Chapter 22

Intermediate Accounting
13th Canadian Edition, Volume 2

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy
Chapter 22
Statement of Cash Flows
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Chapter 22: Statement of Cash Flows
(LO 1 to LO 5)
After studying this chapter, you should be able to:
1. Understand cash and cash equivalents as well as the business
importance of cash flows, and describe the purpose and uses of
the statement of cash flows.
2. Identify the major classifications of cash flows and explain the
significance of each classification.
3. Prepare the operating activities section of a statement of cash
flows using the direct versus the indirect method.
4. Understand the basic steps in the manual preparation of a
statement of cash flows.
5. Prepare a statement of cash flows using the direct method.
Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2

Chapter 22: Statement of Cash Flows
(LO 6 to LO 10)
After studying this chapter, you should be able to:
6. Prepare a statement of cash flows using the indirect method.
7. Prepare a complex statement of cash flows using both the
direct and indirect methods.
8. Identify the financial presentation and disclosure requirements
for the statement of cash flows.
9. Read and interpret a statement of cash flows.
10.Identify differences in accounting between IFRS and APSE, and
what changes are expected in the near future.

The Importance of Cash Flows
• A lack of cash flow is one of the main causes of
bankruptcy
o A sign of a healthy company is positive cash flows from
operations
o Companies need funds to expand, issue dividends or
maintain solvency during economic downturns
• Over the years, the statement of cash flows has grown in
significance
• Many consider it to be less susceptible to earnings
management—providing a better picture of success
LO 1 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 4

Purpose and Usefulness of the
• The statement of cash flows is used to assess
o The quality of earnings
o A company’s ability to repay debts as they come due
o Ability to generate cash for long-run success
• The primary purpose of the statement of cash flows is to
provide information about cash receipts and payments
• Also, to provide information on a cash basis about operating,
investing and financing activities
• The statement reports cash receipts and payments and the net
change in cash in a format that reconciles beginning and
ending cash and cash equivalent balances

Usefulness of Information in a
• The information in a statement of cash flows enables users to
assess
o Liquidity and solvency of an entity—its capacity to generate cash
and its needs for cash resources
o Amounts, timing and uncertainty of future cash flows—examine
the relationship between items and improve predictions
o The reasons for the difference between net income and cash flow
from operating activities
• The information allows users to make their own assessment of
the income number’s representational faithfulness

Cash Flows, Cash, and Cash Equivalents
Cash equivalents are
Cash flows are defined in
short-term, highly
terms of inflows and
liquid investments;
outflows of cash and cash
readily convertible to
equivalents
known amounts of
Cash is defined as cash cash; with insignificant
on hand and demand risk of change in value
deposits
Under IFRS, preferred
Bank overdrafts are shares acquired close
included in cash and cash to their maturity date
equivalents under IFRS and can be included in
ASPE if they are part of cash equivalents
cash management policy

Classification of Cash Flows
The statement of cash flows:
• Is called cash flow statement under ASPE
• Classifies cash receipts and payments according to the
generating activity: operating, investing, or financing
• Is usually based on an analysis of the changes in the
accounts on the SFP over the accounting period
o Operating cash flows: related to working capital accounts
(current asset and current liabilities accounts)
o Investing cash flows: involve long-term assets
o Financing cash flows: derived mainly from changes in long-
term liability and equity accounts

Operating Activities
• Principal revenue-producing activities
• Involve cash transactions that determine net income
o Cash inflows: receipts from customers
o Cash outflows : payments to suppliers, employees, CRA
• Surplus cash flows from operations: needed for
o Repaying loans
o Taking advantage of new investment opportunities
o Paying dividends without external financing

Investing Activities
• Involves acquisition and disposal of long-term assets and
other investments not included in cash/cash equivalents
• Investing cash flows arise from loan activity; acquiring and
disposing of investments and PPE; intangibles; and
derivatives
• The “use of cash in investing activities” tells readers if
o The entity is reinvesting in additional assets that will
generate profits and increase future cash flows, or
o Whether long-term productive assets are being sold
(converted into cash)

