Cashflow Statement

Advanced Financial
Management
Statement of Cash Flows
Statement of Cash Flows 1

Objectives of this Chapter
I. Identify business activities which can

generate or use cash and differentiate
between income flows and cash flows
from operating activities.
II. Introduce the content and the

usefulness of the statement of cash
flows.
Objectives of this Chapter (contd.)
III. Understand cash flows of operating,
investing and financing activities.
IV. Learn how to prepare the statement of

cash flows.
V. Learn the two alternatives (direct and

indirect methods) in preparing net cash
flows from operating activities.
I. Activities which can either generate cash
or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.

A. Operating Activities (i.e., sales
revenue, expenses)

All these activities are reported in the I/S
(income statement). However, I/S only
provides the net income amount which
very often is not the change in cash.

Therefore, we need to adjust from net
income flows to cash flows in order to
report the net cash provided by (or used
in) operating activities.

A. Operating Activities (contd.)

There are two approaches to reconcile
net income to net cash provided by (or
used in) operating activities:
1. Indirect Method
==> Lump-Sum Adjustment
2. Direct Method
==> Individual Account Adjustment

1. Indirect Method

Adjust net income (the lump sum
amount of all revenues and expenses)
for all differences between income
flows and cash flows.

2. Direct Method

Adjust each revenue account to cash
collection and adjust each expense
account to cash payment. Subtract
total cash payments from total cash
collections to derive net cash flows of
the operation activities.

Activities which can either generate cash

B. Investing Activities

In addition to generate cash from or use cash
in the operating activities, companies can also
generate cash from (or use cash in) investing
activities.

i.e., Acquiring (cash outflow) or selling (cash
inflow):
 PPE
 Investments (current or noncurrent)
 N/R (current or noncurrent)

Activities which can either generate cash

C. Financing Activities

Companies can also generate cash or
use cash through financing activities:

Financing Activities
1. Cash Inflows
 Issue B/P.
 Issue common stock.
 Issue N/P.

2. Cash Outflows
 Retirement of B/P.
 Retirement of common stock.
 Retirement of N/P.
 Payments of dividends.

II. The Content and the Usefulness of
the Statement of Cash Flows

In order to show cash flows of a
company, cash flows of all three
activities should be reported. In doing
so, investors can also obtain all the
information of operating, investing, and
financing activities of a company.
Moreover, the following questions can
also be answered:
The Content and the Usefulness of the
Statement of Cash Flows (contd.)
1. What is the relationship between net
income and cash provided by
operations?
2. Why did cash decreased when net
income increased?
3. What expansion (investment) activities
took place and how were they financed?

The Content and the Usefulness of the
4. How much is the cash provided by
operating activities?
5. What happened to the proceeds
received from issuance of bonds or
common stock?
All of these cannot be answered from
either the income statement or the
balance sheet statement.
APB Opinion No. 19

In 1971 APB Opinion No. 19, “Reporting
Changes in Financial Position”, requires
a statement of changes in financial
position be presented in a company’s
set of financial statements.

APB Opinion No. 19 (contd.)

APB No. 19 allowed flexibility in
defining the financial position(i.e.,
Working capital or cash).

Disadvantage: lose the comparability
among firms when firms adopted
different financial position in preparing
the statement.

SFAS No. 95

To improve the comparability, SFAS
No. 95, “Statement of Cash Flows,”
requires companies present the
statement of cash flows using a specific
format.

SFAS No. 95 (contd.)

Following SFAS No. 95, the statement
of cash flows should have three
sections:
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities.

III. Understand Cash Flows from Operating,
Investing, and Financing Activities
Cash flows from operating activities:

Cash Inflows:
1. Collections from customers including
cash received from sales (or services)
and collections of A/R.
2. Cash receipts of interests or dividends.
3. Collections of other operating receipts
(i.e., unearned revenue, rent revenue).
Cash Flows from
Operating Activities (contd.)

