Cash flow statement-Teaching note

Priyesh V Purayil., IIM Amritsar

 Statement of Cash Flows - Indirect Method
Cash flows from operating activities
Net income Start assuming that NI = change in cash
Adjustments to reconcile net income to operating cash flow: Correct for that assumption
Income statement items (opposite direction): Why?
+ Noncash expenses (Depreciation, amortization) These expenses didn't reduce cash
- Noncash revenues) These revenues didn't provide cash
+ Loss on sale of LT assets Cash flow is reported in the
- Gain on sale of LT assets Investing activities section
Balance sheet items:
Change in noncash operating assets (opposite direction)
+ Decreases in current operating assets
- Increases in current operating assets
Change in noncash operating liabilities (same direction)
+ Increases in current operating liabilities
- Decreases in current operating liabilities
Net cash provided (used) by operating activities

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 Arundel Company
Income Statement
For the year ended December 31, 20X1
Revenues $100,000 Accounts receivable decrease $24,000
Operating expenses Purchased a machine for cash $10,000
Salaries expense $84,000 Salaries payable increase 18,000
Utilities expense 14,000 Other accrued liabilities decrease 8,000
Depreciation expense 14,600
Other expenses 3,400
Total operating expenses 116,000
Net loss ($16,000)

Arundel Company
Statement of Cash Flows (partial) - Indirect Method
Cash flows from operating activities
Net loss ($16,000)
Adjustments to reconcile net income to operating cash flow:
Depreciation expense $14,600
Accounts receivable decrease 24,000
Salaries payable increase 18,000
Other accrued liabilities decrease (8,000)
Net cash provided by operating activities $32,600

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 Sonad Company Sonad Company
Income Statement Statement of Cash Flows (partial) - Indirect Method
For the year ended December 31, 2016 For the year ended December 31, 2016
Sales $1,828,000 Cash flows from operating activities
Cost of goods sold 991,000 Net income $481,540
Gross profit 837,000 Adjustments to reconcile net income to operating cash flow:
Operating expenses Depreciation expense $44,200
Salaries expense $245,535 Amortization expense - Patents 4,200
Depreciation expense 44,200 Gain on sale of equipment (6,200)
Rent expense 49,600 Increase in Accounts receivable (30,500)
Amortization expense - Patents 4,200 Increase in Merchandise inventory (25,000)
Utilities expense 18,125 Decrease in Accounts payable (12,500)
Total operating expenses 361,660 Decrease in Salaries payable (3,500)
475,340 (29,300)
Gain on sale of equipment 6,200 Net cash provided by operating activities $452,240
Net income $481,540

Changes in current asset and current liability accounts for the year that relate to operating activities follow:

Accounts receivable $30,500 Increase Accounts payable $12,500 Decrease

Merchandise inventory 25,000 Increase Salaries payable 3,500 Decrease

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Salud Company reports the following information. Use the indirect method to prepare only the operating
activities section of the statement of cash flows for the year ended December 31, 2016.

Selected 2016 Income Statement Selected Year-End 2016 Balance Sheet Data
Net income $400,000 Accounts receivable increase 40,000
Depreciation expense 80,000 Prepaid expenses decrease 12,000
Gain on sale of machinery 20,000 Accounts payable increase 6,000
Wages payable decrease 2,000

Salud Company
Statement of Cash Flows (partial) - Indirect Method
For the year ended December 31, 2016
Cash flows from operating activities
Net income $400,000
Adjustments to reconcile net income to operating cash flow:
Depreciation expense $80,000
Gain on sale of machinery (20,000)
Accounts receivable increase (40,000)
Prepaid expenses decrease 12,000
Accounts payable increase 6,000
Wages payable decrease (2,000)
36,000
Net cash provided by operating activities $436,000

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a. Equipment with a book value of $65,300, and an original cost of $133,000 was sold at a loss of $14,000.
b. Paid $89,000 cash for a new truck.
c. Sold land costing $154,000 for $198,000 cash, yielding a gain of $44,000.
d. Long-term investments in stock were sold for $60,800 cash, yielding a gain of $4,150.
   