Financing Activities
• Result in changes in the size and composition of the
entity’s capital and borrowings
• Details of financing cash flows allow readers to
o Assess the potential for future claims against the
organization’s cash
o Identify major changes in the form of financing, especially
between debt and equity
• Financing activities include issuing and repaying debt,
making payments on capital leases, and obtaining capital
from owners

Is it Investing or Financing?
• There are differences between classification of cash
dividends and interest under IFRS and ASPE
Interest and Dividends Paid Interest and Dividends Received
ASPE Operating: if recognized in net income Operating
Financing: if charged to retained earnings
IFRS Choice: Operating or financing Choice: Operating or investing
• Once a choice is made, it is applied consistently

Some activities that are a result of investing or
financing activities may impact reporting of operating
activities. For example, proceeds on sale of equipment
would be an investing activity, and the related gain or
loss would be excluded from operating activities
Investing and Financing Activities
Reported on the Income Statement
• Sale of PPE: cash proceeds are an investing activity; gain
or loss on sale to be excluded from operating activities
• Payment of a debt: cash paid to redeem the debt is a
financing activity; gain or loss to be excluded from
operating activities
• Outflows to purchase investments/loans held for trading:
and proceeds from the sale, are operating activities
• Other investments not held for trading are investing
activities
• Income tax payments classified as operating unless
specifically identified with financing/investing activities
Investing and Financing Activities That
Do Not Affect Cash
• Statement of cash flow reports only the cash effect of
activities
• Significant non-cash financing and investing activities are
excluded from the statement
• Required to be disclosed elsewhere in the statements
• Examples of significant non-cash transactions
o Acquisition of assets by assuming related liabilities or by
issuing equity securities
o Exchanges of non-monetary assets
o Conversion of debt or preferred shares to common shares
o Issue of equity securities to retire debt
Format of the Statement—Basics
• The three types of activities, operating, investing, and
financing guide the general format of the statement
• Usually, operating activities are listed first, followed by
investing and then financing
• Individual inflows and outflows are reported separately—
not netted
• Statement provides a reconciliation of the beginning and
ending cash balances as reported in the comparative SFP
• The indirect method presents net cash flow from operating
activities by adjusting accrual net income to a cash basis
• The direct method directly identifies the sources of
operating cash payments and receipts
separately, it is harder to see how extensive the enterprise’s investing and financing activities
are and therefore it is more difficult to assess future cash flows.6
Illustration 22.3 sets out a basic or “skeleton” format of a statement of cash flows. Note
Statement of Cash Flows—Indirect Method

that the statement also provides a reconciliation between the beginning-of-the-period cash
and the end-of-the-period cash reported in the comparative statement of financial position.
ILLUS
COMPANY NAME Forma
This is an Statement of Cash Flows
Period Covered
Cash F
example of a Cash flows from operating activities

Net income XXX
statement of Adjustments to reconcile net income to cash provided by
XX XX
cash flows Net cash provided by (used in) operating activities

Cash flows from investing activities
XXX
prepared using Net cash provided by (used in) investing activities

XX
XXX
the indirect Cash flows from financing activities
XX
method Net cash provided by (used in) financing activities XXX
Net increase (decrease) in cash XXX
(Illustration 22.3) Cash at beginning of period XXX

Cash at end of period XXX
IFRS and ASPE encourage use of the direct method; most

Illustration 22.3 presents the net cash flow from operating activities indirectly by making
companies use the
the indirect method (less costly to generate).
adjustments needed to the net income reported on the income statement. This was intro-
duced in Chapter 5 and is called the indirect method (or reconciliation method). The cash
flow from operating activities could be calculated directly by identifying the sources of the
operating cash receipts and payments. This approach, shown in Illustration 22.4, is called
LO 3 the direct method.
Statement of Cash Flows—Direct Method
• When preparing a statement of cash flows using the direct
method, the operating activities section is the only one
that differs from the indirect method
• Example of a cash flow from operating activities prepared
using the direct method