Cash Outflows:
1. Payments to suppliers.
2. Payments to employees.
3. Payments for interest expense.
4. Payments for income taxes.
5. Payments for other expenses(i.e.,
Prepaid expenses; rent expenses).

Cash Flows from
Investing Activities

Transactions involving acquiring
(Investing (Cash outflows)) and selling
(Disinvesting (Cash inflows)) :
a. Property, Plant and Equipment.
b. Investments (current and non-current).
c. Notes Receivable (current and non-
current).
Notes Receivable
 Notes Receivable (current and non-
current), including:
 Lending money (N/R , cash outflow);
 Collecting of loan (N/R , cash inflow);
 Selling of N/R (N/R, discounting N/R,
cash inflow)

Cash Flows from
 Obtaining resources from owners and
creditors (cash inflows) and repaying the
amount borrowed (cash outflows).
 Cash inflows:
 Cash received from issuance of common
stock.
 Cash received from issuance of bonds.
 Cash received from issuance of N/P
(short-term or long term).
Cash Flows from
Financing Activities (contd.)

Cash Outflows:
 Retirement of bonds.
 Retirement of stock.
 Payments of N/P.
 Payments of dividends.

IV. Procedures for Preparation of the
1. Operating Cash Flows (indirect
method).
2. Investing Cash Flows.
3. Financing Cash Flows.

1. Operating Cash Flows
(Indirect Method; Reconciliation Method)
Net Income
 Adjustments
+ Any increase in current Liabilities (except for
N/P)
+ Any decrease in current assets (except for
cash and N/R)
- Any decrease in current liabilities (except for
N/P)
- Any increase in current assets (except for cash
and N/R)
2. Investing Cash Flows
Inflows: decrease in noncurrent assets
(i.e., long-term investments,
P.P.E.) and certain current
assets (i.e., trading securities,
N/R).
Outflows: increases in noncurrent assets

and certain current assets

3. Financing Cash Flows
Inflows: increases in noncurrent liabilities
(i.e., B/P, N/P), stockholders’
equity and certain current liability
(i.e., N/P).
Outflows: decreases in noncurrent

liabilities, stockholders’ equity,
certain current liability and
dividend payment.
Adjustments to Convert Net Income to Net
Cash Flow from Operating Activities
Net Income
+ Depreciation, depletion and amortization

expense, B/D expense
+ Amortization of discount on B/P
Adjustments
+ Amortization of premium on investment
in bonds
+ Increase in deferred income tax liability
+ Loss on disposal of assets or liabilities
+ Investment loss under the equity method
Adjustments to Convert Net Income to Net Cash
Flow from Operating Activities (contd.)
+ Increases in current liabilities other than N/P
(i.e., A/P, salaries payable, interest payable, I/T
payable, deferred I/T, and any other current
liabilities related to operations)
+ Decreases in current assets other than cash
and N/R (i.e., A/R, interest receivable,
inventory, prepaids, and any other current
assets related to operations)

Adjustments to Convert Net Income to Net
Cash Flow from Operating Activities (contd.)
- Amortization of premium on B/P
- Amortization of discount on investment in
bonds
Adjustments
- Gain on disposal of assets or liabilities
- Investment income under the equity
method
- Decrease in deferred income tax liability
- Decreases in current liabilities
- Increases in current assets
||
Net Cash Flows from Operating Activities
Adjustments:
+ Amortization of Discount on B/P

Example: Issue a 2-year bond, market int.
rate = 12%, bond int. rate = 10%
P.V. of Bond = $10,000 x 0.797 + 1,000 x
1.690 = 9,600
1. 1/1/x1
Cash 9,660
Discount on B/P 340
B/P 10,000
Adjustments:
+ Amortization of Dis. on B/P (contd.)
2. Payment of Interest on 12/31/x1
Interest Expense
(12% x 9660) 1159.2
Cash 1,000.0
Dis. On B/Pa 159.2
a. Amortization of bond discount increase
interest expense but does not use cash.
Adjustments:
+ Amortization of Dis. on B/P (contd.)
3. Payable of Interest on 12/31/x2
Interest Expense
(9660 +159.2)  0.12 1,174.4
Cash 1,000.0
Discount On B/P 174.4
Dis
340 159.2
174.4
Adjustments:
+ Amortization of Premium on Investment in Bonds

