flows.
method. Cash Flows.

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

Direct Method 13-10

Direct Method 13-14

Cash Received from Customers Interest and Dividends Received

o Accrual basis revenue includes sales that did
+ Decrease in
not result in cash inflows. Interest Interest interest receivable
=
o Can be computed as: Received Revenue - Increase in interest
Decrease in
receivable
+ receivables =
+ Decrease in
Cash Received from
Net Sales Dividends Dividends dividends receivable
Customers
=
Increase in Received Revenue - Increase in dividends
– receivables = receivable

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

Direct Method 13-11

Direct Method 13-15

Cash Received from Customers Cash Paid for Merchandise

The accounts receivable balance was $80,000 on Step 1
12/31/04 and $110,000 on 12/31/05. If accrual
sales revenue for 2005 was $900,000, what + Incre ase in inventory
Purchases = COGS
was cash basis revenue? - Decrease in inventory

Decrease in
+ receivables = Step 2
Net Sales Cash Received from
$900,000 Customers Cash paid for + Decrease in A/P
= Purchases
Increase in
merchandise - Increase in A/P
– receivables =
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

Direct Method 13-12

Direct Method 13-16

Cash Received from Customers Cash Paid for Merchandise

The accounts receivable balance was $80,000 on How much did Martin Co. pay for inventory
12/31/04 and $110,000 on 12/31/05. If accrual in 2005?
sales revenue for 2005 was $900,000, what
Inventory, 1/1/05 $ 130,000 A/P, 1/1/05 $ 23,000
was cash basis revenue?
Inventory,12/31/05 $ 165,000 A/P, 12/31/05 $ 35,000
COGS, 12/31/05 $ 900,000

Purchases for 2005 were $935,000.

a. $900,000
Net Sales b. $923,000 Purchases = $900,000 + $35,000
Cash Received from
$900,000 Customers = $870,000 c. $947,000 Cash Paid for Merchandise in 2005
$30,000
Increase in d. $877,000 was $923,000.
– receivables = Cash Paid = $935,000 - $12,000
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU
 Direct Method 13-17 13-21

Cash Payments for Expenses Direct Method

M artin Co.
After deducting depreciation and other Income Statement Amounts
For the Year Ending December 31, 2005
noncash expenses, the cash paid for
Sales Revenues $ 800,000
expenses is affected by
Cost of Goods Sold 560,000
Depreciation Expense 5,000
(1) whether the expense was prepaid, and Interest Expense 28,050
Income T ax Expense 27,980
(2) whether the expense was accrued. Salary Expense 80,000
Other Expenses 71,000
Amortization of Bond Premium 1,000
+ Increase in + Decrease in
Gain on Sale of Equipment 3,000
Cash Paid for prepaid expenses accrued liabilities
= Expenses Extraordinary Loss 30,000
Expenses - Decrease in - Increase in
Equity in Investee Income 40,000
prepaid expenses accrued liabilities
Net Income $ 41,970
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-18 13-22

Direct Method
Additional Information
 Trading Securities were purchased during
Now, let’s 2005 at a cost of $25,000.
prepare a direct  Equipment with a book value of $40,000 was
sold during the year for $43,000.
method  Equipment with a book value of $30,000 was
Statement of destroyed during a freak flood in 2005. There
Cash Flows for was no insurance.
 Martin owns 25% of the common stock of
Martin Co. another company and uses the equity
method to account for this investment.

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-19 13-23

Direct Method Direct Method

Martin Co. Additional Information
Comparative Balance Sheets - Assets
 Martin’s tax rate is 40%.
December 31,
2004 2005  The Notes Payable to the bank carry a 12%
rate. The payments are due on the first day
Cash $ 60,000 $ 70,370
Accounts Receivable, net 27,000 35,000
of each month.
Inventory 230,000 200,000  The Bonds Payable carry a 9% rate. Interest
Trading Securities - 25,000 is payable semiannually on July 1 & Jan. 1.
Equipment, net 500,000 425,000  Sold stock during 2005 for $50,000.
Investments 100,000 130,000
 Received received $10,000 dividends from its
Total Assets $ 917,000 $ 885,370
equity investment.
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-20 13-24

