Chapter 16

Statement of Cash Flows

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 16 - 2

Purpose of the Statement

of Cash Flows

How Where
Wheredoes
doesaa
Howdoes
doesaa
company company
companyspend
spendits
companyobtain
obtainits
its its
cash? cash?
cash?
cash?

What
What explains
explainsthe
the
change
changeinin the
thecash
cash
balance?
balance?
 16 - 3

Importance of Cash Flows

How Does
Doesthe
thebusiness
business
Howdid
didthe
the
business have
havesufficient
sufficientcash
cash
businessfund
fundits
its
operations? to
topay
payits
itsdebts
debtsas
as
operations?
they
theymature?
mature?

Did Did
Didthe
thebusiness
Didthe
the business
business business
make borrow
borrowany
anyfunds
fundsor
makeanyanydividend
dividend or
payments? repay
repayany
anyloans?
loans?
payments?
 16 - 4

Measurement of Cash Flows

Cash Cash
Cash
Equivalents Currency

 Short-term,
Short-term, highly
highly liquid
liquid investments.
investments.
 Readily
Readily convertible
convertible into
into cash.
cash.
 Sufficiently
Sufficiently close
close to
to maturity
maturity so
so that
that market
market value
value is
is
unaffected
unaffected byby interest
interest rate
rate changes.
changes.
 16 - 5

C1

Classification of Cash Flows

The Statement of Cash Flows

includes the following three
sections:
 Operating Activities
 Investing Activities
 Financing Activities
 16 - 6

C1

Operating Activities
Inflows
Inflows
 Receipts
Receiptsfrom
from customers
customers

Outflows
Outflows
 Salaries
Salariesand
andwages
wages
 Payments
Paymentsto tosuppliers
suppliers
 Taxes
Taxesand
andfines
fines
 16 - 7

C1

Investing Activities
Inflows
Inflows
 Selling
Sellinglong-term
long-termproductive
productive
assets
assets
 Selling
Sellingequity
equityinvestments
investments
 Collecting
Collectingprincipal
principalon
onloans
loans

Outflows
Outflows
 Purchasing
Purchasinglong-term
long-term
productive
productiveassets
assets
 Purchasing
Purchasingequity
equity
investments
investments
 Purchasing
Purchasingdebt
debtinvestments
investments
 16 - 8

C1

Financing Activities
Inflows
Inflows
 Issuing
Issuingitsitsown
ownequity
equity
securities
securities
 Issuing
Issuingbonds
bonds and
andnotes
notes
 Issuing
Issuingshort-
short-and
andlong-term
long-term
liabilities
liabilities
 Contributions
Contributionsby byowners
owners

Outflows
Outflows
 Purchasing
Purchasing treasury
treasuryshares
shares
 Repaying
Repayingcash
cashloans
loans
 16 - 9

C1

Classification of Cash Flow Items

Reporting entities have choices in classifying interest and
dividends
Operating Investing Financing

Interest received Yes Yes

Dividends received Yes Yes

Interest paid Yes Yes

Dividends paid Yes Yes

 16 - 10

C1

Noncash Investing and Financing

Items
Items requiring
requiring separate
separate disclosure
disclosure
include:
include:
 Retirement
Retirement of
of debt
debt by
by issuing
issuing equity
equity
securities.
securities.
 Conversion
Conversion ofof preference
preference shares
shares to
to
ordinary
ordinary shares.
shares.
 16 - 11

Format of the Statement

of Cash Flows
 16 - 12

P1 Preparing the Statement

of Cash Flows
 16 - 13

P1

Analyzing the Cash Account

The Cash account is a natural place to look for

information about cash flows from operating,
investing, and financing activities.
 16 - 14

P1

Analyzing the Cash Account

Cash from
Operating

Cash from
Investing

Cash from
Financing

Cash
Proved
 16 - 15

P1

Analyzing Noncash Account

A second approach to preparing the statement
of cash flows is analyzing noncash accounts.
 16 - 16

P1

Information to Prepare the Statement

Information to prepare the statement of cash

flows usually comes from three sources:

Comparative Current
Balance Sheets Income Statement

Additional
Information
 16 - 17

Cash Flows from Operating

Indirect and Direct Methods of Reporting

Direct
Method

Indirect
Method
The net cash amount
provided by operating
activities is identical under
both the direct and indirect
methods.
 16 - 18

P2
Application of the
Indirect Method of Reporting
 16 - 19

P2 Application of the
Indirect Method of Reporting
Additional information on Genesis Inc.’s 2011 transactions:
a) The accounts payable balances result from merchandise
inventory purchases.
b) Purchased $70,000 in property, plant and equipment by
paying $10,000 cash and issuing $60,000 of notes payable.
c) Sold property, plant and equipment with an original cost of
$30,000 and accumulated depreciation of $12,000 for $12,000
cash, yielding a $6,000 loss.
d) Received $15,000 cash from issuing 3,000 shares of no-par
ordinary shares.
e) Paid $18,000 cash to retire notes with a $34,000 carrying
amount, yielding a $16,000 gain.
f) Declared and paid cash dividends of $14,000.
 16 - 20