Example: GEO Corp. purchased
$100,000, 10% 5-year bonds on 1/1/x2,
with interest payable on 7/1 and 1/1.
The bonds sell for $108,111 which
results in bond premium of $8,111 and
an effective interest rate of 8%.

+ Amortization of Premium on Investment
in Bonds (contd.)
Example (contd.)
Record the purchase on 1/1/x2:
Investments 108,111
Cash 108,111
Record the interest revenue on 7/1/x2:
Cash 5,000
Interest Revenue 4,324a
Investments 676
a. Interest revenue = $108,111 x 4% = $4,324
Adjustments:
+ Loss on Disposal of PPE or Investments

Example: Sale a piece of land with a
cost of $7,000 for $9,000
Cash 9,000
Land 7,000
Gain on Sale of Landa 2,000
a. This transaction results in a cash increase of
$7,000 reported in the investing activity section,
not the operating activity section.
Adjustments:
+ Investment Loss under equity method

Equity method must be used to account for
return on investment in stock when gaining
ownership of 20% ~ 50% with significant
influence.

Example:
Obtain 30% of ownership with significant
influence on investment in stock of Green
Corp. for $40,000
+ Investment Loss under equity method
(contd.)
2/4/x2
Investment in Stock 40,000
Cash 40,000
12/31/x2
Green’s Loss of Year x2
= 100,000
Loss in Investment 30,000
Investment in Stock 30,000
Data needed to prepare statement of
cash flows
1. Comparative balance sheet statements.
2. The income statement.
3. The retained earnings statement.
4. Other supplemental information
concerning the reasons for the changes
in the B/S accounts (other than cash).

Example 1
Layton Company Balance Sheet (12/31/x2)
Balance Balance Change
Accounts 1/1/x2 12/31/x2
Cash 4,000 6,600
A/R 6,300 9,000 2,700
Land 9,000 6,000 3000a
Buildings & Equipment 48,000 60,000 12,000b
Accummulated Depreciation (12,500) (14,800)
Total Assets $54,800 $ 66,800
a. Land was sold at cost for cash during the year.
b. A building was purchased for cash during the year
and no building or equipment was sold during the year.
Example 1 (contd.)
Layton Company Balance Sheet (12/31/x2)
Balance Balance Change
Accounts 1/1/x2 12/31/x2
A/P 7,500 9,000 1,500
B/P 14,000 21,000 7000a
Common Stock, $10 22,000 22,000 0
Retained Earnings 11,300 14,800
Total Liabilities &
Stockholdrs' Equity $54,800 $66,800
a. Bonds were issued at the end of year.
Example 1 (contd.)
Income Statement (for the year ended 12/31x2)
Sales Revenue $31,800

Opeating Expenses
Depreciation Expense 2,300
Interest Expense 1,400
Other Expenses 18,100 (21,800)
Income before Income Tax 10,000
Income Tax Expense (3,000)
Net Income $7,000

Example 1 (contd.)
Layton Company Retained Earnings (19x2)
Beginning Retained Earnings $11,300

Add: Net Income 7,000
$18,300
Less: Dividends (3,500)
Ending Retained Earnings $14,800

Layton Company
For the Year Ended December 31, 19x2
Net cash flow from operating activities:
Net Income $7,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Add: Depreciation expense 2,300
Increase in A/P 1,500
Less: Increase in A/R (2,700)
Net cash provided by
operating activities $8,100
Layton Company
Cash flows from investing activities:
Proceeds from sale of land $3,000
Payments for
purchase of building (12,000)
Net cash used
by investing activities (9,000)
Cash flows from financing activities:
Proceeds from issuance of bonds 7,000
Payments of dividends (3,500)
Net cash provided by
financing activities 3,500

