16-1

Reporting the
Chapter
Statement of

16 Cash Flows

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-2

Purpose
Purpose of
of the
the Statement
Statement of
of Cash
Cash
Flows
Flows
How
How does
doesaa Where
Wheredoes
doesaa
company
companyobtain
obtainits
its company
companyspend
spendits
its
cash?
cash? cash?
cash?

What
Whatexplains
explainsthe
the
change
changein
inthe
thecash
cash
balance?
balance?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-3

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

Did
Didthe
thebusiness
business Did
Didthe
thebusiness
business
make
makeanyanydividend
dividend borrow
borrow any
anyfunds
fundsor
or
payments?
payments? repay
repayany
anyloans?
loans?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-4

Measurement
Measurement of
of Cash
Cash Flows
Flows
Cash Cash
Cash
Equivalents Currency

 Short-term,
Short-term, highly
highlyliquid
liquidinvestments.
investments.
 Readily
Readilyconvertible
convertibleinto
intocash.
cash.
 So
Sonear
nearmaturity
maturitythat
thatmarket
marketvalue
valueis
isunaffected
unaffectedby
by
interest
interestrate
ratechanges.
changes.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-5

Classifying
Classifying Cash
Cash Flows
Flows
The Statement of Cash Flows includes the
following three sections:
 Operating Activities
 Investing Activities
 Financing Activities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-6

Operating
Operating Activities
Activities
Inflows
Inflows
 Receipts from customers.
Receipts from customers.
 Cash dividends received.
Cash dividends received.
 Interest from borrowers.
Interest from borrowers.
 Other.
Other.
Outflows
Outflows
 Salaries and wages.
Salaries and wages.
 Payments to suppliers.
Payments to suppliers.
 Taxes and fines.
Taxes and fines.
 Interest paid to lenders.
Interest paid to lenders.
 Other.
Other.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-7

Investing
Investing Activities
Activities
Inflows
Inflows
 Selling long-term productive
Selling long-term productive
assets.
assets.
 Selling equity investments.
Selling equity investments.
 Collecting principal on loans.
Collecting principal on loans.
 Other.
Other.
Outflows
Outflows
 Purchasing long-term
Purchasing long-term
productive
productiveassets.
assets.
 Purchasing equity
Purchasing equity
investments.
investments.
 Purchasing debt investments.
Purchasing debt investments.
 Other.
McGraw-Hill/Irwin
Other. © The McGraw-Hill Companies, Inc., 2005
 16-8

Financing
Financing Activities
Activities
Inflows
Inflows
 Issuing its own equity
Issuing its own equity
securities.
securities.
 Issuing bonds and notes.
Issuing bonds and notes.
 Issuing short- and long-term
Issuing short- and long-term
liabilities.
liabilities.

Outflows
Outflows
 Pay dividends.
Pay dividends.
 Purchasing treasury
Purchasing treasurystock
stock
 Repaying cash loans.
Repaying cash loans.
 Paying owners’ withdrawals.
Paying owners’ withdrawals.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-9

Noncash
Noncash Investing
Investing and
and Financing
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 of of preferred
preferred stock
stock toto
common
common stock.
stock.

Leasing
Leasing ofof assets
assets inin aa capital
capital lease
lease
transaction.
transaction.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-10
Exh.
16.5

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., 2005

 16-11
Exh.
16.5

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:
There are two acceptable methods to determine Cash
[List of individual inflows and outflows]
Flows from Operating Activities:
Net cash provided (used) by investing activites #####
Cash flows from financing Direct Method
activities:
[List of individual inflows and outflows]
Net cash provided (used)Indirect Method
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., 2005

 16-12

Let’s look at the

Direct Method
for preparing
the Cash Flows
from Operating
Activities
section.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-13

Analyzing
Analyzing the
the Cash
Cash Account
Account
Cash
Balance, Jan. 1, 2005 22,000 Payments for merchandise 150,000
Receipts from customers 466,000 Payments for wages 145,000
Receipts from sale of land 25,000 Payments for interest 10,000
Receipts from stock issuance 35,000 Payments for taxes 20,000
Payments for equipment 70,000
Payments for bond retirement 50,000
Payments for dividends 40,000
Balance, Dec. 31, 2005 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., 2005
 B&G Company 16-14

Statement of Cash Flows

For the Year Ended December 31, 2005
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, 2005 22,000
Cash, December 31, 2005 $ 63,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-15

Let’s look at the

Indirect Method
for preparing
the Cash Flows
from Operating
Activities
section.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-16

Indirect
Indirect Method
Method of
of Reporting
Reporting Operating
Operating
Cash
Cash Flows
Flows
Changes
Changesinincurrent
currentassets
assets
and
andcurrent
currentliabilities.
liabilities.

