1 Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Mowen/Hansen Statement of Cash Flows Chapter Fifteen Cornerstones of Managerial Accounting 2e

2 Statement of Cash Flows Details the sources and uses of cash Provides information not shown on the other three financial statements Required for all firms registered with the U.S. Securities and Exchange Commission (SEC)

3 Definition of Cash Currency Cash equivalents ◦Highly liquid investments ◦Examples: ∙Treasury bills ∙Money market funds ∙Commercial paper ◦Treated as cash for the statement of cash flows

4 Sources and Uses of Cash Sources of Cash Activities which increase cash Referred to as “Cash Inflows” Uses of Cash Activities which decrease cash Referred to as “Cash Outflows”

5 Classification of Cash Flows Sources of CashUses of Cash Operating Activities Collection of sales revenue Payment of operating expenses Investing Activities Sale of long-term assets Purchase long-term assets Financing Activities Retirement of long- term debt Treasury stock purchases Payment of dividends Issuance of long- term debt or stock

6 Noncash Exchanges Investing and financing activities that do not involve cash Called “Noncash investing and financing activities” Must be disclosed as a supplementary schedule attached to the statement of cash flows

7 Methods for Calculating Operating Cash Flows Only difference in methods is in how they compute operating cash flows: ◦Direct Method ∙Computes operating cash flows by adjusting each line on the income statement to reflect cash flows ∙Must attach a supplemental schedule showing the reconciliation of net income to operating cash flows ◦Indirect Method ∙Computes operating cash flows by adjusting net income for items that do not affect cash flows ∙No supplemental schedules needed ∙Most widely used method

8 Statement of Cash Flows Preparation 1.Compute the change in cash for the period. 2.Compute the cash flows from operating activities. 3.Identify the cash flows from investing activities. 4.Identify the cash flows from financing activities. 5.Prepare the statement of cash flows. 5 Basic Steps

9 Computing Change in Cash Flow Difference between ending and beginning cash balance Used as a control figure in the statement of cash flows ◦Must equal the sum of the operating, investing, and financing cash flows

10 Definition Change in Cash Flow = Ending Cash balance – Beginning Cash Balance

11 Definition Four types of adjustments: a.Add to net income any increases in current liabilities and decreases in noncash current assets. b.Deduct from net income any decreases in current liabilities and increases in noncash current assets. c.Add to or deduct from net income the remaining net income items that do not affect cash flows. d.Eliminate any income items that belong in either the investing or financing section.

12 Direct Method Computes operating cash flows as the difference between: ◦Operating cash inflows ◦Operating cash outflows Operating cash inflows and outflows are computed by adjusting each item on the income statement

13 Worksheet Approach Minimizes confusion Allows careful consideration of all details underlying an analysis of cash flows Created using spreadsheet software Does not replace statement of cash flows ◦Statement can easily be prepared from worksheet data ◦Two major sections: ◦Balance sheet classifications ◦Statement of cash flows classifications