CASH FLOW

STATEMENT
ACC 1101 FINANCIAL
ACCOUNTING AND REPORTING 1
WHAT IS THE STATEMENT OF CASH FLOWS?
• The statement of cash flows reports on a business’s cash receipts and
cash payments for a specific period.
• This statement does the following:
• Reports on the cash flows of a business
• Reports why cash increased or decreased during the period
• Covers a span of time and is dated the same as the income statement

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Purpose of the Statement of Cash Flows
• The statement of cash flows explains why net income as reported on
the income statement does not equal the change in the cash balance.
• The statement of cash flows helps:
• Predict future cash flows
• Evaluate management
• Predict ability to pay debts and dividends

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Classification of Cash Flows

The Statement of Cash Flows must

include the following three sections:
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities
 Operating Activities
Cash Flows from
Operating Activities
_
+

Inflows Outflows
Investing Activities
Cash Flows from Investing
Activities

Inflows Outflows
Financing Activities
Cash Flows from
Financing Activities

Inflows Outflows
Cash and Cash Equivalents

Cash

Cash Equivalents Currency

• Short-term, highly liquid investments.

• Readily convertible into cash.
• So near maturity that market value is unaffected
by interest rate changes.
Two Formats for Cash flow from Operating
Activities
Indirect Direct
method method
Starts with
Restates the
accrual income
income in
and adjusts it
terms of cash
to net cash

Uses account
Shows actual
relationships
cash receipts
to determine
and cash
changes in
payments
cash
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HOW IS THE STATEMENT OF CASH FLOWS PREPARED USING THE
INDIRECT METHOD?

Items needed:
• Income statement for the current year
• Balance sheet from the current year
• Balance sheet from the prior year
• Additional information based on review of transactions

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HOW IS THE STATEMENT OF CASH FLOWS PREPARED USING THE
INDIRECT METHOD?

Prepare the statement of cash flows in five steps:

1. Complete the cash flows from the operating
activities section.
2. Complete the cash flows from the investing activities
section.
3. Complete the cash flows from the financing
activities section.
4. Compute the change in cash.
5. Prepare a schedule for non-cash activities.

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HOW IS THE
STATEMENT OF CASH
FLOWS PREPARED
USING THE INDIRECT
METHOD?

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HOW IS THE
STATEMENT OF CASH
FLOWS PREPARED
USING THE INDIRECT
METHOD?

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HOW IS THE
STATEMENT OF
CASH FLOWS
PREPARED USING
THE INDIRECT
METHOD?

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Cash Flows from Operating Activities
• When using the indirect method, the operating activities section
begins with accrual-basis net income or loss, which needs to be
adjusted to a cash number.
• For example:
• Sales on account generate revenues that increase net income, but the
company has not yet collected cash from those sales.
• Accrued expenses decrease net income, but the company has not yet paid
cash.

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The Indirect Method: A Summary
Depreciation, Depletion, and Amortization
Expenses
• Depreciation does not affect cash.
• To go from net income to net cash flows, we must remove depreciation by
adding it back to net income.

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Gains and Losses on the Disposal of
Long-term Assets
Disposals of long-term assets create a gain or loss that must be removed
from net income, which is in the operating activities section.

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 Changes in Current Assets and Current
Liabilities
Most current assets and current liabilities result from operating activities.

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 Evaluating Cash Flows from Operating
Activities
The operating activities section starts with accrual net income, and then
adjustments are made to reconcile net income to net cash.

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Cash Flows from Investing Activities
• Investing activities affect long-term assets, such as:
• Plant Assets
• Investments
• Notes Receivable
• It is helpful to evaluate the T-accounts for each long-term asset to
determine if there was an acquisition or a disposal.

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Cash Flows from Investing Activities
Let’s look at the Plant Assets and Accumulated Depreciation accounts for
ShopMart.

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Cash Flows from Investing Activities
Use the information available to determine the cash received from an
asset disposal:

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Cash Flows from Investing Activities

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Cash Flows from Financing Activities
• Financing activities affect the long-term liability and equity accounts:
• Long-term Notes Payable
• Bonds Payable
• Common Stock
• Retained Earnings

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Long-term Liabilities
The cash inflow and cash outflow associated with these notes payable are listed
first in the cash flows from financing activities section.

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Common Stock and Treasury Stock
• The amount of new issuances of stock is determined by analyzing the stock
accounts and reviewing additional information:
• Received $120,000 cash from issuing shares of common stock.
• Paid $20,000 cash for purchase of shares of treasury stock.

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Common Stock and Treasury Stock
The $20,000 payment for treasury stock is shown as a cash outflow in the financing
section of the statement of cash flows.

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Computing Dividend Payments
• The amount of dividend payments can be computed by analyzing the Retained Earnings
account.
• ShopMart earned net income of $40,000.

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Computing Dividend Payments
Only cash dividends paid are reported on the statement of cash flows.

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Net Change in Cash and Cash Balances

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Non-cash Investing and Financing Activities
• The last step is to prepare the non-cash investing and financing
activities section.
• Let’s consider three non-cash transactions for The Outdoors, Inc.:
1. Acquired $300,000 building by issuing common stock.
2. Acquired $70,000 land by issuing notes payable.
3. Retired $100,000 notes payable by issuing common stock.

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Non-cash Investing and Financing Activities

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