Direct Method Direct Method

Martin Co.
Comparative Balance Sheets - Liabilities and Equity Cash Received from Customers
December 31, S a le s R e v e n u e s $ 8 0 0 ,0 0 0
2004 2005
L e s s : In c re a s e in A /R (8 ,0 0 0 )
Accounts Payable $ 15,000 $ 12,000
Salaries Payable 7,000 5,000 C ash R e c e iv e d fro m C u s to m e rs $ 7 9 2 ,0 0 0
Interest Payable 11,950 7,350
Income Tax Payable 20,000 17,000
Notes Payable, Bob's Bank 70,000 60,000 Cash Paid to Employees
Bonds Payable 250,000 150,000
Premium on Bonds Payable 5,000 4,000 S a la ry E x p e n s e $ 8 0 ,2000000
A d d : D e c re a s e in S a la ry P a y a b le 2 ,0 0 0
Common Stock 450,000 500,000
Retained Earnings 88,050 130,020 C a s h P a id to E m p lo y e e s $ 8 2 ,0 0 0

Total Liabilities and Equity $ 917,000 $ 885,370

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU
 13-25 13-29

Martin Co.
Direct Method Statement of Cash Flows
For the Period Ending December 31, 2004
Cash Paid for Inventory Notice that the Ending
Operating Cash Flows $ 27,370
C o st o f G o o d s S o ld $ 560,000 Cash Balance per the
Investing Cash Flows
A d d : D ecrease in A /P 3,000 Statement of Cash Flows
L ess: D ecrease in In ven to ry (30,000) Proceeds fromagrees
sale of Equipment
with the 12/31/05 43,000
C ash P aid fo r In ven to ry $ 533,000 Financing Cash Flows
Cash balance on the
Proceeds from saleBalance
of Stock Sheet.
$ 50,000
Principal paid on Bonds (100,000)
Cash Paid for Interest
Principal paid on Notes (10,000) (60,000)
I n te r e s t E x p e n s e $ 2 8 ,2005000 Net Cash Flows for the Period $ 10,370
A d d : D e c r e a s e i n I n te r e s t P a y a b l e 4 ,60 0
Add: Beginning Cash Balance 60,000
C a s h P a i d fo r I n te r e s t $ 3 2 ,65 0
Ending Cash Balance $ 70,370

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-26 13-30

Direct Method
Cash Paid for Taxes

In c o m e T a x E x p e n s e $ 2 7 ,2908000
Let’s look at the
A d d : D e c re a s e in T a x e s P a y a b le 3 ,0 0 0
Indirect Method
C a s h P a id fo r T a x e s $ 3 0 ,9 8 0
that is used by
Other Operating Cash Flows over 97% of all
A d d : D i v i d e n d s fro m T i n y C o . $ 10,000
L e s s : P u rc h a s e o f T r a d i n g S e c u r itie s (2 5 ,0 0 0 ) companies.
L e s s : O th e r O p e r a ti n g E x p e n s e s (7 1 ,0 0 0 )
C a s h F l o w fr o m O th e r S o u r c e s $ (8 6 ,0 0 0 )

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-27 13-31

Direct Method Indirect Method

Cash Flows From Operating Activities
Changes in current assets and current
liabilities as shown on the following table.
Cash Received from Customers $ 792,000
Cash Paid to Employees (82,000) Cash Flows
Net
from Operating
Cash Paid for Inventory (533,000) Income
Activities
Cash Paid for Interest (32,650)
Cash Paid for Taxes (30,980) + Losses and + Noncash
- Gains expenses such as
Cash Paid to Other Sources (86,000) depreciation and
amortization.
Cash From Operating Activities $ 27,370

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-28 13-32

Martin Co.
Equipment with a bookofvalue
Statement CashofFlows Indirect Method
For the
$40,000 Period
was sold Ending December 31, 2005
for $43,000.
Operating Cash Flows $ 27,370
Change in Account Balance During Year
Investing Cash Flows
Bonds Payable decreased from Increase Decrease
Proceeds
$250,000 from saleduring
to $150,000 of Equipment
2005. 43,000
Current Subtract from net Add to net income.
Financing Cash Flows
Assets income.
Proceeds from sale of Stock $ 50,000 Current Add to net income. Subtract from net
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Liabilities income.

Net Cash Flows for the Period $ 10,370

Notes Payable decreased from Use this table when adjusting Net
Add: Beginning
$70,000 Cashduring
to $60,000 Balance
2005. 60,000
Ending Cash Balance $ 70,370
Income to Operating Cash Flows.

