CH 13

13-1
Chapter 13 Statement of Cash Flows

Learning Objectives
After studying this chapter, you should be able to:
1. Indicate the usefulness of the statement of cash flows.
2. Distinguish among operating, investing, and financing activities.
3. Prepare a statement of cash flows using the indirect method.
4. Analyze the statement of cash flows.
13-2
Preview of Chapter 13
Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
13-3
Usefulness and Format
Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet obligations.
3. Reasons for difference between net income and net cash

provided (used) by operating activities.
4. Cash investing and financing transactions during the period.
13-4 LO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows
Operating Investing Financing

Activities Activities Activities
Income Changes in Changes in

Statement Items Investments and Non-Current
Non-Current Liabilities and
Asset Equity
13-5 LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Illustration 13-1

Typical receipt and
payment classifications

Classification of Cash Flows Illustration 13-1

Typical receipt and
payment classifications

Significant Non-Cash Activities

1. Direct issuance of ordinary shares to purchase assets.
2. Conversion of bonds into ordinary shares.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report non-cash activities in either a

 separate note or
 supplementary schedule to the financial statements.

13-9
Format of the Statement of Cash Flows
Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

Format of the Statement of Cash Flows
Illustration 13-3

Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 shares of HK$50 par value ordinary Financing

shares for HK$800,000 cash.
2. Borrowed HK$2,000,000 from Castle Bank, signing
Financing
a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for HK$1,700,000
Investing
cash.
4. Paid employees HK$120,000 for salaries and Operating
wages.
5. Collected HK$200,000 cash for services provided. Operating

Preparing the Statement of Cash Flows
Three Sources of Information:
1. Comparative statements of financial position
2. Current income statement
3. Additional information

Three Major Steps:

Illustration 13-4

Three Major Steps: Illustration 13-4

Indirect and Direct Methods

Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare, and
2. Focuses on the differences between net income and net

cash flow from operating activities.

Illustration – Indirect Method

Illustration 13-5
13-17 LO 3 Prepare a statement of cash flows using the indirect method.

Illustration 13-5

Illustration 13-5
Additional information for 2014:

1. Depreciation expense was comprised of €6,000 for building and €3,000 for equipment.
2. The company sold equipment with a book value of €7,000 (cost €8,000, less
accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment costing €25,000 was
also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-19 LO 3
Step 1: Operating Activities

Determine net cash provided/used by operating activities by
converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):

 Add back non-cash expenses (depreciation, amortization,
or depletion expense).
 Deduct gains and add losses.
 Changes in non-cash current asset and current liability
accounts.

Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of ordinary shares.
c. Payment of cash dividends to the company’s
shareholders.
d. None of the above.

Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 13-7
Cash flows from operating activities:
Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities € 154,000

Loss on Disposal of Plant Assets

Companies should report cash received from the sale
(disposal) of plant assets in the investing activities section.
Because of this,
 any loss on sale is added to net income in the

operating section.
 any gain on sale is deducted from net income in the

operating section.

Loss on Disposal of Plant Assets

Illustration 13-8

Loss on disposal of plant assets 3,000

Changes to Non-Cash Current Asset Accounts

When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 13-9
Accounts Receivable
1/1/014 Balance 30,000 Receipts from customers 517,000

Sales revenue 507,000
12/31/14 Balance 20,000
Company adds to net income the amount of the decrease in

accounts receivable.


Illustration 13-10
Decrease in accounts receivable 10,000


When the Inventory balance increases, the cost of
merchandise purchased exceeds the cost of goods sold.
Inventory
1/1/14 Balance 10,000 Cost of goods sold 150,000

Purchases 155,000
12/31/14 Balance 15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.


Illustration 13-10
Increase in inventory (5,000)

When the Prepaid Expense balance increases, cash paid for

expenses is higher than expenses reported on an accrual
basis. The company deducts the decrease from net income
to arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher

than the expenses paid.


Illustration 13-10
Increase in prepaid expenses (4,000)

Changes to Non-Cash Current Liability Accounts

When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Taxes Payable decreases, the income tax

expense reported on the income statement was less than the
amount of taxes paid during the period. The decrease is
subtracted from net income to determine net cash provided by
operating activities.