Arguments in Favour of Direct Method
• Both IFRS and ASPE encourage, but do not require use of
the direct method
• The direct method is favoured because
o It is more consistent with the objective of providing
information useful in estimating future operating cash flows
o Some consider information about cash receipts and
payments more useful than changes in current asset and
liability accounts
o Incremental cost of accumulating the cash receipts and
payments data is not significant with sophisticated
accounting systems

Arguments in Favour of Indirect Method
• Use of the direct method is the exception; indirect
method used in the past and is more familiar
• The indirect method is favoured because
o It focuses on the differences between net income and cash
flow from operating activities
o It is less costly to develop the information that adjusts net
income to cash flow from operating activities
o Reporting income statement information on a cash basis
(using the direct method) rather than the usual accrual basis
might suggest net cash flow is as good as, or better than net
income as a performance measure

Information to Prepare the Statement
of Cash Flows
• Information to prepare the statement comes from three
sources:
1. Comparative statements of financial position—provide the
amount of change in each SFP account
2. Current income statement—provides most significant
changes in retained earnings account; may indicate
expenses that do not use cash or revenues that do not
generate cash
3. Selected transaction data from the general ledger—may be
needed to determine how cash was generated or used

Steps One & Two in the Preparation of
the Statement of Cash Flows
• There are four basic (manual) steps in preparing the SCF:
1. Determine the change in cash and cash equivalents using the
comparative SFP
2. Record information from the income statement into the
operating activities section—adjustments fall under three
categories
o Category 1: Amounts reported as revenues and expenses that
are not the same as cash received and paid
o Category 2: Costs incurred and paid for in a previous period
o Category 3: Amounts reported as gains or losses on the income
statement where the underlying activity is not an operating
transaction
Steps Three and Four in the
Preparation of the Statement of Cash
Flows
… four basic steps continued
3. Analyze the change in each SFP account, identify all cash
flows associated with changes in the account balance, and
record the effect on the statement of cash flows
4. Complete the statement of cash flows. Calculate subtotals
for the operating, investing, and financing categories and
ensure that the net change in cash you determined is
equal to the actual change in cash for the period

Simple Statement of Cash Flows, Direct
Method—Facts (Part 1)
PiP 22.1 Facts: Tax Consultants Inc. began operations on Jan 1, 2022—
issued 20,000 common shares for $20,000 cash. Office space and
furniture and equipment were rented; Revenue came from tax
consulting services. Following are the comparative statements of 2023.

Simple Statement of Cash Flows,
Direct Method—Facts (Part 2)

Simple SCF—Preparing the Statement:
Direct Method (Steps 1 and 2)
• Step 1: Determine the change in cash–use the comparative
statements of financial position
Cash on hand, End of 2023 $ 89,000
Less: Cash on hand, Beginning of 2023 40,000
Net increase in cash on hand $ 49,000
• Step 2: Record information from the income statement on the

statement of cash flows

Preparing the Statement: Direct
Method, Operating Activities (Step 3)
• Step 3: Identify all cash flows associated with changes in the SFP
account balances and record the effect on the statement of cash flows
Income Adjust Cash flow
Cash flows from operating activities (a) Refer to Step 1
Cash received from customers 125,000 (36,000) (b) 89,000
Cash paid to suppliers (85,000) 5,000 (c) (80,000)
(b) Receivables increased by
Income taxes paid (6,000) (6,000) $36,000. This represents
34,000 3,000 revenue that was recognized
during the period for which no
Cash flows from investing activities - cash was received. Deduct
$36,000 to adjust to cash basis.
Cash flows from financing activities
Proceeds from issue of shares ($80,000 - $20,000) (d) 60,000 (c) Payables increased by $5,000.
Dividends paid (e) (14,000) Purchases were $5,000 higher
46,000 than cash payments to
suppliers. Deduct $5,000 from
Increase in cash ($3,000 + $0 + $46,000) (a) 49,000 cash paid to suppliers to adjust
to cash basis.
Method, Financing Activities (Step 3)
• Step 3: Identify all cash flows associated with changes in the SFP
account balances and record the effect on the statement of cash flows
Income Adjust Cash flow
Cash flows from operating activities (d) The increase in the common
Cash received from customers 125,000 (36,000) (b) 89,000 shares account was due to an
Cash paid to suppliers (85,000) 5,000 (c) (80,000) issuance of common shares.
Income taxes paid (6,000) (6,000)
This is a financing activity.
34,000 3,000
(e) Retained earnings increased
Cash flows from investing activities - by $20,000. Because net
income was $34,000; there
Cash flows from financing activities
Proceeds from issue of shares ($80,000 - $20,000) (d) 60,000
must have been a
Dividends paid (e) (14,000) deduction—which would be
46,000 dividends. The entire dividend
must have been paid in
Increase in cash ($3,000 + $0 + $46,000) (a) 49,000 cash—no dividends payable.