Layton Company
Net increase in cash $2,600

Cash, Jan 1, 19x2 $4,000
Cash, Dec 31, 19x2 $6,600

Example 2:
Green Company Balance Sheet
Accounts 1/1/x2 12/31/x2 Difference
Cash $3,500 $5,500
A/R 4,400 3,600 800 
Inventory 5,000 6,600 1,600 
Land 8,200 12,200 4,000c 
Building & Equip 35,700 48,700 13,000a,d 
Acc. Depr. (6,000) (8,700)
Total Assets $50,800 $67,900
Green Company Balance Sheet (contd.)
A/P $5,100 $3,200 1,900
Salary Payable 1,400 1,800 400
B/P, 10% 7,000 15,000 8,000b
Common Stock, $10 par 8,000 9,000 1,000
Paid-in Capital 16,000 19,000 3,000
R/E 13,300 19,900
Total Liabilities
& Equity $50,800 $67,900
Income Statement
For the Year Ended 12/31/19x2
Sales Revenue $80,000

CGS (48,600)
Gross Profit $31,400
Operating Expenses:
Deprecation Expense $3,400
Other Expenses 15,900(19,300)
$12,100
Other Revenues & Expenses
Gains on Sale of Equipment $600
Interest Expense (700) (100)
Income Before Income Tax $12,000
Income Tax Expense (3,600)
Net Income $8,400 .

53
Retained Earnings (19x2)
Beginning balance
of retained earnings $13,300
21,700
Less: Dividends (1,800)
Ending balance
of retained earning $19,900
Supplemental Information for 19x2
(a) Equipment was purchased for cash at a cost
of $15,200.
(b) Ten-year bonds payable with a face value of
$8,000 were issued for $8,000 at the end of
the year.
(c) Land was acquired through the issuance of
100 shares of $10 par common stock when
the stock was selling at a market price of $40
per share.
(d) Equipment with a cost of $2,200 and a book
value of $1,500 was sold for $2,100 cash.
GREEN Company
Net cash flows from operating activities:
Net Income $8,400
Adj. To reconcile net income to net
cash provided by operating activities:
Add: Depreciation Expense 3,400
Decrease in A/R 800
Increase in S/P 400
Less: Increase in Inventory (1,600)
Decrease in A/P (1,900)
Gain on sale of Equipment (600)
Net cash provided by operating activities $8,900
GREEN Company
Payments for purchase of equip. (15,200)
Proceeds from sale of equipment 2,100
Net cash used by investing activities (13,100)
Proceeds from issuance of bonds 8,000
Payments of dividends (1,800)
Net cash provided by financing activities 6,200
Net increase in cash (see Schedule 1) $2,000
Cash, Jan 1, 19x2 $3,500
Cash, Dec 31, 19x2 $5,500
57

GREEN Company
Schedule 1: Investing & financing activities not affecting

cash flows:
Investing activities:
Acquisition of land by Issuance of
common stock ($4,000)
Financing Activities:
Issuance of common stock for land $4,000
58

Special Topics
1. Direct exchange.
2. Partial cash investing and
financing activities.
3. Cash dividends declared.

1. Direct Exchange

Direct exchange: An example of a
direct exchange is issuing bonds to
acquire a building. This transaction
should appear in the schedule of the
cash flow statement as an investing
activity (i.e., acquisition of building) and
as a financing activity (i.e., issue bonds
for building).

2. Partial Cash Investing and

Example: acquiring land costing
$10,000 by paying $1,000 down and
signing a $9,000 notes payable.