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

 13-33 13-37

Indirect Method Indirect Method

Joyce, Inc. has prepared the Balance Sheet as Joyce, Inc.
Ending Retained Earnings
Balance Sheets (cont.)
of March 31, 2004, and March 31, 2005. at 3/31/05 was computed3/31/2003 3/31/2004
The Income Statement for the year ended as follows:
Liabilities
3/31/05 has also been prepared. Joyce needs Accounts Payable $ 27,000 $ 38,000
Beginning
Salaries PayableR/E, 3/31/04 $ 14,000
46,000 9,000
help preparing the Statement of Cash Flows –Long-Term
Net Loss Note
for 2005 (19,000)
Payable 50,000 -
using the indirect method. – Dividends Paid in 2005
Total Liabilities
(20,000)
$ 91,000 $ 47,000
= Ending R/E, 3/31/05 $ 7,000
Owners' Equity
Common Stock $ 450,000 $ 500,000
Retained Earnings 46,000 7,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-34 13-38

Indirect Method Indirect Method

The $8,000 gain was the Joyce, Inc.

Joyce, Inc.
result of selling land Cash Flows from Operations:
Income Statement
costing $32,000 for $40,000
For the Year Ending 3/31/05 Net Loss $ (19,000)
during the period.
Revenues $ 727,000
Operating Expenses (748,000) With the indirect method, always
Depreciation Expense (6,000) start with the net income or net
loss for the period.
Gain on Sale of Land 8,000
Net Loss $ (19,000)

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-35 13-39

Indirect Method Indirect Method

Joyce, Inc.
Joyce, Inc.
Balance Sheets
Cash Flows from Operations:
3/31/2004 3/31/2005
Assets Net Loss $ (19,000)
Add/Less: Changes in Current Assets & ?
Cash $ 90,000 $ 62,000
Current Liabilities
Accounts Receivable 40,000 23,000
Inventory 300,000 350,000 Cha nge in Account Ba la nce During Ye a r
Land 112,000 80,000 Incre a se De cre a se
Curre nt S ubtra ct from ne t Add to ne t incom e .
Equipment, net 45,000 39,000
Asse ts incom e .
Total Assets $ 587,000 $ 554,000 Curre nt Add to ne t incom e . S ubtra ct from ne t
Lia bilitie s incom e .

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-36 13-40

Indirect Method Indirect Method

Joyce, Inc.
Joyce issued $50,000 of no
Balance Sheets (cont.) Joyce, Inc.
par common stock to 3/31/2004 3/31/2005 Cash Flows from Operations:
settle theLiabilities
$50,000 note
payable.
Accounts Payable $ 27,000 $ 38,000 Net Loss $ (19,000)
Salaries Payable 14,000 9,000 Add: Decrease in Accounts Receivable 17,000
Long-Term Note Payable 50,000 -
Total Liabilities $ 91,000 $ 47,000
Owners' Equity Accounts receivable decreased.
Common Stock $ 450,000 $ 500,000 3/31/05 3/31/04
Retained Earnings 46,000 7,000
$23,000 - $40,000 = $(17,000)
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

 13-41 13-45

Indirect Method Indirect Method

Joyce, Inc. Joyce, Inc.

Cash Flows from Operations: Cash Flows from Operations:

Net Loss $ (19,000) Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000 Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000 Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Accounts payable increased. Decrease in Salaries Payable (5,000)
Subtract gains.
3/31/05 3/31/04 Add: Depreciation Expense 6,000
$38,000 - $27,000 = $11,000 Subtract: Gain on Sale of Land (8,000)
Net cash flow from operations $ (48,000)

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-42 13-46

Indirect Method Indirect Method

Joyce, Inc.
Cash Flows from Operations:
Net Loss
Add: Decrease in Accounts Receivable
Increase in Accounts Payable
Subtract: Increase in Inventory
Inventory increased.
3/31/05 3/31/04
$350,000 - $300,000 = $50,000
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/05
Cash Flows from Operating Activities $ (48,000)
$ (19,000)
17,000 Cash Flows fromThe
Investing Activities
operating cash
11,000 flows amount comes
(50,000) Cash Flows from from the schedule
Financing Activities
just prepared.
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-43 13-47

Indirect Method Indirect Method

Joyce, Inc.
Cash Flows from Operations:
Net Loss
Add: Decrease in Accounts Receivable
Increase in Accounts Payable
Subtract: Increase in Inventory
Decrease in Salaries Payable
Salaries payable decreased.
3/31/05 3/31/04
$ 9,000 - $14,000 = $(5,000)
© Prof.Dr. Oktay Taş, ITU
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/05
Cash Flows from Operating Activities $ (48,000)
$ (19,000)
17,000 Cash Flows from Investing Activities
11,000 Proceeds from sale of land 40,000
(50,000) Cash Flows from Financing Activities
Land originally costing $32,000
(5,000)
was sold for $40,000.
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
© Prof.Dr. Oktay Taş, ITU

