1. The Statement of Cash Flows
Chapter 12
The Statement of Cash Flows
Financial Accounting, Alternate 4e by Porter and Norton

2. Cash Flows and Net Income for Four Computer Companies in 2002
(in millions)
Increase
(Decrease) Net Income
in Cash (Loss)
$ $2,122
(948) ,579
6, (903)
(265) (298)
Dell Computer Corp.
IBM
Hewlitt-Packard Co.
Gateway, Inc.

3. Purpose of the Statement of Cash Flows
Explains changes in cash over a period of time
Summarizes cash inflows and outflows from:
Operating
Activities
Investing
Activities
Financing
Activities

4. Cash Equivalents Readily convertible to cash
Little risk of price change
Original maturity to investor of three months or less 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Examples:
Commercial paper
U.S. Treasury bills
Certain money market funds

5. Statement of Cash Flows Format
outflows
Cash
inflows
Classified by:
Operating activities
Investing activities
Financing activities =
Beginning
Cash +
= Ending
Cash
Increase or decrease in cash

6. Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $ xxx
Cash flows from investing activities:
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $ xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $ xxx
from balance sheets

7. Operating Activities
Incur employee
salaries and wages
Cash transactions concerned with acquiring and selling products and services
Sell products
and services
Incur utility and
other operating
costs
Make inventory
purchases

8. Purchase/Sell intangible assets (e.g., patents, trademarks)
Investing Activities
Purchase/Sell
long-term
investments
Cash transactions concerned with acquiring and disposing of long-term assets
Buy/Sell
property, plant
& equipment
Purchase/Sell intangible assets
(e.g., patents, trademarks)

9. Financing Activities
Sell/Repurchase
stocks
Cash transactions concerned with internal and external financing of the business
Borrow $/
repay loans
Issue/Retire
bonds
Issue dividends
Paycheck for
Date
Dept. of Treasurer
Jane Doe

10. Categorizing Cash Flow Activities
Income
Statement
Transactions
Current
Assets
and
Liabilities
Operating Activities
Long-Term
Assets
Investing Activities
Long-Term
Liabilities or
Stockholders’
Equity
Financing
Activities

11. Methods to Report Cash from Operating Activities
Direct Method
Indirect Method
both methods arrive at same cash from operating activities
reports major classes of cash receipts and payments
adjusts net income to remove effect of accruals and deferrals

12. Preparing the Statement of Cash Flows: Direct Method
Step 1
Set up three schedules
Cash Flows from
Operating Activities
Cash Flows from
Investing Activities
Cash Flows from
Financing Activities
Step 2
Determine the cash flows from operating activities by analyzing each item on the income statement, current assets and current liabilities

13. Direct Method - Operating Activities
Determine cash collected from customers:
Beginning accounts receivable $ 57,000
+ Sales revenue 670,000
– Cash collections (x)
= Ending accounts receivable $ 63,000
From Balance
Sheet
From Income
Statement
Solve for x. Cash collections = $664,000

14. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account ,000

15. Direct Method - Operating Activities
Interest Revenue: Since no Interest Receivable account exists on the balance sheet, the interest earned was received, not accrued.
Gain on Sale of Machine: Not an operating cash flow

16. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account ,000
Interest ,000

17. Direct Method - Operating Activities
Calculate cash paid to suppliers by first finding purchases:
Beginning inventory $ 92,000
+ Purchases (x)
– Cost of goods sold (390,000)
= Ending inventory $ 84,000
Solve for x.
Purchases = $382,000

18. Direct Method - Operating Activities
Then examine Accounts Payable to determine cash paid to suppliers:
Beginning accounts payable $ 31,000
+ Purchases ,000
– Cash payments (x)
= Ending accounts payable $ 38,000
Solve for x.
Cash paid to suppliers = $ 375,000

19. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account ,000
Interest ,000
Cash payments for:
Inventory purchases (375,000)

20. Direct Method - Operating Activities
Salaries and wages:
Beginning salaries & wages pay. $ 9,000
+ Salaries & wages expense ,000
– Cash payments to employees (x)
= Ending salaries & wages pay. $ 7,000
Solve for x.
Cash paid for salaries & wages = $ 62,000

21. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account ,000
Interest ,000
Cash payments for:
Inventory purchases (375,000)
Salaries and wages (62,000)

22. Direct Method - Operating Activities
Depreciation expense is not a cash flow
Insurance Expense and Prepaid Insurance:
Beginning prepaid insurance $ 18,000
+ Cash payments for insurance (x)
– Insurance expense (12,000)
= Ending prepaid insurance $ 12,000
Solve for x. Cash paid for insurance = $6,000

23. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account ,000
Interest ,000
Cash payments for:
Inventory purchases (375,000)
Salaries and wages (62,000)
Insurance (6,000)

24. Direct Method - Operating Activities
Interest Expense: Since no Interest Payable account exists on the balance sheet, the interest expensed was paid, not deferred.
Income Tax Expense and Income Taxes Payable:
Beginning income taxes payable $ 5,000
+ Income tax expense ,000
– Cash payments for taxes (x)
= Ending income taxes payable $ 8,000
Solve for x. Cash paid for taxes = $47,000

25. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account $ 664,000
Interest ,000
Cash payments for:
Inventory purchases (375,000)
Salaries and wages (62,000)
Insurance (6,000)
Interest (15,000)
Taxes (47,000)
Net cash provided by operating
activities $ 174,000

26. Preparing the Statement of Cash Flows: Direct Method
Step 3
Determine the cash flows from investing activities by examining the long-term asset accounts and any additional info

27. Direct Method – Investing Activities
Long-Term Investments: The net increase of $30,000 matches the additional info given on the balance sheet and required the use of cash.
Land: The additional balance sheet info
reveals that a note payable was issued.
No cash was involved in the land transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows

28. Direct Method – Investing Activities
Property and Equipment: The additional balance sheet info reveals that equipment was purchased for $75,000 and a machine was sold for $25,000.
Beginning property and equip. $280,000
+ Acquisitions ,000
– Disposals (x)
= Ending property and equip. $320,000
Solve for x.
The cost of fixed assets sold = $35,000

29. Direct Method – Investing Activities
Accumulated Depreciation:
Beginning accum. depreciation $ 75,000
+ Depreciation expense ,000
– Accum. depreciation on assets sold (x)
= Ending accum. depreciation $100,000
Solve for x. The accumulated depreciation on the assets disposed of during the year = $15,000

30. Cash Flows from Investing Activities
Schedule of
Cash Flows from Investing Activities
Cash inflows from:
Sale of machine $ 25,000
Cash outflows from:
Purchase of investment (30,000)
Purchase of property and equip. (75,000)
Net cash used by investing activities $(80,000)

31. Preparing the Statement of Cash Flows: Direct Method
Step 4
Determine the cash flows from financing activities
Paycheck for
Date
Dept. of Treasurer
Jane Doe

32. Direct Method – Financing Activities
Notes payable: This increase is already shown on a supplemental schedule of noncash activities.
Bonds payable: Bonds with a face value of $60,000 are retired by paying $63,000.

33. Direct Method – Financing Activities
Capital stock was issued for cash
Retained earnings:
Beginning retained earnings $ 193,000
+ Net income ,000
– Cash dividends (x)
= Ending retained earnings $ 246,000
Solve for x. Cash paid for dividends = $67,000

34. Cash Flows from Financing Activities
Schedule of
Cash Flows from Financing Activities
Cash inflows from:
Issuance of stock $ 25,000
Cash outflows from:
Retirement of bonds (63,000)
Payment of cash dividends (67,000)
Net cash used by financing activities $(105,000)

35. Noncash Investing and Financing Activities
Disclose important financing and investing activities which do not require cash
Exchange Stock for Assets
Certificate of Stock
Examples:
Buy Assets through Debt Financing from Supplier

36. Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $ xxx
Cash flows from investing activities:
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $ xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $ xxx
Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

37. Indirect Method - Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities

38. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable (6,000)
From balance sheet:
Accts. receivable, $63,000
Accts. receivable, ,000
$ 6,000
Decrease $6,000

39. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable (6,000)
Gain on sale of machine 5,000
Selling price of machine $25,000
Book value of machine ,000
Gain on sale $ 5,000
Increase $5,000

40. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
From balance sheet:
Inventory, $92,000
Inventory, ,000
$ 8,000
Decrease $8,000

41. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
Increase in accounts payable 7,000
From balance sheet:
Accts. payable, $38,000
Accts. payable, ,000
$ 7,000
Increase $7,000

42. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Salaries & wages payable, 2003 $9,000
Salaries & wages payable, ,000
$2,000
Decrease $2,000

43. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Prepaid insurance, $18,000
Prepaid insurance, ,000
$ 6,000
Decrease $6,000

44. Indirect Method - Operating Activities Add back noncash expense
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Depreciation expense 40,000
Add back noncash expense

45. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine 5,000
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Depreciation expense 40,000
Increase in income taxes payable 3,000
Inc. taxes payable, $8,000
Inc. taxes payable, ,000
$3,000
Increase $3,000

46. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Gain on sale of machine ( 5,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Depreciation expense 40,000
Loss on retirement of bonds 3,000
Report entire outflow as a financing activity

47. Cash Flow Adequacy
Measures company’s ability to meet principal and interest obligations
Creditors concerned with cash available to repay debts after company has replaced its long-term assets
Cash Flow from Operating Activities
- Capital Expenditures
Avg. Debt Maturing over Next Five Years

48. A Work-Sheet Approach to the Statement of Cash Flows
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows

49. Indirect Method: Using a Work Sheet
Enter account balances

50. Indirect Method: Using a Work Sheet
Record investing & financing activities

51. Indirect Method: Using a Work Sheet
Enter net income

52. Indirect Method: Using a Work Sheet
Enter noncash
revenues or expenses

53. Indirect Method: Using a Work Sheet
Extend current assets
& current liabilities

54. Indirect Method: Using a Work Sheet
Total columns

55. Indirect Method: Using a Work Sheet
Determine net cash inflow (outflow)

56. End of Chapter 12