2. Partial Cash Investing and Financing
Activities (contd.)

Presentation on Cash Flow Statement for
Partial Investing & Financing Activities:
Cash Flows from Investing Activities:
Purchase of land by issuance
of note and cash ($10,000)
Less: issuance of note 9,000
Cash payment
for purchase of land ($1,000)
3. Cash Dividends Declared
(Stock dividends not reported on
statement of cash flows.)
a. Cash dividends declared and paid in
the same year:
 Reported as a cash outflow of
financing activities

3. Cash Dividends Declared (contd.)
b. Cash dividends declared in the current
year but paid in the next year:
(1)No impact on cash of the current
year; only increase dividends
payable (D/P).
(2)When D/P decrease next year,
reported as a cash outflow of
financing activity.
Example 3:
Jones Company Balance Sheet
Balance Change
1/1/x2 12/31/x2
Cash $3,200 $5,900
A/R 5,600 7,600 2,000 
Inventory 7,300 7,000 300 
Prepaid Expense 1,200 1,400 200 
Investments 6,000 6,000
Land 10,000 18,200 8,200b,c 
Equipment 29,000 29,000

Jones Company Balance Sheet (contd.)
Acc. Depr: Equip. (12,000) (14,820)
Building 144,000 149,000 5,000 
Acc. Depr: Bldg. (39,300) (39,600)
Leased Equip. 0 5,300 5,300c 
Paten (Net) 5,000 4,400 600 
Total Assets $160,000 $179,380

A/P $8,600 $7,300 1,300 

I/T Payable 1,500 2,130 630 
Interest Payable 0 500 500 
Notes Payable 0 2,600 2,600a 
Obligation under
Capital Lease 0 5,300 5,300f 
B/P, 10% 0 10,000 10,000g 
Dis. On B/P (1,000) (900) 100g 
Convertible B/P 7,0000 7,000h,g 
Deferred I/T 1, 9202,100 180i 
Common Stock,
$10 par 34,00037,4003,400j,h 
Additional Paid-in
Capital -- C.S. 67,00073,7006,700hj 
Retained Earnings 39,98039,250
Total Liabilities &
Stockholder’s
Equity $160,000$179,380
Jones Company
Income Statement
For the Year Ended 12/31/20x2
Sales$88,020
Less: CGS $(52,200)
Operating Expenses (15,800)
Depr. Expense: Equip. (2,820)
Depr. Expense: Bldg. (5,100)
Amortization Expense: Patent (600)
Interest Expense (Bond) (1,100)
I/T Expense (3,630)
Plus: Gain on Sale of Equipment 1,700(79,550)
Income Before Extraordinary items $8,470
Extraordinary Loss (Net of I/T) (2,100)
Net Income $6,370
69

Retained Earnings (20x2)
Beginning balance
of retained earnings $39,980
46,350
Less: Stock Dividends $3,100
Cash Dividends $4,000 (7,100)
Ending balance
of retained earning $39,250
F (a) On 12/31/x2, Jones borrowed
$2,600 by issuing a 12%, 90-day
notes payable.
I (b) During 20x2, additional land was
acquired at a cost of $10,400.
I&A (c) During 20x2, land costing $2,200
was sold for $3,900, resulting in a
gain of $1,700.
I (d) In 20x2, a building was acquired
at a price of $15,000.
(contd.)
I&A (e) In 20x2, an earthquake destroyed
a building that costs $10,000 with a
book value of $5,200. Settlement with
the insurance company resulted in
after-tax cash proceeds of $3,100 and
an extraordinary loss (net of I/T) of
$2,100.
D.E. F&I (f) On 12/31/20x2, Jones leased
equipment, under a long-term capital
lease of $5,300.