13-44 13-48

Indirect Method Indirect Method

Joyce, Inc.
Joyce, Inc. Statement of Cash Flows
Cash Flows from Operations: For the Year Ending 3/31/05
Cash Flows from Operating Activities $ (48,000)
Net Loss $ (19,000)
Add: Decrease in Accounts Receivable 17,000 Cash Flows from Investing Activities
Increase in Accounts Payable 11,000 Proceeds from sale of land 40,000
Subtract: Increase in Inventory (50,000) Cash Flows from Financing Activities
Add back in
Decrease non-cash
Salariesexpenses.
Payable (5,000) Dividends paid to owners (20,000)
Add: Depreciation Expense 6,000
Net Changeof
Dividends in $20,000
Cash forwere
the Period
paid to
Beginning Cash Balance
owners during the year.
Ending Cash Balance

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

 13-49 13-53

Indirect Method Managing Cash Flows

Joyce, Inc. Cash Budgets are used by management to plan and
Statement of Cash Flows forecast future cash flows.
For the Year Ending 3/31/05
Cash Flows from Operating Activities $ (48,000) A Cash Budget can be used to:
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Force management to coordinate activities.
Compute
Cash Flowsthe
fromnet change in
Financing cash
Activities
forpaid
Dividends the period.
to owners (20,000) Provide managers with advance notice of available resources.
Decrease in Cash for the Period $ (28,000)
Provide targets useful in evaluating performance.
Beginning Cash Balance
Ending Cash Balance Provide advance warnings of potential cash shortages.

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-50 13-54

Indirect Method Managing Cash Flows

Joyce, Inc.  Increase collection of accounts receivables.
Statement of Cash Flows
For the Year Ending 3/31/05  Keep inventory low.
Cash Flows from Operating Activities $ (48,000)  Delay payment of liabilities.
Cash Flows from Investing Activities  Plan timing of major expenditures.
Proceeds from sale of land 40,000
Complete the Statement of Cash  Invest idle cash.
Cash Flows from Financing Activities
Flows by reconciling
Dividends beginning
paid to owners (20,000)
cash to ending cash.
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000

© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-51 13-55
Cash Budgeting
Indirect Method
Cash Budget
May June July August
Joyce, Inc.
Note that the ending Beginning cash balance $ 27,500 $ 15,000 $ - $ -
Statement of Cash Flows Add: Cash receipts 3,500
cash amount ties Total available cash $ 31,000
For the Year Ending 3/31/05
back to Joyce’s
Cash Flows from Operating Activities
Balance Sheet $ (48,000)
at Less: Cash disbursements 16,000
Joyce, Inc.
Cash Flows from Investing
Balance Sheets 3/31/05.
Activities Excess (deficiency) of
available cash over cash
Proceeds from sale of land 3/31/2005
3/31/2004 40,000
disbursements $ 15,000
Cash Flows from Financing Activities
Assets Financing needed
Cash $ owners
Dividends paid to 90,000 $ 62,000 (20,000) Financing repayments -
Ending cash balance $ 15,000
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000 The ending cash balance of one month becomes the
beginning cash balance of the next month.
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU

13-52 13-56
Cash Budgeting
Indirect Method
Cash Budget
May June July August
Joyce, Inc. Beginning cash balance $ 27,500 $ 15,000 $ 10,000 $ 10,000
In addition, onStatement
the faceofofCash
the Flows
statement or in Add: Cash receipts 3,500 2,000 9,000 14,000
a supplemental schedule, disclose
For the Year Ending 3/31/05 the Total available cash $ 31,000 $ 17,000 $ 19,000 $ 24,000

$50,000
Cash noncash
Flows from financing
Operating activity.
Activities $ (48,000) Less: Cash disbursements 16,000 18,000 6,000 8,000
Cash Flows from Investing Activities Excess (deficiency) of
available cash over cash
Proceeds from sale of land 40,000
disbursements $ 15,000 $ (1,000) $ 13,000 $ 16,000
Cash Flows from Financing Activities Financing needed 11,000 - -
Dividends paid to owners (20,000) Financing repayments - - 3,000 6,000
Cash interest payments and cash tax Ending cash balance $ 15,000 $ 10,000 $ 10,000 $ 10,000
Decrease in Cash for the Period $ (28,000)
payments must
Beginning Cash Balance
be disclosed.
90,000
Ending Cash Balance $ 62,000 Financing is needed in June because the company
must maintain a minimum cash balance of $10,000.
© Prof.Dr. Oktay Taş, ITU © Prof.Dr. Oktay Taş, ITU