Cash
CashFlows
Flows
Net
Net from
fromOperating
Operating
Income
Income Activities
Activities

++Losses
Lossesandand ++Noncash
Noncash
--Gains
Gains expenses
expensessuch
suchas as
depreciation
depreciationand
and
amortization.
amortization.

97.5%
97.5% of
of all
all companies
companies use
use the
the indirect
indirect method.
method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-17

Indirect
Indirect Method
Method of
of Reporting
Reporting Operating
Operating
Cash
Cash Flows
Flows

Use this table when adjusting Net Income

to Operating Cash Flows.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-18

Indirect
Indirect Method
Method
Example
Example
East,
East, Inc.
Inc. reports
reports $125,000
$125,000 netnet income
income for
for the
the
year
year ended
ended December
December 31,31, 2005.
2005.
Accounts
Accounts Receivable
Receivable increased
increased by by $7,500
$7,500
during
during thethe year
year and
and Accounts
Accounts Payable
Payable
increased
increased byby $10,000.
$10,000.
During
During 2005,
2005, East
East reported
reported $12,500
$12,500 of
of
Depreciation
Depreciation Expense.
Expense.

What is East, Inc.’s Operating

Cash Flow for 2005?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-19

Indirect
Indirect Method
Method
Example
Example

Net
Netincome
income $$ 125,000
125,000

Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
receivable
For
For thethe indirect
indirect
Cash
Cash provided
method,
provided by operating
start
by with
operating
method,
activities
start with
activities
net
net income.
income.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-20

Indirect
Indirect Method
Method
Example
Example

Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
Add
Add noncash
receivable noncash
expenses
expenses such
such asas
Cash
Cashprovided
providedby
byoperating
operating
depreciation,
depreciation,
activities
activities
depletion,
depletion,
amortization,
amortization, or or bad
bad
debt
debt expense.
expense.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-21

Indirect
Indirect Method
Method
Example
Example

Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
receivable (7,500)
(7,500)

Cash
Cashprovided
providedby
byoperating
operating
activities
activities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-22

Indirect
Indirect Method
Method
Example
Example

Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
receivable (7,500)
(7,500)
Add:
Add:Increase
Increaseininaccounts
accountspayable
payable 10,000
10,000
Cash
Cashprovided
providedbybyoperating
operating
activities
activities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-23

Indirect
Indirect Method
Method
Example
Example

Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
receivable (7,500)
(7,500)
Add:
Add:Increase
Increaseininaccounts
accountspayable
payable 10,000
10,000
Cash
Cashprovided
providedbybyoperating
operating
activities
activities $$ 140,000
140,000

If we used the Direct Method, we would get the same

$140,000 for Cash Provided by Operating Activities.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-24

Let’s prepare a
Statement of
Cash Flows for
B&G Company
using the
Indirect
Method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 16-25

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-26

 Additional
Additional Information
Information for
for 2005:
2005:
•• Net
Net income
income was
was $105,000.
$105,000.
•• Cash
Cash dividends
dividends declared
declared and
and paid
paid were
were
$40,000.
$40,000.
•• Bonds
Bonds payable
payable of
of $50,000
$50,000 were
were
redeemed
redeemed forfor $50,000
$50,000 cash.
cash.
•• Common
Common stock
stock was
was issued
issued for
for $35,000
$35,000
cash.
cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 B&G Company 16-27
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:

Add
Add noncash
noncash expenses
expenses Start
Start with
with
and
and losses.
losses. accrual-basis
accrual-basis
Subtract
Subtract noncash
noncash net
net income.
income.
revenues
revenues and
and gains.
gains.
Then,
Then, analyze
analyze the
the
changes
changes inin current
current
assets
assets and
and current
current
liabilities.
liabilities.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 B&G Company 16-28
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 B&G Company 16-29
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities

Now,
Now, let’s
let’s complete
complete
the
the investing
investing
section.
section.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 B&G Company 16-30
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
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

Now,
Now, let’s
let’s complete
complete
the
the financing
financing section.
section.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 B&G Company 16-31
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
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, 2005 22,000
Cash, December 31, 2005 $ 63,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-32

Analyzing
Analyzing Cash
Cash Sources
Sources and
and Uses
Uses
Cash Flows of Competing Companies
all numbers in thousands BMX ATV Trex
Cash provided (used) by operating
activities $ 90,000 $ 40,000 $ (24,000)
Cash provided (used) by investing
activities:
Proceeds from sale of operating
assets 26,000
Purchase of operating assets (48,000) (25,000)
Cash provided (used) by financing
activities:
Proceeds from issuance of debt 13,000
Repayment of debt (27,000)
Net increase (decrease) in cash $ 15,000 $ 15,000 $ 15,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-33

Cash
Cash Flow
Flow on
on Total
Total Assets
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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 16-34

End of Chapter 16

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005