Changes to Non-Cash Current Liability Accounts

Illustration 13-11
Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
13-32 LO 3
Summary of Conversion to Net Cash Provided

by Operating Activities—Indirect Method
Illustration 13-12
13-33
LO 3
13-34
Step 2: Investing and Financing Activities
Company purchased land of €110,000 by issuing long-term

bonds. This is a significant non-cash investing and financing
activity that merits disclosure in a separate schedule.
Land
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance 20,000
For land 110,000
12/31/14 Balance 130,000

Partial statement Illustration 13-14
Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000
Disclosure: Issuance of bonds to purchase land € 110,000
13-36 LO 3
From the additional information, the company acquired an

office building for €120,000 cash. This is a cash outflow
reported in the investing section.
Building
1/1/14 Balance 40,000
Office building 120,000
12/31/14 Balance 160,000

Partial statement Illustration 13-14

13-38 LO 3
The additional information explains that the equipment increase

resulted from two transactions: (1) a purchase of equipment of
€25,000, and (2) the sale for €4,000 of equipment costing €8,000.
Illustration 13-12
Equipment
1/1/14 Balance 10,000 Cost of equipment sold 8,000

Purchase 25,000
12/31/14 Balance 27,000
Cash 4,000
Journal
Accumulated depreciation 1,000
Entry
Equipment 8,000

Illustration 13-14
Statement Net income € 145,000
of Cash Adjustments to reconcile net income to net cash

Flows Depreciation expense

Loss on disposal of plant assets
9,000
3,000
Indirect
Method Net cash provided by operating activities 172,000
13-40
LO 3
The increase in ordinary shares resulted from the issuance of

new shares.
Share Capital - Ordinary
1/1/14 Balance 50,000

Shares sold 20,000
12/31/14 Balance 70,000

Illustration 13-14
Partial statement
13-42
LO 3
Retained earnings increased €116,000 during the year. This

increase can be explained by two factors: (1) Net income of
€145,000 increased retained earnings, and (2) Dividends of
€29,000 decreased retained earnings.
Retained Earnings
1/1/14 Balance 48,000

Dividends 29,000 Net income 145,000
12/31/14 Balance 164,000

Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase ordinary shares.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.

Illustration 13-14
Statement Net income € 145,000
of Cash Adjustments to reconcile net income to net cash

Flows Depreciation expense

Loss on disposal of plant assets
9,000
3,000
Indirect
Method Net cash provided by operating activities 172,000
13-45
LO 3
Step 3: Net Change in Cash
Illustration 13-5
Compare The Net Change In Cash On The Statement Of Cash Flows With
The Change In The Cash Account Reported On The Statement Of
Financial Positions To Make Sure The Amounts Agree.

13-47
Using Cash Flows to Evaluate a Company
Free Cash Flow

Illustration 13-15
Free cash flow describes the cash remaining from operations

after adjustment for capital expenditures and dividends.
13-48 LO 4 Analyze the statement of cash flows.

Using Cash Flows to Evaluate a Company
Illustration 13-16
Illustration
Required:
Calculate free
cash flow.
Cash provided by operating activities €4,189

Less: Expenditures on property and equipment 1,794
Dividends paid 2,088
Free cash flow
€307
13-49 LO 4 Analyze the statement of cash flows.
APPENDIX 13A USING A WORKSHEET – INDIRECT METHOD
Using a
Worksheet to
Prepare the
Statement of Cash
Flows-Indirect
Method
Illustration 13A-1
13-50
LO 5
APPENDIX 13A USING A WORKSHEET – INDIRECT METHOD
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the
statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that

explain the changes in the statement of financial position
accounts other than cash and their effects on the statement of
cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
13-51
LO 5 Explain how to use a worksheet to prepare the
statement of cash flows using the indirect method.
APPENDIX 13A
Using a Worksheet
to Prepare the
Statement of Cash
Flows-Indirect
Method
Illustration 13A-3
Completed worksheet—
indirect method
13-52 LO 5
APPENDIX 13B STATEMENT OF CASH FLOWS – DIRECT METHOD
Statement of Cash Flows-Direct Method

1. Compute net cash provided by operating activities by
adjusting each item in the income statement from the
accrual basis to the cash basis.
2. Companies report only major classes of operating cash

receipts and cash payments.
3. For these major classes, the difference between cash

receipts and cash payments is the net cash provided by
operating activities.
13-53 LO 6 Prepare a statement of cash flows using the direct method.


