1. Chapter 13 The Statement of Cash Flows
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2. Introduction
The statement of cash flows reports the impact of a firm’s operating, investing, and financing activities on cash flows during the accounting period.
In fact, users of financial statements have made the statement of cash flows one of the most important of the four required financial statements. 2

3. The Purpose of the Statement of Cash Flows
* Provides information about cash inflows and outflows during a period.
* Provides information about cash changes between two balance sheet dates.
* Discloses items that affect the balance sheet but don’t show up in the income statement.
* Categorizes changes as operating, investing, or financing activities.

4. Summary of Activities Making Up a Cash Flow Statement

5. Definition of Cash What is Cash?
Accounting standards define certain items as equivalent to cash, which are combined with cash on the balance sheet and the statement of cash flows.
A cash equivalent is an item that can be readily converted to a known amount of cash and has an original maturity to the investor of three months or less.
Commercial paper, money market funds, and Treasury bills are examples of cash equivalents.

6. Example: The exchange of a Long-term Note Payable for Land
Noncash Transactions
Organizations may have exchange transactions that do not directly involve cash inflows or outflows, but still warrant disclosure on a statement of cash flows. These are primarily in the financing and investing areas.
Example: The exchange of a Long-term Note Payable for Land

7. Separate Noncash Schedule Example
Generally accepted accounting principles require that any significant noncash transaction be reported either in a separate schedule or in a footnote to the financial statements.
ABC Inc.
Statement of Cash Flows for Fiscal Year Ended 12/31/11
Net Income (amounts in thousands of dollars)
$212,075
Adjustments to reconcile net earnings to net cash:
Hhhhhhhhhhhhhhhhhhhhhhhhh
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Change in cash
217,266
Cash, January 1, 2011
725,002
Cash, December 31, 2011
$942,268 7

8. Direct and Indirect Method Differences for Cash Flows From Operations
The direct method reports major classes of gross cash receipts and payments.
The indirect method, starts with net income and removes the effect of all noncash items resulting from accruals or noncash expenses.

9. Which Method Should You Use?
Direct Method: More straightforward and is useful for evaluating operating efficiency.
Indirect Method: Focuses attention cash VS. accrual basis of accounting and must be prepared even if you use the Direct Method.
Most Companies use the Indirect Method.

10. Changes in Cash Explained
We begin with the Accounting Equation to further understand the changes in the Statement of Cash Flows:
Assets = Liabilities + Owners’ equity
Expanded:
Cash + Noncash + Long-term = Current + Long-term + Capital + Retained
Current Assets Liabilities Liabilities Stock Earnings
Assets
Rearranged:
Cash = Current + Long-term + Capital + Retained – Noncash – Long-term
Liabilities Liabilities Stock Earnings Current Assets
Assets 10

11. Examples

12. Six Steps in Preparing the Statement of Cash Flows
Compute net change in cash
Six Steps in Preparing the Statement of Cash Flows
Compute net cash provided by operating activities
Compute net cash provided by investing activities
Compute net cash provided by financing activities
Compute net cash flow : Add the three activities sections
Report significant
noncash activities

13. Direct Method - Operating Cash Flows
Operating activities that generate cash outflows include buying merchandise for resale to customers, making payments to employees, and making payments for
other operating expenses, such as insurance, interest, rent, and taxes.
Now let’s look at a modification of the cash expenditures for operating expenses formula to understand how cash outflows for purchases and payroll is computed.

14. Direct Method - Operating Cash Flows
Cost of Goods Purchased
Cost of Goods Sold ( ) = -
Beginning – Ending
Inventory Inventory
Cash outflows for purchases
Cost of Goods Purchased ( ) + =
Beg. Accts – End. Accts
Payable Payable
Cash outflows for payroll ( )
Payroll
Expense = +
Beg. Payroll – End. Payroll
Payable Payable 14

15. Indirect Method – Operating Cash Flows
Net Income +
Increases in related liabilities
Decreases in related noncash assets -
Increases in related noncash assets
Decreases in related liabilities =
Cash flow from operating activities

16. Examples of Additions and Deductions

17. Statement of Cash Flows for Fiscal Year Ended 12/31/10
Regardless of whether you use the Direct or Indirect method, both the investing and financing activities sections are calculated the same way. Only the Operating Section differs.
ABC, Inc.
Statement of Cash Flows for Fiscal Year Ended 12/31/10
hhhhhhhhhhhhhhhhhhhhhhhhh
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Cash flow from operating activities
$496,624
Cash flow from investing activities
$(120,671)
Cash flow from financing activities
$(158,641)
Change in cash
217,266
Cash, January 1, 2010
725,002
Cash, December 31, 2010
$942,268
Supplemental Information:
Interest paid
$33,265
Income taxes paid
32,962

18. End of Chapter 13