Cash flows from investing activities

Cash received from the sale of equipment $51,300
Cash paid for the new truck (89,000)
Cash received from the sale of land 198,000
Cash received from the sale of long-term investments in stock 60,800
Net cash provided by investing activities $221,100

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 a. Net income was $35,000.
b. Issued common stock for $64,000 cash.
c. Paid cash dividend of $14,600.
d. Paid $50,000 cash to settle a note payable at its $50,000 maturity value.
e. Paid $12,000 cash to acquire its treasury stock.
f. Purchased equipment for $39,000 cash.

Use the above information to determine this company's cash flows from financing activities.

Cash flows from financing activities

Proceeds for issuance of common stock $64,000
Paid cash dividend (14,600)
Repaid note payable (50,000)
Purchased treasury stock (12,000)
Net cash used by financing activities ($12,600)

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Peugeot, S.A. reports the following financial information for the year ended December 31, 2014 (euros in millions). Hint:
Each line item below is titled, and any necessary parentheses added, as it is reported in the statement of cash flows.)
Net loss (€ 822) Cash from issuance of shares € 2,961
Depreciation and amortization 2,530 Cash paid for other financing activities (1,891)
Loss on disposals and other 42 Cash from disposal of plant assets and intangibles 206
Net decrease in current assets and other 2,314 Cash paid for plant assets, intangibles & other (2,542)
Cash paid for dividends (58) Cash and cash equivalents, December 31, 2013 5,974
Prepare its statement of cash flows for 2014 using the indirect method (assuming IFRS).
Peugeot, S.A. Company
Statement of Cash Flows - Indirect Method
For the year ended December 31, 2014
Cash flows from operating activities
Net loss (€ 822)
Adjustments to reconcile net income to operating cash flow:
Net decrease in current assets and other € 2,314
Depreciation and amortization 2,530
Loss on disposals and other 42
Net cash provided by operating activities 4,064
Cash flows from investing activities
Cash from disposal of plant assets and intangibles 206
Cash paid for plant assets, intangibles & other (2,542)
Net cash used by investing activities (2,336)
Cash flows from financing activities
Cash paid for dividends (58)
Cash from issuance of shares 2,961
Cash paid for other financing activities (1,891)
Net cash provided by financing activities 1,012
Net increase in cash 2,740
Cash and cash equivalents, December 31, 2013 5,974
Cash and cash equivalents, December 31, 2014 € 8,714
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 FERRON COMPANY
  Cash and cash equivalents balance, December 31, 2015 $40,000
  Cash and cash equivalents balance, December 31, 2016 148,000 Statement of Cash Flows - Direct Method
  Cash received as interest 3,500 For the year ended December 31, 2016
  Cash paid for salaries 76,500 Cash flows from operating activities
  Bonds payable retired by issuing common stock   Cash received from customers $495,000
(no gain or loss on retirement) 185,500   Cash received as interest 3,500
  Cash paid to retire long-term notes payable 100,000   Cash paid for merchandise (254,500)
  Cash received from sale of equipment 60,250   Cash paid for salaries (76,500)
  Cash received in exchange for six-month note payable 35,000   Cash paid for other expenses (20,000)
  Land purchased by issuing long-term note payable 105,250
  Cash paid for store equipment 24,750 Net cash provided by operating activities $147,500
  Cash dividends paid 10,000 Cash flows from investing activities
  Cash paid for other expenses 20,000   Cash received from sale of equipment $60,250
  Cash received from customers 495,000   Cash paid for store equipment (24,750)
  Cash paid for merchandise 254,500 Net cash provided by investing activities 35,500
Cash flows from financing activities
  Cash paid to retire long-term notes payable ($100,000)
  Cash received in exchange for six-month note payable35,000
  Cash dividends paid (10,000)

Net cash used by financing activities (75,000)

Net increase in cash $108,000
  Cash and cash equivalents balance, December 31, 2015 40,000
  Cash and cash equivalents balance, December 31, 2016 $148,000

Noncash investing and financing activities:

  Bonds payable retired by issuing common stock $185,500
(no gain or loss on retirement)
  Land purchased by issuing long-term note payable $105,250