Illustration 13B-2
13-54 LO 6
Illustration 13B-1
13-55 LO 6
Illustration 13B-1

Illustration 13B-1
13-57 LO 6
Cash Receipts from Customers

For Computer Services Company, accounts receivable decreased
€10,000.
Illustration 13B-4
Illustration 13B-5

Cash Payments to Suppliers

In 2014, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Illustration 13B-6 Illustration 13B-7
Illustration 13B-9

Cash Payments for Operating Expenses

Cash payments for operating expenses were €115,000.
Illustration 13B-10
Illustration 13B-11

Cash Payments for Income Taxes

Cash payments for income taxes were €49,000.
Illustration 13B-12
Illustration 13B-13

Step 1:
Operating
Activities
Illustration 13B-16
13-62

Increase in Equipment. (1) Computer Services purchased for
cash equipment costing €25,000. And (2) it sold for €4,000 cash
equipment costing €8,000, whose book value was €7,000.
Illustration 13B-15


Increase in Building. From the additional information, the
company acquired an office building for €120,000 cash. This is a
cash outflow reported in the investing section.
Building
1/1/14 Balance 40,000

Office building 120,000
12/31/14 Balance 160,000


Increase in Land. Computer Services
Significant non-cash
purchased land of €110,000 by directly
investing and financing
exchanging bonds for land.
transaction.
Increase in Bonds Payable. Bonds

Payable increased €110,000. The Significant non-cash
additional information indicated that investing and financing
Computer Services issued €110,000 of transaction.
long-term bonds in direct exchange for
land.


Increase in Share Capital - Ordinary.
The Share Capital - Ordinary account Financing activity.
increased €20,000. The additional
information indicated that Computer
Services issued ordinary shares for cash.
Increase in Retained Earnings. The

€116,000 net increase in Retained
Financing activity
Earnings resulted from net income of
(cash dividend).
€145,000 and the declaration and
payment of a cash dividend
of €29,000.

Step 2:
Investing
and
Financing
Activities
Illustration 13B-16
13-67
Step 3: Net Change in Cash

Compare the net change in cash on the Statement of Cash Flows
with the change in the cash account reported on the Statement of
Financial Position to make sure the amounts agree.

APPENDIX 13C T-ACCOUNT APPROACH
What this means is that the change in cash is equal to the

change in all of the other statement of financial position
accounts.
Another way to think about this is that if we analyze the

changes in all of the non-cash statement of financial position
accounts, we will explain the change in the cash account.
13-69
Illustration 13C-1
APPENDIX
13C
13-70
Another Perspective
Key Points
 Companies preparing financial statements under both GAAP and
IFRS must prepare a statement of cash flows as an integral part of
the financial statements.
 Both IFRS and GAAP require that the statement of cash flows
should have three major sections—operating, investing, and
financing—along with changes in cash and cash equivalents.
 Similar to IFRS, the statement of cash flows can be prepared using
either the indirect or direct method under GAAP. Companies choose
for the most part to use the indirect method for reporting net cash
flows from operating activities.
13-71
Another Perspective
Key Points
 The definition of cash equivalents used in GAAP is similar to that
used in IFRS. A major difference is that in certain situations, bank
overdrafts are considered part of cash and cash equivalents under
IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts
are classified as financing activities in the statement of cash flows
and are reported as liabilities on the statement of financial position.
 IFRS requires that non-cash investing and financing activities be
excluded from the statement of cash flows. Instead, these non-cash
activities should be reported elsewhere. This requirement is
interpreted to mean that non-cash investing and financing activities
should be disclosed in the notes to the financial statements instead
of in the financial statements. Under GAAP, companies may present
this information on the face of the statement of cash flows.
13-72
Another Perspective
Key Points
 One area where there can be substantial differences between IFRS
and GAAP relates to the classification of interest, dividends, and
taxes. The following table indicates the differences between the two
approaches.
13-73
Another Perspective
Key Points
 Under IFRS, some companies present the operating section in a
single line item, with a full reconciliation provided in the notes to the
financial statements. This presentation is not seen under GAAP.
 Similar to IFRS, under GAAP companies must disclose the amount
of taxes and interest paid. Under GAAP, companies disclose this in
the notes to the financial statements. Under IFRS, some companies
disclose this information in the notes, but others provide individual
line items on the face of the statement. In order to provide this
information on the face of the statement, companies first add back
the amount of interest expense and tax expense (similar to adding
back depreciation expense) and then further down the statement
they subtract the cash amount paid for interest and taxes.
13-74
Another Perspective
Looking to the Future

