7/e

The Statement
of Cash Flows
Statements and
12 the Annual Report

PowerPoint Author: Catherine Lumbattis

COPYRIGHT © 2011 South-Western/Cengage Learning

 Purpose of the Statement
of Cash Flows
 Explains changes in cash over a period of time
 Summarizes cash inflows and outflows from:

Operating Financing
Activities Investing Activities
Activities

LO1
 Cash Equivalents
 Readily convertible
Examples: to cash
 Commercial paper  Little risk of price
 U.S. Treasury bills change
 Certain money market funds
 Original maturity to
investor of three
months or less

LO2
Statement of Cash Flows Format
inflows Cash outflows

Classified by:
Operating activities
Investing activities
Financing activities
=
+Beginning
Cash and = Ending
Increase or decrease in Cash and
Cash cash and cash
Equivalents Cash
equivalents Equivalents
LO3
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $ xxx
Cash flows from investing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $xxx
from balance sheets
 Operating Activities
Collection of Payment to suppliers
customer accounts for inventory
Cash
transactions
concerned with
acquiring and
selling products
and services
Payment of wages
Payment of taxes
 Investing Activities
Cash transactions
concerned with
acquiring and Capital
disposing of long- expenditures
term assets

Sale of property, plant Purchase/sale of

and equipment another company
 Financing Activities
Issuance/repayment
Issuance/repurchase
Cash of bank note
of stock
transactions
concerned with
the raising and
repayment of
funds in the
form of debt
Issuance/retirement and equity
of bonds Payment of dividends
 Categorizing Cash Flow Activities
Operating Activities Current
assets
and
current
Investing Activities liabilities

Long-term
liabilities
Long-term Financing or
assets Activities stockholders’
equity
 Noncash Investing and
Financing Activities
Disclose important financing and investing
activities which do not require cash

Exchange stock for assets

Buy assets through debt financing

from supplier
 Methods to Report Cash from
Operating Activities
 Direct Method The amount of
• Reports major classes of cash provided by
gross cash receipts and operating
cash payments activities is the
same under both
Indirect Method methods
• Adjusts net income to
remove the effect of all
accruals and deferrals

LO4
 Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $xxx
Cash flows from investing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:Only section of
Inflows statement that differs $ xxx
Outflows in form between direct (xxx)
Net cash provided (used) by financing activities xxx
and indirect method
Net increase (decrease) in cash and cash equivalents $xxx
(net cash
Cash and cash equivalents at beginning flow total is
of year xxx
Cash and cash equivalents at end of yearthe same) $xxx
 Preparing the Statement Cash
Flows: Direct Method
 Step 1: Set up 3 schedules with the following headings:
Cash Flows from Cash Flows from Cash Flows from
Operating Activities Investing Activities Financing Activities

 Step 2: Determine the cash flows from operating activities

 Step 3: Determine the cash flows from investing activities
 Step 4: Determine the cash flows from financing activities

LO5
 Direct Method
Operating Activities
Consider each of the items on the Income
Statement and any related current assets or
liabilities from the Balance Sheet:
Accounts Receivable, January 1 $ 57,000
+ Sales revenue 670,000
-Cash
- Cash collections
collections ( ?????)
?????
= Accounts Receivable, Dec 31 $ 63,000
From Balance
Sheet
 Direct Method
Operating Activities
Accounts Receivable, Jan. 1 $ 57,000
+ Sales on account 670,000
- Accounts Receivable, Dec 31 ( 63,000)
Cash collections $664,000
 Direct Method
Operating Activities

Inventory, Jan. 1 $ 92,000

= Cost of goods sold $ 390,000
+ Purchases on account ????
- Inventory, Dec. 31 84,000

From Balance
Sheet
 Direct Method
Operating Activities

Inventory, Jan. 1 $ 92,000

- Cost of Goods Sold (390,000)
- Inventory, Dec 31 (84,000)
= Purchases on account $ 382,000
 Direct Method
Operating Activities
Accounts Payable, Jan 1 $ 31,000
+ Purchases 382,000
- Accounts Payable, Dec 31 38,000

= Cash payments for Purchases $ 375,000

 Direct Method
Operating Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net
Equity Income
Accumulated Depreciation
Depreciation Expense
(40,000) (40,000) (40,000) (40,000)

There is no effect on cash flow from depreciation.

 Direct Method
Operating Activities
Prepaid Insurance, Jan 1 $18,000
+ Cash payments ?????
-Insurance Expense (12,000)
= Prepaid Insurance, Dec 31 $12,000

From Balance
Sheet
 Direct Method
Operating Activities
Prepaid Insurance, Jan 1 $18,000
- Insurance Expense 12,000
- Prepaid Insurance, Dec 31 12,000
= Cash payments for Insurance $ 6,000
 Schedule of Cash Flows
from Operating Activities
Cash Flows from Operating Activities
Cash receipts from: Cash payments for:
Sales on account 664,000 375,000 Inventory purchases
Interest 15,000 62,000 Salaries and wages
6,000 Insurance
15,000 Interest
47,000 Taxes

Net Cash Inflows from Operating Activities

$174,000
 Preparing the Statement of
Cash Flows: Direct Method
 Step 3: Determine the cash flows from
investing activities
 Direct Method
Investing Activities
LT Investments , Jan 1 $ 90,000
+ LT Investments purchased for cash ?????
- LT Investments sold ( 0)
= LT Investments, Dec 31 $120,000

From Balance
Sheet
 Direct Method
Investing Activities
LT Investment, Jan 1 $ 90,000
- LT Investments sold 0
- LT Investments, Dec 31 120,000
= Cash payments for LT Investments $ 30,000
 Direct Method
Investing Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net
Equity Income
Land = Notes Payable
50,000 50,000

No cash was involved in this transaction so it should be

reported in a separate schedule instead of directly on the
statement of cash flows.
 Direct Method
Investing Activities
Property and Equipment , Jan 1 $280,000
+ Property and Equipment purchased 75,000
- Property and Equipment sold ?????

