1. 12 Introduction to Financial Accounting Information, 7/e The Statement
of Cash Flows
Statements and
the Annual Report 12
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning

2. Purpose of the Statement of Cash Flows
Explains changes in cash over a period of time
Summarizes cash inflows and outflows from:
Financing
Activities
Operating
Activities
Investing
Activities
LO1

3. Cash Equivalents Readily convertible to cash Examples:
Little risk of price change
Original maturity to investor of three months or less
Examples:
Commercial paper
U.S. Treasury bills
Certain money market funds
LO2

4. Statement of Cash Flows Format
outflows
Cash
inflows
Classified by:
Operating activities
Investing activities
Financing activities =
+ Beginning
Cash and
Cash
Equivalents
= Ending
Cash and
Cash
Equivalents
Increase or decrease in cash and cash equivalents
LO3

5. 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

6. Operating Activities
Collection of
customer accounts
Cash transactions concerned with acquiring and selling products and services
Payment to suppliers
for inventory
Payment of wages
Payment of taxes

7. Investing Activities
Cash transactions concerned with acquiring and disposing of long-term assets
Capital
expenditures
Purchase/sale of
another company
Sale of property, plant
and equipment

8. Financing Activities
Issuance/repayment
of bank note
Issuance/repurchase
of stock
Cash transactions concerned with the raising and repayment of funds in the form of debt and equity
Issuance/retirement
of bonds
Payment of dividends

9. Categorizing Cash Flow Activities
Current
assets
and
current
liabilities
Operating Activities
Long-term
assets
Investing Activities
Long-term
liabilities or
stockholders’
equity
Financing
Activities

10. Noncash Investing and Financing Activities
Disclose important financing and investing
activities which do not require cash
Exchange stock for assets
Buy assets through debt financing
from supplier

11. Methods to Report Cash from Operating Activities
Direct Method
Reports major classes of gross cash receipts and cash payments
The amount of cash provided by operating activities is the same under both methods
Indirect Method
Adjusts net income to remove the effect of all accruals and deferrals
LO4

12. 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:
Outflows (xxx)
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)

13. Preparing the Statement Cash Flows: Direct Method
Step 1: Set up 3 schedules with the following headings:
Cash Flows from
Operating Activities
Cash Flows from
Investing Activities
Cash Flows from
Financing Activities
Step 2: Determine the cash flows from operating activities
Step 3: Determine the cash flows from investing activities
Step 4: Determine the cash flows from financing activities
LO5

14. Direct Method Operating Activities
Consider each of the items on the Income Statement and any related current assets or liabilities from the Balance Sheet:
Accounts Receivable, January $ 57,000
+ Sales revenue ,000
Cash collections ( ?????)
= Accounts Receivable, Dec $ 63,000
- Cash collections ?????
From Balance
Sheet

15. Direct Method Operating Activities
Accounts Receivable, Jan. 1 $ 57,000
+ Sales on account ,000
- Accounts Receivable, Dec ( 63,000)
Cash collections $664,000

16. Direct Method Operating Activities
Inventory, Jan $ 92,000
- Inventory, Dec ,000
From Balance
Sheet
= Cost of goods sold $ 390,000
+ Purchases on account ????

17. Direct Method Operating Activities
Inventory, Jan $ 92,000
- Cost of Goods Sold (390,000)
- Inventory, Dec (84,000)
= Purchases on account $ 382,000

18. Direct Method Operating Activities
Accounts Payable, Jan $ 31,000
- Accounts Payable, Dec ,000
+ Purchases ,000
= Cash payments for Purchases $ 375,000

19. There is no effect on cash flow from depreciation.
Direct Method
Operating Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income
Accumulated Depreciation Depreciation Expense (40,000) (40,000) (40,000) (40,000)
There is no effect on cash flow from depreciation.

20. Direct Method Operating Activities
Prepaid Insurance, Jan $18,000
From Balance
Sheet
+ Cash payments ?????
Insurance Expense (12,000)
= Prepaid Insurance, Dec $12,000

21. Direct Method Operating Activities
Prepaid Insurance, Jan $18,000
- Insurance Expense ,000
- Prepaid Insurance, Dec ,000
= Cash payments for Insurance $ 6,000

22. Schedule of Cash Flows from Operating Activities
Cash receipts from:
Cash payments for:
375,000 Inventory purchases
62,000 Salaries and wages
6,000 Insurance
15,000 Interest
47,000 Taxes
Sales on account 664,000
Interest ,000
Net Cash Inflows from Operating Activities
$174,000

23. Preparing the Statement of Cash Flows: Direct Method
Step 3: Determine the cash flows from investing activities

24. Direct Method Investing Activities
From Balance
Sheet
LT Investments , Jan $ 90,000
+ LT Investments purchased for cash ?????
LT Investments sold ( )
= LT Investments, Dec $120,000

25. Direct Method Investing Activities
LT Investment, Jan $ 90,000
- LT Investments sold
- LT Investments, Dec ,000
= Cash payments for LT Investments $ 30,000

26. Direct Method Investing Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income
Land = Notes Payable
50, ,000
No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows.