Completing the Statement: Direct
Method (Step 4)
• Step 4:
Complete the
statement of
cash flows.

Flows: Indirect Method, Facts (Part 1)
PiP 22.2 Facts: Eastern Window Products Limited (EWPL) has been operating for
several years. The company obtained a mortgage of $155,000 to help finance
the acquisition of some land and building during 2023.
Assume that EWPL is a

publicly accountable
enterprise, and company
management has chosen to
present interest paid as an
operating cash flow and
dividends paid as a financing
flow.

Flows: Indirect Method, Facts (Part 2)

Preparing the Statement: Indirect
Method (Steps 1 and 2)
• Step 1: Determine the change in cash
Cash on hand, End of 2023 $ 37,000
Less: Cash on hand, Beginning of 2023 59,000
Net decrease in cash on hand $ (22,000)

statement of cash flows (Under the indirect method, record the
$59,900 net income in the operating activities section of the
statement of cash flows.)
Cash flows from operating activities-Indirect method
Net income 59,900

Method, Operating Activities (Step 3)
• Step 3: Identify and analyze the changes in account balances
Net income 59,900 (c) Decrease means expenses exceeded
Adjustments: purchases—add back
Decrease in accounts receivable + 10,000 (a)
(e) and (g) Depreciation is a non-cash
Increase in inventory − (9,000) (b)
expense—add back
Decrease in prepaid expenses + 1,500 (c)
Depreciation expense—building + 6,000 (e) (h) Increase means purchases and
Depreciation expense—equipment + 9,000 (g) expenses exceeded cash payments—
add back
Increase in accounts payable + 10,900 (h)
Increase in income taxes payable + 3,000 (i) (i) Increase means income tax expense
Decrease in salaries and wages payable − (700) (j) exceeded income tax payments—add
+ 90,600 back
(j) Decrease means salary payments
(a) Decrease means cash receipts exceeded salary expense—reduce
exceeded revenues—add back income
(b) Increase means cash purchases
exceeded COGS—reduce income

Method, Investing Activities (Step 3)
Cash flows from investing activities

Indirect Method
Purchase of land and building (270,000) (d)
Purchase of equipment (5,000) (f)
(275,000)
(d) $270,000 Purchase of land and
building—investing outflow;
but $155,000 mortgage is a
financing inflow
(f) Increase in equipment—
investing outflow

Method, Financing Activities (Step 3)
Cash flows from financing activities (k) Mortgage was $155,000 but
Indirect Method balance on SFP is $152,400,
Mortgage payable 155,000 (d) means a payment of $2,600 was
made against the principal—
Repayment of mortgage payable (2,600) (f) financing outflow
Bond Issued 10,000 (l) (l) Increase in bonds payable
Shares issued 8,000 (m) means $10,000 bonds were
Dividends Paid (8,000) (n) issued—financing inflow
162,400 (m) Increase in common shares
means $8,000 shares issued—
financing inflow
(d) $270,000 Purchase of land and (n) Retained earnings increased by
building—investing outflow; $155,000 $51,900, of which $59,900 was
mortgage—financing inflow net income; $8,000 dividends
paid—financing outflow
Complete the Statement of Cash Flows:
Indirect Method(Step 4)
• Step 4: Note:
Complete the depreciation is
statement of added back
cash flows because it is a
non-cash item
a Many companies
provide only the
subtotal on the
statement of cash
flows and report the
details in a note to the
financial statements.