=Property and Equipment, Dec 31 $320,000

From Balance
Sheet
 Direct Method
Investing Activities
Property and Equipment, Jan 1 $280,000
+Property and Equipment purchased 75,000
- Property and Equipment, Dec 31 (320,000)
= Property and Equipment Sold $ 35,000
 Direct Method
Investing Activities
Accumulated Depreciation , Jan 1 $ 75,000
+ Depreciation Expense 40,000
- Accumulated Depreciation on assets sold ?????

= Accumulated Depreciation, Dec 31 $100,000

From Balance
Sheet
 Direct Method
Investing Activities
Accumulated Depreciation, Jan 1 $ 75,000
+ Depreciation Expense 40,000
- Accumulated Depreciation, Dec 31 (100,000)
= Accumulated Depreciation on
Equipment Sold $ 15,000
 Schedule of Cash Flows
from Investing Activities
Cash Flows from Investing Activities
Cash receipts from: Cash payments for:
Sale of machine 25,000 30,000 Purchase of
investments
75,000 Purchase of
property and
equipment

Net Cash Outflows from Investing Activities

$80,000
Preparing the Statement of Cash
Flows: Direct Method
 Step 4: Determine the cash flows
from financing activities
 Direct Method – Financing
Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net
Equity Income
Land = Notes Payable
50,000 50,000

No cash was involved in this transaction so it

should be reported in a separate schedule instead
of directly on the statement of cash flows.
 Direct Method
Financing Activities

Bonds Payable , Jan 1 $260,000

- Bonds Payable Retired ?????

= Bonds Payable, Dec 31 $200,000

From Balance
Sheet
 Direct Method
Financing Activities
Bonds Payable, Jan 1 $ 200,000
- Bonds Payable, Dec 31 (260,000)
= Bonds Payable Retired $ 60,000
 Direct Method
Financing Activities
Capital Stock , Jan 1 $ 75,000

+ Capital Stock Sold ?????

= Capital Stock , Dec 31 $100,000

From Balance
Sheet
 Direct Method
Financing Activities
Capital Stock, Jan 1 $ 75,000
- Capital Stock, Dec 31 (100,000)
= Capital Stock Sold $ 25,000
 Direct Method
Financing Activities
Retained Earnings, Jan 1 $193,000
+ Net income 120,000
- Cash Dividends ?????
=Retained Earnings, Dec 31 $246,000

From Balance
Sheet
 Direct Method
Financing Activities
Retained Earnings, Jan 1 $193,000
+ Net income 120,000
- Retained Earnings, Dec 31 (246,000)
= Cash Dividends $ 67,000
 Schedule of Cash Flows
from Financing Activities
Cash Flows from Financing Activities
Cash receipts from: Cash payments for:
Issuance of stock 25,000 63,000 Retirement of bonds
67,000 Payment of cash
dividends

Net Cash Outflows from Financing Activities

$105,000
$105,000
 Indirect Method
Operating Activities
Income Statement

Conversion
of accrual
to cash
basis

Cash Flows from Operating Activities

LO6
Indirect Method – Operating
Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)

Accounts Receivable

Bal. Jan. 1 57,000

+ Net increase 6,000 Decrease $6,000

Bal. Dec. 31 63,000

 Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Inventory

Bal. Jan. 1 92,000

- Net decrease 8,000
Bal. Dec. 31 84,000 Increase $8,000
Indirect Method – Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Accounts Payable
Bal. Jan. 1 $ 31,000
+Net increase 7,000 Increase $7,000
Bal. Dec. 31 $ 38,000
 Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Salaries and Wages Payable
Bal. Jan. 1 $ 9,000
- Net decrease 2,000
Increase $2,000
Bal. Dec. 31 $ 7,000
 Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000

Prepaid Insurance
Bal. Jan. 1 $18,000
- Net decrease 6,000 Decrease $6,000
Bal. Dec. 31 $12,000
 Indirect Method –
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Income Taxes Payable
Bal. Jan. 1 $5,000
Increase $3,000 +Net increase 3,000
Bal. Dec. 31 $8,000
 Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Gain on sale of machine (5,000)
Depreciation expense 40,000
Loss on retirement of bonds 3,000
Report entire
Add back
Gain is not part of outflow as a
noncash expense
operating activities financing activity
 Cash Flow Adequacy
 Measures company’s ability to meet
principal and interest obligations
 Creditors concerned with cash available to
repay debts after company has replaced
and updated its existing base of long-term
assets
Cash Flow from Operating Activities – Capital Expenditures
Average Amount of Debt Maturing over Next Five Years

LO7
 Appendix
Accounting Tools: A Work-Sheet Approach to the
Statement of Cash Flows
 Indirect Method:
Using a Work Sheet

Enter account
balances

LO8
 Indirect Method:
Using a Work Sheet
 Indirect Method:
Using a Work Sheet

Enter net
income
 Indirect Method:
Using a Work Sheet

Enter noncash
revenues or
expenses
 Indirect Method:
Using a Work Sheet

Extend current
assets and
current
liabilities
 Indirect Method:
Using a Work Sheet

Total
columns
 Indirect Method:
Using a Work Sheet

Determine net
cash inflow
(outflow)
End of Chapter 12