Presently, the FASB and the IASB are involved in a joint project on the presentation
and organization of information in the financial statements. One interesting approach,
revealed in a published proposal from that project, is that in the future the income
statement and statement of financial position (balance sheet) would adopt headings
similar to those of the statement of cash flows. That is, the income statement and
statement of financial position would be broken into operating, investing, and
financing sections.
With respect to the cash flow statement specifically, the notion of cash equivalents
will probably not be retained. That is, cash equivalents will not be combined with cash
but instead will be reported as a form of highly liquid, low-risk investment. The
definition of cash in the existing literature would be retained, and the statement of
cash flows would present information on changes in cash only. In addition, the FASB
favors presentation of operating cash flows using the direct method only. However,
the majority of IASB members express a preference for not requiring use of the direct
method of reporting operating cash flows.
13-75
Another Perspective
GAAP Self-Test Questions

Under GAAP interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
13-76
Another Perspective

IFRS requires that non-cash items:
a) be reported in the section to which they relate, that is, a non-

cash investing activity would be reported in the investing
section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
13-77
Another Perspective

In the future, it appears likely that:
a) the income statement and statement of financial position

(balance sheet) will have headings of operating, investing, and
financing, much like the statement of cash flows.
b) cash and cash equivalents will be combined in a single line

item.
c) the IASB will not allow companies to use the direct approach
to the statement of cash flows.
d) None of the above.

13-78
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the use of the information contained herein.”
13-79

CH 13

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13-1

Chapter 13 Statement of Cash Flows

1. Indicate the usefulness of the statement of cash flows.

2. Distinguish among operating, investing, and financing activities.

3. Prepare a statement of cash flows using the indirect method.

4. Analyze the statement of cash flows.

Usefulness of the Statement of Cash Flows

2. Entity’s ability to pay dividends and meet obligations.

3. Reasons for difference between net income and net cash

4. Cash investing and financing transactions during the period.

13-4 LO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows

Operating Investing Financing

Income Changes in Changes in

13-5 LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Illustration 13-1

13-6 LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Illustration 13-1

13-7 LO 2 Distinguish among operating, investing, and financing activities.

Significant Non-Cash Activities

Companies report non-cash activities in either a

13-8 LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows

13-10 LO 2 Distinguish among operating, investing, and financing activities.

13-11 LO 2 Distinguish among operating, investing, and financing activities.

1. Issued 100,000 shares of HK$50 par value ordinary Financing

13-12 LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows

Three Sources of Information:

1. Comparative statements of financial position

2. Current income statement

13-13 LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows

Three Major Steps:

13-14 LO 2 Distinguish among operating, investing, and financing activities.

Three Major Steps: Illustration 13-4

13-15 LO 2 Distinguish among operating, investing, and financing activities.

Indirect and Direct Methods

1. Easier and less costly to prepare, and

2. Focuses on the differences between net income and net

13-16 LO 2 Distinguish among operating, investing, and financing activities.

Illustration – Indirect Method

13-17 LO 3 Prepare a statement of cash flows using the indirect method.

13-18 LO 3 Prepare a statement of cash flows using the indirect method.

Additional information for 2014:

Step 1: Operating Activities

Common adjustments to Net Income (Loss):

13-20 LO 3 Prepare a statement of cash flows using the indirect method.

13-21 LO 3 Prepare a statement of cash flows using the indirect method.

13-22 LO 3 Prepare a statement of cash flows using the indirect method.

Loss on Disposal of Plant Assets

 any loss on sale is added to net income in the

 any gain on sale is deducted from net income in the

13-23 LO 3 Prepare a statement of cash flows using the indirect method.

Loss on Disposal of Plant Assets

Cash flows from operating activities:

13-24 LO 3 Prepare a statement of cash flows using the indirect method.

Changes to Non-Cash Current Asset Accounts

1/1/014 Balance 30,000 Receipts from customers 517,000

12/31/14 Balance 20,000

Company adds to net income the amount of the decrease in

13-25 LO 3 Prepare a statement of cash flows using the indirect method.

Changes to Non-Cash Current Asset Accounts