Complex Statement of Cash Flows:
Direct Method, Preamble
PiP 22.3
• Yoshi Corporation is a publicly accountable entity.
• The information (financial statements and additional information)
needed to prepare a statement of cash flows is extensive so this
analysis of the changes in accounts shows only partial information
• Reference PiP 22.3 in the text for the full analysis.
• An example of the indirect method is provided in Appendix 22A:
Using a Work Sheet to Prepare a Statement of Cash Flows

Method (Steps 1 and 2)
• Step 1: Determine the change in cash and cash equivalents
Closing cash and cash equivalents $ 19,000

Less: opening cash and cash equivalents 36,000
Net decrease in cash and cash equivalents $ (17,000)

statement of cash flows
Reference Panel B of solution to PIP 22.3

Complex Statement of Cash Flows—
Direct Method: Operating Analysis
The following items are

Operating Activities on the
(Slides 46 to 56)

Direct Method: Analysis (a)
FV-NI investments in ABC Company at the beginning of the year were
sold during the year for $32,300. Additional investments in XYZ Limited,
also accounted for at FV-NI, were acquired at a cost of $26,000 and were
still held at the end of the year.
FV-NI investments: $5,000 decrease (a)
Account Cash flow The net cash flow of $6,300 is
Sale of Investments (30,000) 30,000 an operating flow because FV-
Gain on disposal of investments 2,300 NI securities acquired for
trading purposes are treated
Purchase of investments 26,000 (26,000) similarly to inventory (IAS
Unrealized loss on shares (1,000) - 7.15).
(5,000) 6,300
$6,300 is included in cash provided by operations

Direct Method: Analysis (b and c)
2023 2022
Accounts Receivable 106,500 52,700 53,800 increase (b)
Allowance for expected credit losses (2,500) (1,700) 800 increase (c)
Net sales from the income statement: $923,200
Accounts receivable of $1,450 were written off
Allowance for expected credit losses is a non-cash account
$800 + 1450 = $2,250 not included in cash net income
An increase in accounts
Sales on account 923,200 receivable means sales
Increase in accounts receivable (53,800) exceeded cash receipts
Accounts written off (1,450)
867,950 Cash received from customers

Direct Method: Analysis (d, e, m) Con’t
2023 2022
Prepaid Expenses 16,500 17,000 (500) Decrease (e)
To determine payments to suppliers requires analyzing a number of
different accounts.
Begin with supplies and
Cost of goods sold 395,400 services related expenses
Selling and admin expenses 134,600 from the income statement
Other expenses 12,000 Deduct non-cash item, Bad
542,000 debt expense included in
Bad debt expense (2,250) Other expenses [See item (c)]
Prepaid Expense (500) Decrease in prepaid expenses
means expenses exceeded
Carry forward balance 539,250
payments; reduce expenses

Direct Method: Analysis (d, e, m)
2023 2022
Inventory 303,000 311,000 (8,000) Decrease (d)
Accounts Payable 130,000 131,000 (1,000) Decrease (m)
Decrease in inventory means Carry forward balance 539,250

cost of goods sold exceeded Decrease in inventory (8,000)
inventory purchases; reduce
expenses Decrease in accounts payable 1,000
Loss on disposal of equipment (1,500)
Decrease in accounts payable
means payments exceeded Carry forward balance 530,750
expenses; increase expenses
Equipment costing $28,000 was sold at a loss of $1,500. The loss was
included in other expenses and losses; reduce expenses/losses

Direct Method: Analysis (d, e, h, m)
2023 2022
Deferred development costs 190,000 30,000 160,000 Increase (h)
During the year, Yoshi incurred $200,000 of development costs that met
the criteria for deferral as an intangible asset. During the year, $40,000 of
this asset was amortized.