27. Direct Method Investing Activities
Property and Equipment , Jan $280,000
+ Property and Equipment purchased ,000
From Balance
Sheet
- Property and Equipment sold ?????
=Property and Equipment, Dec $320,000

28. Direct Method Investing Activities
Property and Equipment, Jan $280,000
+Property and Equipment purchased ,000
- Property and Equipment, Dec (320,000)
= Property and Equipment Sold $ 35,000

29. Direct Method Investing Activities
Accumulated Depreciation , Jan $ 75,000
+ Depreciation Expense ,000
From Balance
Sheet
- Accumulated Depreciation on assets sold ?????
= Accumulated Depreciation, Dec $100,000

30. Direct Method Investing Activities
Accumulated Depreciation, Jan $ 75,000
+ Depreciation Expense ,000
- Accumulated Depreciation, Dec (100,000)
= Accumulated Depreciation on
Equipment Sold $ 15,000

31. Schedule of Cash Flows from Investing Activities
Cash receipts from:
Cash payments for:
Sale of machine ,000
30, Purchase of
investments
75, Purchase of
property and
equipment
Net Cash Outflows from Investing Activities
$80,000

32. Preparing the Statement of Cash Flows: Direct Method
Step 4: Determine the cash flows from financing activities

33. Direct Method – Financing Activities
Review entries recorded during period:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income
Land = Notes Payable
50, ,000
No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows.

34. Direct Method Financing Activities
Bonds Payable , Jan $260,000
From Balance
Sheet
- Bonds Payable Retired ?????
= Bonds Payable, Dec $200,000

35. Direct Method Financing Activities
Bonds Payable, Jan $ 200,000
- Bonds Payable, Dec (260,000)
= Bonds Payable Retired $ 60,000

36. Direct Method Financing Activities
Capital Stock , Jan $ 75,000
From Balance
Sheet
+ Capital Stock Sold ?????
= Capital Stock , Dec $100,000

37. Direct Method Financing Activities
Capital Stock, Jan $ 75,000
- Capital Stock, Dec (100,000)
= Capital Stock Sold $ 25,000

38. Direct Method Financing Activities
Retained Earnings, Jan $193,000
+ Net income ,000
From Balance
Sheet
- Cash Dividends ?????
=Retained Earnings, Dec $246,000

39. Direct Method Financing Activities
Retained Earnings, Jan $193,000
+ Net income ,000
- Retained Earnings, Dec (246,000)
= Cash Dividends $ 67,000

40. Schedule of Cash Flows from Financing Activities
Cash receipts from:
Cash payments for:
63, Retirement of bonds
67, Payment of cash
dividends
Issuance of stock ,000
Net Cash Outflows from Financing Activities
$105,000

41. Indirect Method Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities
LO6

42. Indirect Method – Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease $6,000
Accounts Receivable
Bal. Jan ,000
Bal. Dec ,000
+ Net increase ,000

43. Indirect Method Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase $8,000
Inventory
Bal. Jan ,000
Bal. Dec ,000
- Net decrease 8,000

44. Indirect Method – Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Increase $7,000
Accounts Payable
Bal. Jan $ 31,000
Bal. Dec $ 38,000
+Net increase ,000

45. Salaries and Wages Payable
Indirect Method
Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Increase $2,000
Salaries and Wages Payable
Bal. Jan $ 9,000
Bal. Dec $ 7,000
- Net decrease ,000

46. Indirect Method Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance ,000
Decrease $6,000
Prepaid Insurance
Bal. Jan $18,000
Bal. Dec $12,000
- Net decrease ,000

47. Indirect Method – Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance ,000
Increase in income taxes payable ,000
Increase $3,000
Income Taxes Payable
Bal. Jan $5,000
Bal. Dec $8,000
+Net increase ,000

48. Indirect Method Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance ,000
Increase in income taxes payable ,000
Gain on sale of machine (5,000)
Depreciation expense 40,000
Loss on retirement of bonds ,000
Gain is not part of operating activities
Add back noncash expense
Report entire outflow as a financing activity

49. 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 and updated its existing base of long-term assets
Cash Flow from Operating Activities – Capital Expenditures
Average Amount of Debt Maturing over Next Five Years
LO7

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

51. Indirect Method: Using a Work Sheet
Enter account balances
LO8

52. Indirect Method: Using a Work Sheet
Record investing and financing activities

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

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

55. Indirect Method: Using a Work Sheet
Extend current
assets and
current
liabilities

56. Indirect Method: Using a Work Sheet
Total columns

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

58. End of Chapter 12