(contd.)
F&A (g) On 1/1/x2, Jones issued
$10,000 of long-term bond at 90.
Bond discount amortization was
$100 for the year.
D.E. F&F (h) On 1/1/x2, convertible bonds with a
face value of $7,000 were
converted into 240 shares of
common stock. The book value
method was used to record the
conversion.
(contd.)
A (i) Taxable income was less than pretax
accounting income for the year resulting
in an increase in deferred income taxes
payable of $180.
J.E.
I/T Expense 3,630
I/T Payable 3,450
Deferred I/T payable 180
I/T Payable 2,820
Cash 2,820
(contd.)
N (j)During 20x2, stock dividend was
declared and issued. Involved were 100
shares of $10 par common stock. The
market value of the stock on the
declaration date was $31 per share.
J.E.
R/E 3,100
C.S 1,000
Paid-in capital in excess of par 2,100
Jones Company
Cash flows from operating activities:
Net Income $6,370
Adjustments to reconcile net income to
net cash provided by operating activities:
Add: Depr. Expense: Equip. 2,820
Depr. Expense: Bldg. 5,100
Amortization Expense: Patent 600
Decrease in Inventories 300
Increase in I/T payable 630
Increase in int. payable 500

Jones Company
Extraordinary loss
from earth quake 2,100
Increase in Deferred I/T payable 180
Amortization of Discount on B/P 100
Less: Increase in A/R (2,000)
Increase in prepaid expense (200)
Decrease in A/P (1,300)
Gain on sale of land (1,700)
Net cash provided
by operating activities: 13,500
Jones Company
Payments for purchase
of land (10,400)
Proceeds from sale of land 3,900
Payments for purchase
of building (15,000)
Proceeds from building
destroyed by earthquake 3,100
Net cash used
by investing activities: (18,400)
Jones Company
Proceeds from issuance of N/P 2,600
Proceeds from issuance of bond9,000
Payments of Cash Dividends (4,000)
Net cash provided
by financing activities: 7,600
Net increase in cash (see schedule 1) $2,700
Cash, 1/1/x2 3,200
Cash, 12/31/x2 $5,900
Jones Company
Schedule 1: investing and financing activities not
affecting cash
Investing activities
Acquisition of equipment
under capital lease $(5,300)
Issuance of capital lease for equip. $5,300
Conversion of bonds to C.S. $(7,000)
Issuance of common stock
to convert bonds $7,000

Cash flows for a Leasee – at the Signing of the
Lease on 1/1/x5
 A capital lease is reported as an investing
and a financing activity at the signing of the
lease with no cash impact.
 If MLP is paid in advance (i.e., on 1/1/x5, 1/1/x6,
etc.), the cash outflow paid on 1/1/x5 is
reported as a financing activity.
J.E.a Leased Equip. 112,000
(1/1/x5) Lease Liability 112,000
Lease Liability 32,923.45
Cash 32,923.45
a. see Example A2Statement
of Statement of Cash Flows
of Cash Flows 81
Cash flows for A Leasee – Subsequent Lease
Payments
1/1/x6 (second lease payment)
Interest Payable 9,489.19
Lease Liability 23,434.26
Cash 32,923.45

Reporting of Cash Flows (Direct Method):
 $23,436.26---reported as cash outflow-
financing activity
 $9,489.19--- reported as cash outflow,
operating activity, payment for interest
expense.
V. Cash Flows from
the Operating Activities
Activities can be presented using:
a. Indirect Method (as used in examples
1,2,and 3):
N/I  Adjustments to reconcile net income to
cash flows.
b. Direct Method: The operating cash outflows
are deducted from the operating cash
inflows to determine the net cash provided
by (or used in) operating activities.
Cash Flows from
the Operating Activities (contd.)

SFAS No. 95 allows the use of both
methods, but encourages the use of
the direct method. However, if the
direct method is used, a reconcile of
net income and cash using the indirect
method must also be provided in the
supplementary statement.

Using The Direct Method in Preparing
The Operating Cash Flows
Cash inflows from operating activities:
1. Collections from customers.
2. Interest & dividends collected.
3. Other operating receipts.