Amortization does not Amortization of development costs (40,000)
involve cash. Amount
should be subtracted Payment to suppliers 490,750
from expenses.
This is the amount that will be used for
“Payments to Suppliers” under Operating
Activities on the Statement of Cash Flows.

Direct Method: Analysis (f)
2023 2022
Investment in associate (Portel Corp) 18,500 15,000 3,500 Increase (f)
Yoshi accounts for its 22% interest in Portel Corp. using the equity
method. Portel Corp. paid a dividend during the year and Yoshi’s share of
Portel’s net income was $5,500.
Account Cash flow

Income from Portel Corp 5,500 -
$5,500 is a non-cash item;
Dividend received (2,000) 2,000 and is not included in cash
3,500 2,000 net income

Direct Method: Analysis (n)
2023 2022
Dividends payable, preferred shares 2,000 - 2,000 Increase (n)
Interest and dividends expense from income statement: $11,300
An increase in dividends payable means dividends declared

exceeded dividends paid; reduce expense by $2,000.
Interest and dividend expense 11,300
Dividends payable (2,000)

Direct Method: Analysis (q)
2023 2022
Bonds payable 97,800 97,500 300 Increase (q)
In the absence of other information, we assume the change in the

Bonds Payable account was due to amortization of the discount. This
is a non-cash item; reduce expense by $300.
This is the amount that
Carry forward balance 9,300 will be used for “Interest
Bonds payable (300) and Dividend Expense”
Cash Flow from dividends and interest 9,000 under Operating
Activities on the
Statement of Cash Flows.

Direct Method: Analysis (o)
2023 2022
Accrued liabilities 43,000 39,000 4,000 Increase (o)
From income statement: Salaries and Wages Expense, $200,000

Increase means expenses exceeded cash payments
Salary and Wages Expense 200,000

Accrued Liabilities (4,000)
Payments to employees 196,000

Direct Method: Analysis (p and s)
2023 2022
Income taxes payable 3,000 16,000 (13,000) Decrease (p)
Deferred tax liability 10,000 6,000 4,000 Increase (s)
Income tax expense from income statement:

Current, $49,500; Deferred, $3,000; Total = $52,500
A decrease in income tax payable

Account Cash flow means payments exceeded
Income tax: Current 49,500 62,500 expense. Increase expense
account by $13,000.
Deferred tax expense 3,000 -
Deferred tax expense--OCI 1,000 - Deferred tax and tax on
53,500 62,500 unrealized gain are non-cash
items.

Complex Statement of Cash Flows
(Direct Method): Cash Provided by
(Used In) Operations
Received from customers $ 867,950
Received from Portel investment 2,000
Received from FV-NI Investments 6,300
Payments to suppliers (490,750)
Payments to employees (196,000)
Interest and dividend payments (9,000)
Income taxes paid (62,500)
Cash provided by operations $ 118,000

Direct Method: Investing Analysis

Investing Activities on the
(Slides 58 to 61)

(Direct Method): Analysis (h)
2023 2022
Deferred development costs 190,000 30,000 160,000 Increase (h)
During the year, Yoshi incurred $200,000 of development costs that met
the criteria for deferral as an intangible asset. During the year $40,000 of
this asset was amortized.
The $200,000 is an investing cash flow. Amortization would have been
included with the selling and administration expenses. No cash would
have been involved with this entry. Account Cash flow
Development costs 200,000 200,000
Amortization (40,000) -
160,000 200,000

(Direct Method): Analysis (l)
2023 2022
Land 131,500 82,000 49,500 Increase (l)
Land in the amount of $54,000 was purchased by issuing term preferred

shares. The income statement shows a gain on the disposal of land:
$10,500.
Land purchased by issuing shares does not involve cash.
Account Cash flow If land was purchased

Purchase of land 54,000 - worth $54,000, then
Disposal of land (4,500) 4,500 some land must have
Gain on disposal of land - 10,500 been sold to bring the
49,500 15,000 balance to $49,500.