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 Cash
  Balance, Dec. 31, 2015 333,000
  Receipts from customers 5,000,000   Payments for merchandise 2,590,000
  Receipts from dividends 208,400   Payments for wages 550,000
  Receipts from land sale 220,000   Payments for rent 320,000
  Receipts from machinery sale 710,000   Payments for interest 218,000
  Receipts from issuing stock 1,540,000   Payments for taxes 450,000
  Receipts from borrowing 3,600,000   Payments for machinery 2,236,000
  Payments for long-term investments 1,260,000
  Payments for note payable 386,000
  Payments for dividends 500,000
  Payments for treasury stock 218,000
  Balance, Dec. 31, 2016 2,883,400

THOMAS COMPANY
Statement of Cash Flows - Direct Method
For the year ended December 31, 2016
Cash flows from operating activities
Cash received from customers $5,000,000
Cash received from dividends 208,400
Cash paid for merchandise (2,590,000)
Cash paid for wages (550,000)
Cash paid for rent (320,000)
Cash paid for interest (218,000)
Cash paid for taxes (450,000)
Net cash provided by operating activities $1,080,400

Cash flows from investing activities

Cash received from sale of land 220,000
Cash received from sale of machinery 710,000
Cash paid for purchases of machinery (2,236,000)
Cash paid for purchases of LT investments (1,260,000)
Net cash used by investing activities (2,566,000)

Cash flows from financing activities

Cash received from issuing stock 1,540,000
Cash received from borrowing 3,600,000
Cash paid for note payable (386,000)
Cash paid for dividends (500,000)
Cash paid for treasury stock purchases (218,000)

Net cash provided by financing activities 4,036,000

Net increase in cash $2,550,400
Beginning balance of cash 333,000
Ending balance of cash $2,883,400
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The following financial statements and additional information are reported:
IKIBAN INC. IKIBAN INC.
Income Statement Comparative Balance Sheets
For the year ended June 30, 2016 June 30, 2016 and 2015
Sales $678,000 2016 2015
Cost of goods sold 411,000 Assets
Gross profit 267,000 Cash $87,500 $44,000
Operating expenses Accounts receivable, net 65,000 51,000
Other expenses $67,000 Inventory 63,800 86,500
Depreciation expense 58,600 Prepaid expenses 4,400 5,400
Total operating expenses 125,600 Equipment 124,000 115,000
141,400 Accum. Depreciation - Equipment (27,000) (9,000)
Gain on sale of equipment 2,000 Total Assets $317,700 $292,900
Income before taxes 143,400
Income taxes expense 43,890 Liabilities and equity
Net income $99,510 Accounts payable $25,000 $30,000
Wages payable 6,000 15,000
Prepare a statement of cash flows for the year Income taxes payable 3,400 3,800
ended June 30, 2016 using the indirect method. Notes payable (long-term) 30,000 60,000
Common stock, $5 par value 220,000 160,000
Retained earnings 33,300 24,100
Total Liabilities and Equity $317,700 $292,900

a. A $30,000 note payable is retired at its $30,000 carrying (book value) in exchange for cash.
b. The only changes affecting retained earnings are net income and cash dividends paid.
c. New equipment is acquired for $57,600 cash.
d. Received cash for the sale of equipment that had cost $48,600, yielding a $2,000 gain.
e. Prepaid expenses and Wages payable relate to Other expenses on the income statement.
f. All purchases and sales of merchandise inventory are on credit.

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 IKIBAN INC. IKIBAN Inc. Company
Comparative Balance Sheets Statement of Cash Flows - Indirect Method
June 30, 2016 and 2015 For the year ended June 30, 2016
2016 2015 Cash flows from operating activities
Assets Net income $99,510
Cash $87,500 $44,000 Adjustments to reconcile net income to operating cash flow:
Accounts receivable, net 65,000 51,000 Depreciation expense $58,600
Inventory 63,800 86,500
Gain on sale of equipment (2,000)
Prepaid expenses 4,400 5,400
Increase in Accounts receivable, net (14,000)
Equipment 124,000 115,000
Accum. Depreciation - Equipment (27,000) (9,000)
Decrease in Inventory 22,700
Total Assets $317,700 $292,900 Decrease in Prepaid expenses 1,000
Decrease in Accounts payable (5,000)
Liabilities and equity Decrease in Wages payable (9,000)
Accounts payable $25,000 $30,000 Decrease in Income taxes payable (400) 51,900
Wages payable 6,000 15,000 Net cash provided by operating activities 151,410
Income taxes payable 3,400 3,800 Cash flows from investing activities
Notes payable (long-term) 30,000 60,000 Cash received sale of equipment $10,000
Common stock, $5 par value 220,000 160,000 Cash paid for equipment (57,600)
Retained earnings 33,300 24,100 Net cash used by investing activities (47,600)
Total Liabilities and Equity $317,700 $292,900 Cash flows from financing activities