P2
Application of the
Indirect Method of Reporting
Changes
Changesin innoncash
noncash
current
currentassets
assetsandandcurrent
current
liabilities
liabilities

1 Cash
CashFlows
Flows
Income
Income from
fromOperating
Operating
before
before Activities
Activities
taxes
taxes 2 3

++Noncash
Noncash ++Losses
Lossesandand
expenses
expensessuch
suchasas --Gains
Gains
depreciation
depreciationand
and
amortization
amortization
 16 - 21

P2

Why start with income before taxes?

 International Financial Reporting Standards
(IFRS)
 Cash flows arising from taxes on income
should be separately disclosed and should be
classified as cash flows from operating
activities.

Cash
CashFlows
Flows
Income
Income from
fromOperating
Operating
before
before Activities
Activities
taxes
taxes
 16 - 22

P2 Adjustments for Changes in

Noncash Current Assets and Current Liabilities
Change in Account Balance During Year
Increase Decrease
Noncash
Current Subtract from income Add to income
Assets

Current Add to income Subtract from income

Liabilities

Use this table when adjusting income before

taxes to operating cash flows
 16 - 23

P2
Adjustments for Changes in
NonCASH Current Assets and
Current Liabilities
 16 - 24

P2
Adjustments for Operating Items
Not Providing or Using Cash
 16 - 25

P2

Adjustments for Nonoperating Items

 16 - 26

P2
Interest Revenues, Dividend Revenues,
Interest Expenses and Income Taxes

Under IFRS, interest and dividends received, interest paid and

income taxes must be separately shown.

Since interest and dividend revenues are added to

derive income amount, adjustments involve
deducting these amounts from income.
Interest expenses are added to income to
cancel the earlier deduction.
 16 - 27

P2

COMPLETING THE OPERATING SECTION

 16 - 28

P2
Summary of Adjustments
for Indirect Method
Common adjustments to income when computing net cash provided or
used by operating activities under the indirect method:
 16 - 29

P3

Cash Flows from Investing

A three-stage process to determine cash

provided or used by investing activities:
Explain these
Identify changes in
changes using
investing-related
reconstruction
accounts
analysis

Report their cash

flow effects
 16 - 30

P3
Cash Flows from Investing

This analysis reveals a $40,000

increase in property, plant and
equipment from $210,000 to
$250,000 and a $12,000
increase in accumulated
depreciation from $48,000 to
$60,000.
 16 - 31

P3

Cash Flows from Investing

Item b: Genesis purchased property, plant and equipment of $70,000
by issuing $60,000 in notes payable to the seller and paying $10,000
in cash.

Item c: Genesis sold property, plant and equipment costing $30,000

(with $12,000 of accumulated depreciation) for $12,000 cash,
resulting in a $6,000 loss.

We also reconstruct the entry for Depreciation Expense using

information from the income statement.
 16 - 32

P3
Cash Flows from Investing
 16 - 33

P3

Cash Flows from Financing

A three-stage process to determine cash

provided or used by financing activities:
Explain these
Identify changes in
changes using
financing-related
reconstruction
accounts
analysis

Report their cash

flow effects
 16 - 34

P3 Cash Flows from Financing

This analysis reveals:

1.an increase in notes payable
from $64,000 to $90,000,
2.an increase in share capital
from $80,000 to $95,000, and
3.an increase in retained
earnings from $88,000 to
$112,000.
 16 - 35

P3

Cash Flows from Financing

Item e: Notes with a carrying amount of $34,000 are retired for

$18,000 cash, resulting in a $16,000 gain.

Item b: Genesis purchased property, plant and equipment of $70,000

by issuing $60,000 in notes payable to the seller and paying $10,000
in cash.
 16 - 36

P3

Cash Flows from Financing

Item d: Issued 3,000 no-par ordinary shares for $5 per share.

Item f: Cash dividends of $14,000 are paid.

 16 - 37

P3
 16 - 38

P3
 16 - 39

A1 Analyzing Cash
Sources and Uses
Most managers stress the importance of
understanding and predicting cash flows for business
decisions.
 16 - 40

A1

Cash Flow on Total Assets

Used,
Used, along
along with
with income-based
income-based ratios,
ratios, to
to
assess
assess company
company performance.
performance.

Cash flow on Operating cash flows

total assets = Average total assets
 16 - 41

P4
Appendix 16A: Direct Method of
Reporting Operating Cash Flows
Adjust income statement accounts related to operating activities
for changes in their related balance sheet accounts:

Framework for
reporting cash
receipts and
cash payments
 16 - 42

Appendix 16A: Direct Method of

P4

Reporting Operating Cash Flows

 16 - 43

End of Chapter 16