(Direct Method) Analysis (j)
2023 2022
Equipment 187,000 142,000 45,000 Increase (j)
Accumulated depreciation--equipment (29,000) (31,000) 2,000 Decrease (j)
Equipment costing $28,000 was sold at a loss of $1,500 and the

accumulated depreciation was $13,500 ; book value was $14,500
If the equipment was sold at a loss, the proceeds must have been
$14,500 − $1,500 = $13,000
Account Cash flow
Cost of equipment sold (28,000) -
Equipment purchased 73,000 (73,000)
Proceeds on sale of equipment - 13,000
45,000 (60,000)

(Direct Method): Cash Flows Provided
by (Used in) Investing Activities
Investment in development costs $ (200,000)
Purchase of equipment (73,000)
Proceeds on sale of land 15,000
Proceeds on sale of equipment 13,000
$ (245,000)

Direct Method: Financing Analysis

Financing Activities on the
(Slides 63 to 66)

(Direct Method) Analysis (r)
2023 2022
Term Preferred Shares 60,000 - 60,000 Increase (r)
Land in the amount of $54,000 was purchased by issuing term preferred

shares (classified as a financial liability).
Assuming term preferred shares were issued in the amount of $54,000
for the land, the remaining $6,000 can be considered cash outflow.
Account Cash flow
Term preferred shares 54,000 -
Other equity transaction 6,000 6,000
60,000 6,000

(Direct Method) Analysis (t)
2023 2022
Common Shares 225,400 88,000 137,400 Increase (t)
Specific information can be found on the Statement of Changes in Equity:
• 2% stock dividend issued, $15,000 transferred from Retained Earnings
• Issuance of shares, $144,000
• Shares purchased and cancelled, $21,600; plus $12,400 from Retained
Earnings
Account Cash flow
2% stock dividend 15,000 - Stock dividends
Proceeds on share issuance 144,000 144,000 do not involve
Shares purchased and cancelled (21,600) (21,600) cash
Shares purchased and cancelled (from R/E) - (12,400)
137,400 110,000

(Direct Method) Analysis (u)
2023 2022
Retained Earnings 602,800 518,500 84,300 Increase (u)
The $6,000 decrease due to dividends paid on the common shares could
be either a financing or an operating outflow. This depends on the
company’s policy and how it has reported dividends in the past.
Account Cash flow
2% stock dividend (15,000) - These items
Shares purchased and cancelled (12,400) - are included in
Net Income 117,700 - other areas
Cash dividends declared and paid (6,000) (6,000)
84,300 (6,000)

(Direct Method): Cash Flows Provided
by (Used in) Financing Activities
Proceeds on issue of common shares $ 144,000
Proceeds on issue of term preferred shares 6,000
Repurchase and cancellation of common shares (34,000)
Dividends paid on common shares (6,000)
$ 110,000

Disclosure Requirements
• IFRS and ASPE require similar disclosures on certain items,
including
o Significant non-cash investing and financing transactions
o Reconciliation of cash and cash equivalents to balance sheet
accounts
o Restricted cash and cash equivalents
• IFRS has stricter requirements relating to disclosure of
some items
o Income taxes
o Interest and dividends (paid and received)
o Restrictions on cash and cash equivalents

Presentation Requirements
• Both ASPE and IFRS describe the indirect method as
reconciling the net income (or, under IFRS, the profit and
loss) to cash flow from operating activities
o Some IFRS companies start with income before tax, or
income before interest and tax—shows the cash paid out for
interest and taxes separately
• Both standards require reporting of gross cash inflows and
outflows from investing and financing activities

Interpreting the Statement of Cash
Flows
• Where did the cash come from? How was it used?
• First step: look at the subtotals for the three classifications
and the overall change in cash—provides a high-level
summary
• Then analyze each section—watching for accounting
policies that might affect how the cash flow is reported
• Familiarity with the company’s strategic direction is useful
• A thorough analysis of cash flows includes sensitivity
analyses of the effect of changes in assumptions