c. New equipment is acquired for $57,600 cash.

d. Received cash for the sale of equipment that had cost
$48,600, yielding a $2,000 gain.
Net increase in cash
Equipment Accum. Depr
115,000 9,000
57,600 48,600 40,600 58,600 The book value of the equipment sold was $8,000 ($48,600 cost -
124,000 27,000 $40,600) accumulated depreciation. Since it was sold at a gain,
cash receipt was $10,000.
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 IKIBAN INC. IKIBAN Inc. Company
Comparative Balance Sheets Statement of Cash Flows - Indirect Method
June 30, 2016 and 2015 For the year ended June 30, 2016
2016 2015 Cash flows from operating activities
Assets Net income $99,510
Cash $87,500 $44,000 Adjustments to reconcile net income to operating cash flow:
Accounts receivable, net 65,000 51,000 Depreciation expense $58,600
Inventory 63,800 86,500
Gain on sale of equipment (2,000)
Prepaid expenses 4,400 5,400
Increase in Accounts receivable, net (14,000)
Equipment 124,000 115,000
Accum. Depreciation - Equipment (27,000) (9,000)
Decrease in Inventory 22,700
Total Assets $317,700 $292,900 Decrease in Prepaid expenses 1,000
Decrease in Accounts payable (5,000)
Liabilities and equity Decrease in Wages payable (9,000)
Accounts payable $25,000 $30,000 Decrease in Income taxes payable (400) 51,900
Wages payable 6,000 15,000 Net cash provided by operating activities 151,410
Income taxes payable 3,400 3,800 Cash flows from investing activities
Notes payable (long-term) 30,000 60,000 Cash received sale of equipment $10,000
Common stock, $5 par value 220,000 160,000 Cash paid for equipment (57,600)
Retained earnings 33,300 24,100 Net cash used by investing activities (47,600)
Total Liabilities and Equity $317,700 $292,900 Cash flows from financing activities
Cash received from stock issuance $60,000
Cash paid to retire notes (30,000)
a. A $30,000 note payable is retired at its $30,000 carrying Cash paid for dividends (90,310)
(book value) in exchange for cash.
Net cash used by financing activities (60,310)
b. The only changes affecting retained earnings are net Net increase in cash $43,500
income and cash dividends paid. Cash balance at June 30, 2015 44,000
$24,100 + $99,510 – Dividends = $33,300 Cash balance at June 30, 2016 $87,500
Dividends = $90,310

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 IKIBAN Inc. Company
Statement of Cash Flows - Indirect Method
For the year ended June 30, 2016
Cash flows from operating activities
Net income $99,510 IKIBAN Inc. Company
Adjustments to reconcile net income to operating cash flow: Statement of Cash Flows - Direct Method
Depreciation expense $58,600 For the year ended June 30, 2016
Gain on sale of equipment (2,000) Cash flows from operating activities
Increase in Accounts receivable, net (14,000) Receipts from customers $664,000
Decrease in Inventory 22,700 Payments for merchandise (393,300)
Payments for other expenses (75,000)
Decrease in Prepaid expenses 1,000
Payments for income taxes (44,290)
Decrease in Accounts payable (5,000) Net cash provided by operating activities $151,410
Decrease in Wages payable (9,000) Cash flows from investing activities
Decrease in Income taxes payable (400) 51,900 Cash received from sale of equipment $10,000
Net cash provided by operating activities 151,410 Cash paid for equipment (57,600)
Cash flows from investing activities Net cash used by investing activities (47,600)
Cash received sale of equipment $10,000 Cash flows from financing activities
Cash received from stock issuance $60,000
Cash paid for equipment (57,600)
Cash paid to retire notes (30,000)
Net cash used by investing activities (47,600) Cash paid for dividends (90,310)
Cash flows from financing activities Net cash used by financing activities (60,310)
Cash received from stock issuance $60,000 Net increase in cash $43,500
Cash paid to retire notes (30,000) Cash balance at June 30, 2015 44,000
Cash paid for dividends (90,310) Cash balance at June 30, 2016 $87,500
Net cash used by financing activities (60,310)
Net increase in cash $43,500
Cash balance at June 30, 2015 44,000
Cash balance at June 30, 2016 $87,500

