Reporting the Statement of

Cash Flows

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

 C1 Purpose of the Statement of Cash
Flows

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

What
Whatexplains
explainsthe
the
change
changein
inthe
thecash
cash
balance?
balance?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

 C1
Importance of Cash Flows

How Does
Doesthe
thebusiness
business
How did
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
business
Didthe
thebusiness
business
make borrow
borrow any
anyfunds
fundsor
or
makeanyanydividend
dividend
payments? repay
repayany
anyloans?
loans?
payments?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

 C1

Measurement of Cash Flows

Cash Cash
Cash
Equivalents Currency

 Short-term,
Short-term, highly
highlyliquid
liquidinvestments.
investments.
 Readily
Readilyconvertible
convertibleinto
intocash.
cash.
 Sufficiently
Sufficientlyclose
closeto
tomaturity
maturityso
sothat
thatmarket
marketvalue
valueis
is
unaffected
unaffectedby byinterest
interestrate
ratechanges.
changes.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007
 Classifying Cash Flows
C2

The Statement of Cash Flows

includes the following three
sections:
• Operating Activities
• Investing Activities
• Financing Activities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

 C2

Operating Activities
Inflows
Inflows
•• Receipts
Receiptsfromfromcustomers
customers
•• Cash
Cashdividends
dividendsreceived
received
•• Interest
Interest from
fromborrowers
borrowers
•• Other.
Other.

Outflows
Outflows
•• Salaries
Salariesand
andwages
wages
•• Payments
Paymentsto tosuppliers
suppliers
•• Taxes
Taxesand
andfines
fines
•• Interest
Interest paid
paidto tolenders
lenders
•• Other
Other
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007
 Investing Activities
C2

Inflows
Inflows
•• Selling
Sellinglong-term
long-termproductive
productive
assets
assets
•• Selling
Sellingequity
equityinvestments
investments
•• Collecting
Collectingprincipal
principalon
onloans
loans
•• Other
Other
Outflows
Outflows
•• Purchasing
Purchasinglong-term
long-term
productive
productiveassets
assets
•• Purchasing
Purchasingequity
equity
investments
investments
•• Purchasing
Purchasingdebt
debt investments
investments
•• Other
Other © The McGraw-Hill Companies, Inc., 2007
McGraw-Hill/Irwin
 Financing Activities
C2

Inflows
Inflows
•• Issuing
Issuingits
itsown
ownequity
equity
securities
securities
•• Issuing
Issuingbonds
bondsand
andnotes
notes
•• Issuing
Issuingshort-
short-and
andlong-term
long-term
liabilities
liabilities

Outflows
Outflows
•• Pay
Paydividends
dividends
•• Purchasing
Purchasingtreasury
treasurystock
stock
•• Repaying
Repayingcash
cashloans
loans
•• Paying
Payingowners’
owners’withdrawals
withdrawals
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007
 C4 Format of the Statement of Cash
Flows
Company Name
Statement of Cash Flows
For Period Ended Date
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activites $ #####
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash provided (used) by investing activites #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activites #####
Net increase (decrease) in cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

 P5
Analyzing the Cash Account
Cash
Cash
Balance,
Balance, Jan.
Jan. 1,1, 2008
2008 22,000
22,000 Payments
Paymentsfor
for merchandise
merchandise 150,000
150,000
Receipts
Receiptsfrom
from customers
customers 466,000
466,000 Payments
Paymentsfor
for wages
wages 145,000
145,000
Receipts
Receiptsfrom
from sale
sale ofofland
land 25,000
25,000 Payments
Paymentsfor
for interest
interest 10,000
10,000
Receipts
Receiptsfrom
from stock
stockissuance
issuance 35,000
35,000 Payments
Paymentsfor
for taxes
taxes 20,000
20,000
Payments
Paymentsfor
for equipment
equipment 70,000
70,000
Payments
Paymentsfor
for bond
bond retirement
retirement 50,000
50,000
Payments
Paymentsfor
for dividends
dividends 40,000
40,000
Balance,
Balance, Dec.
Dec. 31,
31, 2008
2008 63,000
63,000

Let’s use this Cash account to prepare B&G

Company’s Statement of Cash Flows under the
Direct Method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007
 P5

B&G Company
Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flows from operating activities
Cash received from customers $ 466,000
Cash paid for merchandise (150,000)
Cash paid for wages (145,000)
Cash paid for interest (10,000)
Cash paid for taxes (20,000)
Net cash provided by operating activities 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
Cash flows from financing activities
Proceeds from issuance of common stock 35,000
Redemption of bonds (50,000)
Payment of dividends (40,000)
Net cash used by financing activities (55,000)
Net increase in cash 41,000
Cash, January 1, 2008 22,000
Cash, December 31, 2008 $ 63,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007