Flows: Operating Activities
• Cash flow from operating activities shows the extent
receipts from customers can cover payments to suppliers
and employees
o The direct method provides more details about the sources
and uses of cash
o The indirect method explains the difference between
accrual-based net income and cash-based income
• Objective is to assess if cash flow levels are sustainable
and likely to be repeated in the future, or whether they
result from payment deferrals or one-time events

Flows: Investing Activities
• Cash flow from investing activities shows if the company is
just maintaining its existing capacity or if new investment
increases its potential for higher operating cash flows in
the future
o What types of assets have been purchased?
o How do new amounts invested in PPE compare to existing?
o Are there investments in new technologies and
development expenditures?
o Are existing assets being disposed of, reducing the
potential for operating flows in the future?

Flows: Financing Activities
• Cash flow from financing activities shows if any changes
took place to the firm’s capital structure and whether the
entity increased or reduced the claims of creditors to cash
in the future
• The methods of financing are usually related to the types
of assets acquired
• The objective is to determine if there will be increased
demand for future cash for interest claims and debt
repayment

Free Cash Flow
• Free cash flow (FCF) is a non-GAAP measure used by many
companies to indicate discretionary cash available for new
investments, paying dividends, retiring debt, repurchasing
shares, or improving liquidity
• FCF is typically calculated as: Net operating cash flows
minus capital expenditures to sustain current level
operations
• Companies with significant free cash flow have a strong
degree of financial flexibility
• They can take advantage of new opportunities or cope
well during poor economic times without jeopardizing
current operations
A Comparison of IFRS and ASPE
• There are few significant differences between IFRS and
ASPE standards for the statement of cash flows, such as
o The definition of cash equivalents
o The presentation and disclosure requirements for interest
and dividends, restrictions on cash and cash equivalents,
and income tax
o Disclosure requirements (Covered in Illustration 22.6 in the
chapter)
• As in many other situations, IFRS requires more detailed
disclosures

Looking Ahead and Recent Changes
• Exposure draft General Presentation and Disclosures
proposed amendments to IAS 7
Use operating profit or loss instead of net income as the
o
starting point with the indirect method
o Report interest and dividends as financing activities, and
interest and dividends received as investing activities
• Board began redeliberating proposals from the Exposure Draft
in 2021

Copyright
Copyright © 2022 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work beyond that permitted by
Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for
further information should be addressed to the Permissions Department, John Wiley &
Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only
and not for distribution or resale. The author and the publisher assume no responsibility
for errors, omissions, or damages caused by the use of these programs or from the use of
the information contained herein.

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Chapter 22

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Intermediate Accounting

13th Canadian Edition, Volume 2

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 3

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• Once a choice is made, it is applied consistently

Statement of Cash Flows—Indirect Method

example of a Cash flows from operating activities

cash flows Net cash provided by (used in) operating activities

prepared using Net cash provided by (used in) investing activities

(Illustration 22.3) Cash at beginning of period XXX

IFRS and ASPE encourage use of the direct method; most

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 17

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• Step 2: Record information from the income statement on the

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LO 5 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 28

Assume that EWPL is a

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• Step 2: Record information from the income statement on the

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 31

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 32

Cash flows from investing activities

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 33

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 35

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 36

Closing cash and cash equivalents $ 19,000

• Step 2: Record information from the income statement on the

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 37

The following items are

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 38

$6,300 is included in cash provided by operations

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 39

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 40

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 41

Decrease in inventory means Carry forward balance 539,250

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 42

Carry forward balance 530,750

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 43

Account Cash flow

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 44

An increase in dividends payable means dividends declared

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 45

In the absence of other information, we assume the change in the

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 46

From income statement: Salaries and Wages Expense, $200,000

Salary and Wages Expense 200,000

LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 47

Income tax expense from income statement: