Statement of Cash Flows Chapter 22

Understanding the purpose of a statement of cash flows. Learning Objective 1

Learning Unit 22-1 n What are the required financial statements? 1 Income statement 2 Statement of retained earnings 3 Balance sheets 4 Statement of cash flows

The statement of cash flows summarizes the sources and uses of cash by a company during an accounting period. The statement of cash flows summarizes the sources and uses of cash by a company during an accounting period. Learning Unit 22-1

Learning Unit 22-1 n The statement of cash flows consists of three main sections: 1 Operating activities 2 Investing activities 3 Financing activities n A fourth classification is called “non-cash investing and financing activities.”

Prepare the Operating Activities section of the statement of cash flows using the indirect method. Learning Objective 2

Learning Unit 22-1 n The indirect method begins with the bottom line of the income statement and works backward to compute net cash flow from operating activities. n Accrual net income from operating activities is adjusted to cash net income.

Statement of Cash Flows (Indirect Method) Year Ended December 31, 200x Cash Flows from Operating Activities: Net Income from Operations$ 9,960 Add (deduct) items to Convert Net Income from Accrual Basis to Cash Basis: Depreciation expense 11,000 Increase in Accounts Receivable (4,940) Decrease in Merchandise Inventory 2,000 Increase in prepaid insurance (200) Increase in Notes Payable (Short-Term) 2,600 Decrease in Accounts Payable (100) Net Cash Provided by Operating Activities$20,420 Cash Flows from Operating Activities: Net Income from Operations$ 9,960 Add (deduct) items to Convert Net Income from Accrual Basis to Cash Basis: Depreciation expense 11,000 Increase in Accounts Receivable (4,940) Decrease in Merchandise Inventory 2,000 Increase in prepaid insurance (200) Increase in Notes Payable (Short-Term) 2,600 Decrease in Accounts Payable (100) Net Cash Provided by Operating Activities$20,420 Learning Unit 22-1

Current Assets Current Assets Add to Net Income if this account has: Current Liabilities Current Liabilities Decreased Increased Decreased Learning Unit 22-1 Deduct from Net Income if this account has:

Learning Unit 22-1 n How is net cash flows from investing activities determined? n Add sale of stocks and bonds, and deduct the purchase of stocks and bonds. n Add disposals (sale) of plant assets, and deduct purchase of plant assets. n Add loan collections, and deduct loans of cash to borrowers.

Learning Unit 22-1 n How is net cash flows from financing activities determined? n Add cash proceeds from issuance of notes. n Deduct payment of dividends.

Learning Unit 22-1 n Add cash proceeds from issuance of common stocks. n Deduct amounts used to retire bonds payable. n Deduct amounts to repurchase treasury stock.

Transactions with customers, vendors, and employees are Operating Activities. Transactions with customers, vendors, and employees are Operating Activities. Transactions involving the purchase or sale of plant assets are Investing Activities. Transactions involving the purchase or sale of plant assets are Investing Activities. Transactions involving creditors or stockholders are Financing Activities. Transactions involving creditors or stockholders are Financing Activities. Learning Unit 22-1

Prepare the Operating Activities section of the statement of cash flows using the direct method. Learning Objective 3

Learning Unit 22-2 n The direct method determines the amount of cash inflows and cash outflows. n It identifies the activities that increase or decrease cash.

Statement of Cash Flows (Direct Method) Year Ended December 31, 200x Cash Flows from Operating Activities: Cash Received from Customers $185,160 Cash Paid for Merchandise Inventory($101,500) Cash Paid for Salaries (51,040) Cash Paid for Insurance (7,400) Cash Paid for Rent (3,600) Cash Paid for Miscellaneous Expenses (1,200) Total Cash Paid for Operating Activities (164,740) Net Cash Flows from Operating Activities$ 20,420 Cash Flows from Operating Activities: Cash Received from Customers $185,160 Cash Paid for Merchandise Inventory($101,500) Cash Paid for Salaries (51,040) Cash Paid for Insurance (7,400) Cash Paid for Rent (3,600) Cash Paid for Miscellaneous Expenses (1,200) Total Cash Paid for Operating Activities (164,740) Net Cash Flows from Operating Activities$ 20,420 Learning Unit 22-2

Prepare a statement of cash flows. Learning Objective 4

The statement of cash flows... – summarizes the changes in the sources and uses of cash. – summarizes the changes in the sources and uses of cash. – proves net increase (or decrease) in cash. Learning Unit 22-2

Statement of Cash Flows (Investing Activities) Year Ended December 31, 200x Purchase of Plant Asset ($30,000) Net Cash Used by Investing Activities (30,000) Purchase of Plant Asset ($30,000) Net Cash Used by Investing Activities (30,000) Learning Unit 22-2

Statement of Cash Flows (Financing Activities) Year Ended December 31, 200x Issuance of Long-Term Note$ 8,000 Issuance of Common Stock 10,000 Payment of Dividends (8,000) Net Cash Provided by Financing Activities$10,000 Issuance of Long-Term Note$ 8,000 Issuance of Common Stock 10,000 Payment of Dividends (8,000) Net Cash Provided by Financing Activities$10,000 Learning Unit 22-2

Statement of Cash Flows Year Ended December 31, 200x Net Cash Flows from Operating Activities$20,420 Net Cash Used by Investing Activities (30,000) Net Cash Provided by Financing Activities$10,000 Net increase in Cash$ 420 Net Cash Flows from Operating Activities$20,420 Net Cash Used by Investing Activities (30,000) Net Cash Provided by Financing Activities$10,000 Net increase in Cash$ 420 Learning Unit 22-2

End of Chapter 22