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 Exercise
• Use the following information to determine this
company’s cash flows from financing activities.
a. Issued common stock for $40 cash.
b. Paid $70 cash to retire a note payable at its $70
maturity value.
c. Paid cash dividend of $15.
d. Paid $5 cash to acquire its treasury stock.

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 Solution
Cash flows from financing activities
Cash received from issuance of common stock . . . . . . . . . . . $ 40
Cash paid to settle note payable . . . . . . . . . . . . . . . . . . . . . . . (70)
Cash paid for dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
Cash paid to acquire treasury stock . . . . . . . . . . . . . . . . . . . . (5)
Net cash used by financing activities . . . . . . . . . . . . . . . . . $(50)

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Q:Use the following financial statements and additional information to (1) prepare a statement of cash flows
for the year ended December 31, 2016, using the indirect method and (2) analyze and briefly discuss the
statement prepared in part 1 with special attention to operating activities and to the company’s cash level

Additional Information
a. No dividends are declared or paid in 2016.
b. Issued additional stock for $10,000 cash in 2016.
c. Purchased equipment for cash in 2016; no equipment was sold in 2016.

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 MONTGOMERY, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2014
Cash flows from operating activities      
Net income $ 10,500    
Adjustments to reconcile net income to net cash      
provided by operating activities
Decrease in accounts receivable 2,100    
Increase in inventory (19,950)    
Decrease in accounts payable (1,500)    
Decrease in salaries payable (100)    
Depreciation expense 7,200    
Net cash used in operating activities   $ (1,750)  
Cash flows from investing activities      
Cash paid for equipment (Note 1) (8,400)    
Net cash used in investing activities   (8,400)  
Cash flows from financing activities      
Cash received from stock issuance 10,000    
Note 1
Net cash used in financing
Equipmentactivities     10,000  
Bal., 12/31/2013 41,500    
Net decrease
Purchase in cash
“plug” Sale 0  plug = $8,400   $ (150)  
Bal., 12/31/2014 49,900    
Cash balance at beginning of year   30,550  
Cash balance at end of year   $ 30,400  

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The Carpet Company’s 2014 and 2013 balance sheets:

  December 31
  2014 2013
Debits    
Cash $10,500 $ 4,000
Accounts receivable 8,000 9,000
Merchandise inventory 21,000 18,000
Equipment 18,000 15,000
Totals $57,500 $46,000
     
Credits    
Accumulated depreciation, equipment $ 4,000 $ 3,000
Accounts payable 7,000 5,000
Taxes payable 1,000 2,000
Dividends payable 1,500 0
Common stock, $10 par value 27,000 25,000
Contributed capital in excess of par, common stock 6,000 5,000
Retained earnings 11,000 6,000
Totals $57,500 $46,000
     

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The Carpet Company’s income statement:
For the Year Ended December 31, 2014
     
Sales   $61,000
Cost of goods sold $40,000  
Wages and other operating expenses 6,300  
Income taxes expense 4,200  
Depreciation expense 1,500 52,000
Net income   $ 9,000

Additional information includes the following:

a. Equipment costing $3,500 was purchased during the year.
b. Fully depreciated equipment that cost $500 was discarded and its cost and accumulated
depreciation were removed from the accounts.
c. Two hundred shares of stock were sold and issued at $15 per share.
d. The company declared $4,000 of cash dividends and paid $2,500.

Required:
Prepare the statement of cash flows for the year ended December 31, 2014, using the:
1. Indirect method.

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