Using The Direct Method in Preparing
The Operating Cash Flows (contd.)
Cash outflows from operating activities:
1. Payments to suppliers.
2. Payments to employees.
3. Payments of interest.
4. Other operating payments.
5. Payments of income taxes.

Adjustments to Convert I/S Amount to
Operating Cash Flows -- A Direct Approach
I/S Cash Flows from
Amounts Adjustments Operating Activities Net
Collections
Sales +Dec. in A/R; or = from
Revenue -Inc. in A/R Customers
Cash
+Dec. in Int. Rec.; or Inflows
-Inc. in Int. Rec. from
Operating
Interest +Amort. Of Interest Activities
Premium on = Collected
Revenue Invest in Bonds;
or
-Amort. Of
Discount on
Invest in Bonds
Adjustments to Convert I/S Amount to Operating
Cash Flows (contd.)
I/S Cash Flows from
Dividend +Dec. in Dividend Rec. = Dividend
Revenue -Inc. in Dividend Rec. Collected
Cash
+Inc. in Unearned Rev.; Inflows
or from
Other -Dec. in Unearned Rev. Operating
-Gain on Disposal of Other Activities
Revenue Assets & Liabilities = Operating
Receipts
-Investment Income*
(Equity Method)
+Dec. (-Inc.) in Other
Receivable Accounts
* Unless listed as separate items on Income Statement (I/S).
88

Cash Flows (contd.)
I/S Cash Flows from
+Inc. in Inventory;
Cost of or Payments
Goods -Dec. in Inventory = to
Sold +Dec. in A/P; or Suppliers Cash
-Inc. in A/P Outflows
from
Salary +Dec. in Sal. Payable; Payments Operating
or = to Activities
Expense -Inc. in Sal. Payable Employees
89

Adjustments to Convert I/S Amount to Operating Cash
Flows (contd.)
I/S Cash Flows from
+Dec. in Int. Payable
Interest -Inc. in Int. Payable = Payments
Expense +Amort. of Prem. on B/P of Interest
or Cash
-Amort. of Dis. on B/P Outflows
from
+Inc. in Prepaids Operating
-Dec. in Prepaids Activities
-Depre., Depletion exp.
Other Amort. Exp.*, B/D exp. Other
-Losses on disposal of = Operating
Expense Assets and Liabilities Payments
-Investment lossa
(Equity method) a. Unless listed as
+Dec. (-Inc.) in Other separate items on the
Payable Accounts Income Statement
90

Cash Flows (contd.)
I/S Cash Flows from
+Dec. in I/T Payable;
or
Income -Inc. in I/T Payable Payments Cash
Tax +Dec. in Deferred I/T = of Income Outflows
Expense Liability; or Tax from
-Inc. in Deferred I/T Operating
Liability Activities
91

Green Company
(Using the direct method in preparing the operating
activities section of a cash flow statement.Information
as provided in Example 2.)
Cash flows from Operating Activities:
Cash inflows:
Collections from customers $80,8001
Cash inflows from
operating activities $80,800
1. 80,000 + 800 = 80,800.

Green Company
Cash outflows:
Payments to suppliers $(52,100) 1
Payments of interest (700)
Other operating payments (15,500) 2
Payments of income tax (3,600)
Cash outflows
from operating activities (71,900)
1. 48,600 + 1600 + 1900 = 52,100.

2. 15,900 - 400 = 15,500.
Green Company
Net cash inflow
from operating activities $8,900
Cash flows from investing activities
:
:
Cash flows from Financing Activities
:
:
* A reconciliation of net income and cash flows using

indirect method must also be presented.
Information as provided in Example 3 (direct method)
Cash flows from Operating Activities:
Cash inflows:
Collections from customers $86,0201
Cash inflows
Cash outflows:
Payments to suppliers (53,200)2
1. 88,020 - 2,000 = 86,020.

2. 52,200 - 300 + 1300 = 53,200.
Payments of other expenses (16,000)1
Payments of interest expense (500)2
Payments if Income Tax (2,820)3
Cash outflows
from operating activities (72,520)
Net cash inflows
1. 15,800 + 200 = 16,000.
2. 1100 - 500 - 100 = 500.
3 3,630 - 630 -180 = 2,820.

Other Special Topics
1. Gain from sale of cash equivalents.
2. Accounts Receivable.
3. Issues related to adjustment of income
tax expense to cash payment for income
tax.
(see P21-11 for example)

1. Gain from Sale of Cash Equivalent

Gain from sale of cash equivalents results in
a net cash inflow equal the amount of the
gain.

Cash & Cash Equi. 7,000
Gain
from sale of cash equi. 2,000
Cash & Cash Equi. 5,000 or
Cash & Cash Equi. 2,000
Gain from Sale of Cash Equi. 2,000

Gain from Sale of Cash Equivalent
(Contd.)

Using the indirect method, this gain
should not be subtracted from net
income.

This is because the cash inflow from
this sale is reported in the operating,
not investing, activity section.

Using the direct method, this gain
should be reported as a cash inflow in
the operating activities section.
2. Accounts Receivable

The balance used to compute the
changes in accounts receivable should be
the gross amount, not the balance net of
allowance for bad debts.

Also, this gross amount should be
adjusted to prior to the any bad debt write-
offs occurred during the year.

Allowance for bad debts does not affect
cash flows and should not be considered.

3. Issues Related to Adjustments of Income
Tax Expense to Cash Payment for Income
Tax Expense

In adjusting income tax expense to cash
payment for income tax, the expense
used should be the income tax expense
for all existing components of the
income statement for that yeara.

a. Income tax expense for continuing
operations, discontinued operations,
extraordinary items and the cumulative
effect.

3. Issues Related to Adjustments of Income
Tax Expense to Cash Payment for Income
Tax Expense (contd.)

When income tax expense given is for
the continuing operations only, any
income tax savings (liabilities) from
components other than continuing
operations should be subtracted
(added) prior to the adjustment.

Cashflow Statement

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Cashflow Statement

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Advanced Financial

Statement of Cash Flows 1

I. Identify business activities which can

II. Introduce the content and the

IV. Learn how to prepare the statement of

V. Learn the two alternatives (direct and

Statement of Cash Flows 4

Statement of Cash Flows 5

Statement of Cash Flows 6

Statement of Cash Flows 7

Statement of Cash Flows 8

Statement of Cash Flows 9

 Investments (current or noncurrent)

 N/R (current or noncurrent)

Statement of Cash Flows 10

Statement of Cash Flows 11

Statement of Cash Flows 12

Statement of Cash Flows 13

Statement of Cash Flows 14

Statement of Cash Flows 16

Statement of Cash Flows 18

Statement of Cash Flows 19

Statement of Cash Flows 20

Statement of Cash Flows 21

Statement of Cash Flows 23

Statement of Cash Flows 25

Statement of Cash Flows 27

Statement of Cash Flows 28

Outflows: increases in noncurrent assets

Statement of Cash Flows 30

Outflows: decreases in noncurrent

+ Depreciation, depletion and amortization

Statement of Cash Flows 33

Statement of Cash Flows 38

Statement of Cash Flows 43

Sales Revenue $31,800

Statement of Cash Flows 46

Beginning Retained Earnings $11,300

Statement of Cash Flows 47

Statement of Cash Flows 49

Net increase in cash $2,600

Statement of Cash Flows 50

Sales Revenue $80,000

Statement of Cash Flows 53

Statement of Cash Flows 57

Schedule 1: Investing & financing activities not affecting

Statement of Cash Flows 58

Statement of Cash Flows 59

Statement of Cash Flows 60

Statement of Cash Flows 61

Statement of Cash Flows 63

Statement of Cash Flows 65

Statement of Cash Flows 66

A/P $8,600 $7,300 1,300 

Statement of Cash Flows 69

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