Chapter 11

The Statement of
Cash Flows
Identify the ________ of the statement of
cash flows

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Timing of the Financial Statements
12-31-10 For the year ended 12-31-11 12-31-11
(a point in time) (a period of time) (a point in time)

Income
Balance
Statement
Sheet

Balance Statement of Balance

Sheet Changes in Sheet
Accrual Equity Statement
of Cash
Flows

Focus on cash
_______________________

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Purposes of Cash Flow Statements
• ________future cash flows
▫ Past payments and receipts predict future
payments and receipts
• ________management decisions
▫ Running a business requires cash, so information
on operations, investments, and financing
indicates management performance
• Show _____________________________
▫ Income is measured under __________, so it
may not match with ____. Important to
understand the cash position
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Distinguish among operating, investing and
financing cash flows

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Cash Flow Categories

_______ _______ _______

• Create • Relate to • Obtain
revenue, non- cash from
expenses, current and pay
gains and assets cash to
losses • PPE investors
• Investments
and
creditors
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 Cash Flow Categories
Increases Cash ______________________ Decreases Cash

Payment to suppliers
Collections from customers
Payments to employees
Receipts of interests & dividends Operating
Payments of interest & income tax
Sale of short-term investments Activities
Purchase of short-term investments
Other operating receipts
Other operating payments

Sale of PPE Acquisition of PPE

Investing
Sale of long-term investments Purchase of long-term investments
Activities
Collections of loans from others Making loans to others

Payment of dividend
Issuance of shares
Financing Repurchase of shares
Sale of treasury shares
Activities Purchase of treasury shares
Proceeds from loans & borrowings
Payment of debt principal
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 Exercise 11-16A
Indicate whether each of the following items relates to operating (O), investing (I),
financing (F), noncash investing and financing (NIF), or a transaction that is not
reported on the statement of cash flows (N). Indicate whether each item
increases (+) or decreases (–) cash. The indirect method is used for operating
activities.
A Sale of long-term investment
B Issuance of long-term note payable to borrow cash
C Increase in prepaid expenses
D Payment of cash dividend
E Loss on sale of equipment (remove from O)
F Decrease in merchandise inventory
G Acquisition of equipment by issuance of a note payable
H Increase in accounts payable
I Amortization of intangible assets
J Net income
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Exercise 11-16A
K Payment of long-term debt
L Accrual of salary expense
M Cash sale of land
N Purchase of long-term investment
O Acquisition of building by cash payment
P Purchase of treasury shares
Q Issuance of share capital for cash
R Decrease in accrued liabilities
S Depreciation of equipment (add back non-cash exp)

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 Relationship to Balance Sheet

________ ________
cash flows Current assets Current liabilities cash flows

Long-term liabilities
________
________ Long-term assets cash flows
cash flows
Owners’ equity

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Formats for Cash Flow Statement
related to _____________________
• Reconciles from __ Most
______ to cash
_____ provided by
companies use
the Indirect
operating activities Method

• Reports all cash The IASB

suggests the
receipts and cash
_____ payments from
Direct Method
because it
operating activities better predicts
future cash flow

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Prepare cash flows from operating activities by
the __________

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Operating Activities Under the indirect method,
Net Income operating cash flows starts
with ________! We then
adjust for _________items

Depreciation, Depletion & Amortization

Gains on sales of Losses on sales of

long-term assets long-term assets

Increases Decreases Decreases Increases

in current in current in current in current
assets liabilities assets liabilities
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Indirect Cash Flows Steps
• Step 1
▫ Start with ________(or pretax income) from the income
statement.
• Step 2
▫ From the income statement, add back ________,
depletion, and amortization expense, and remove any gains
(or add back losses) on the sale of long-term assets.
• Step 3
▫ Examine the balance sheet, identify changes in “______
______” (current assets and current liabilities), except for
cash and cash equivalents.
• Step 4
▫ Deduct increases in current assets other than cash and add
decreases in current assets other than cash.
• Step 5
▫ Deduct decreases in current liabilities and add increases in
current liabilities.
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Cash Flow Template: Operating
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
+ Depreciation/depletion/amortization expense
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
= Net cash provided by operating activities

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Understanding Reconciliation of
Net Income to CFO
• Depreciation, Depletion, and Amortization
Expenses
▫ Depreciation ________________________
______. Add-back cancels the earlier deduction
• Gains and Losses on Sale of Long-term Assets
▫ These are included in ___________, not
operating

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Prepare cash flows from investing activities

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Cash Flow Template: Investing

Cash Flows from Investing Activities

+ Sales of long-term assets
- Purchases of long-term assets
+ Collections of notes receivable
- Loans to others
= Net cash provided by (used for) investing activities

Long-term assets include PPE, Investments, etc.

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Computing Purchases and Sales of PPE

PPE, Net
Beginning + Acquisitions - Depreciation - Book value of = Ending
balance assets sold Balance

Sale = Book value of + Gain - Loss

proceeds assets sold

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 PPE, Net
Beginning balance Depreciation

Acquisitions Book value of assets sold

Ending balance

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Computing Purchases and Sales of
Investments
Investments
Beginning + Purchases - Book value of = Ending
balance investments sold Balance

Investments
Beginning balance Book value of investments sold
Purchases

Ending balance

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Loans and Collections

Notes Receivable
Beginning + New Loans - Collections = Ending
balance made Balance

Notes Receivable
Beginning balance Collections
New loans made

Ending balance

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Prepare cash flows from financing activities

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Cash Flow Template: Financing
Financing Cash Flows mainly come from _________________________

Cash Flows from Financing Activities

+ Issuance of shares
- Purchase of treasury shares
+ Borrowing
- Payment of notes and bonds payable
- *Payment of dividends
Net cash provided by (used in) financing activities

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Computing Issuance and Payments
of Long-Term Debt
Long-Term Debt (Notes payable, Bonds payable)
Beginning + Issuance of - Payment of debt = Ending
balance new debt Balance

Long-Term Debt
Beginning balance
Payments of debt
Issuance of new debt
(borrowing)
Ending balance

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Computing Issuance of Shares and
Purchases of Treasury Shares
Share Capital
Beginning balance + Issuance of new = Ending Balance
shares
Treasury Share (____________________)
Beginning balance + Purchase of treasury shares = Ending Balance

Treasury Share Share Capital

Beginning balance Beginning balance
Purchase of
Issuance of new shares
treasury share
Ending balance Ending balance
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Computing Dividends

Retained Earnings
Beginning + Net income - Dividends = Ending
balance declared Balance

Retained Earnings
Dividends declared Beginning balance
Net income

Ending balance

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Noncash Investing and Financing
Activities
Noncash investing and financing activities:
Acquisition of building by issuing shares $$$$
Acquisition of land by issuing note payable $$$$
Payment of long-term debt by issuing shares $$$$
Total noncash investing and financing activities $$$$$

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 Exercise 11-20A
• Prepare a cash flow statement using the indirect
method with the following information:
• Net income=$68,900 December 31,
• Dep Exp = $26,000 2010 2009
• Acq $212,000 PPE Current assets:
▫ 160,000 cash Cash $30,000 $10,800
▫ 52,000 note Accounts
receivable 42,000 59,000
• Sale of Land $27,000
Inventory 30,000 91,000
• Issue Shares $80,000
Prepaid expenses 9,400 8,700
• Pay debt $17,000
Current liabilities:
• Pay dividends $13,000
Accounts
payable $38,000 $27,000
Accrued
liabilities
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Exercise 11-20A
December 31,
2010 2009
Current assets: Change
Cash $30,000 $10,800
Accounts receivable 42,000 59,000
Inventory 30,000 91,000
Prepaid expenses 9,400 8,700
Current liabilities:
Accounts payable $38,000 $27,000
Accrued liabilities 18,000 99,000

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Exercise 11-20A
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
+ Depreciation expense
+ Decrease in accounts receivable
+ Decrease in inventory
- Increase in prepaid expenses
+ Increase in accounts payable
- Decrease in accrued liabilities
= Net cash provided by operating activities

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Exercise 11-20A
Cash Flows from Investing Activities
+ Sales of land
- Purchases of PPE
= Net cash used for investing activities
Cash Flows from Financing Activities
+ Issuance of share capital
- Payment of note payable
- Payment of dividends
= Net cash provided by financing activities

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 Exercise 11-20A (combine O, I, and F)
Net cash provided by operating activities
Cash Flows from Investing Activities
+ Sales of land
- Purchases of PPE
= Net cash used for investing activities
Cash Flows from Financing Activities
+ Issuance of share capital
- Payment of note payable
- Payment of dividends
= Net cash provided by financing activities
Net increase in cash
Cash balance, December 31, 2009
Cash balance, December 31, 2010
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Prepare cash flows from operating activities
using the direct method

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The Direct Method
• Preferred by the International Accounting
Standards Board
▫ Provides ______________about the sources
and uses of cash
• Used by very few companies
▫ Takes more computations

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Operating Cash Flows: Direct
Method
• ________:
▫ Collections from customers
▫ Interest and dividends
• ________:
▫ To suppliers
▫ To employees
▫ For interest and income taxes

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Computing Operating Cash Flows

Income Statement
Receipts Account Balance Sheet Account
From Customers Sales revenue + Decrease in Accounts Receivable
- Increase in Accounts Receivable
Of interest Interest revenue + Decrease in Interest Receivable
- Increase in Interest Receivable

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Computing Operating Cash Flows
Income
Statement
Payments Account Balance Sheet Account
To suppliers Cost of + Increase in Inventory + Decrease in Accounts
goods sold Payable
- Decrease in Inventory - Increase in Accounts
Payable
Operating + Increase in Prepaids + Decrease in Accrued
expenses Liabilities
- Decrease in Prepaids - Increase in Accrued
Liabilities
To Salary + Decrease in Salary Payable
employees expense - Increase in Salary Payable

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Computing Operating Cash Flows
Income
Statement
Payments Account Balance Sheet Account
For interest Interest + Decrease in Interest Payable
expense - Increase in Interest Payable
For income Income tax + Decrease in Income Tax Payable
taxes expense - Increase in Income Tax Payable

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Analyze cash flows

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Free Cash Flow

Free Cash Flow

Net Cash Provided by Operating Activities

Cash Payments Earmarked for Investments

in Property, Plant and Equipment (PPE)

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 Cash realization ratio
Cash realization
rate

Net Cash Provided by Operating Activities

÷
Net Income

How much of net profits actually generates cash?

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