1. Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)
Intermediate Accounting, 10th Edition
Kieso ,
Weygandt
, and
Warfield
Chapter 24: The Statement of Cash Flows
Prepared by
Krishnan
Ranganathan
, Angelo State University,
San Angelo, Texas
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

2. Usefulness of the Statement of Cash Flows
The information may help users assess the following aspects:
The entity’s ability to generate future cash flows
The entity’s ability to pay dividends and meet obligations
The reasons as to why net income and net cash flow from operating activities differ
Cash and non cash investing and financing activities during the year
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

3. The Cash Flow Statement
The cash flow statement provides information about:
the cash receipts (cash inflows), and
uses of cash (cash outflows) during the year
Inflows and outflows are reported for:
operating activities,
investing activities, and
financing activities during the year.
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

4. Statement of Cash Flows: Concept
Operating
activities
Investing
Financing
inflows
Cash
Pool
Operating
activities
Investing
Financing
outflows
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

5. Preparing a Statement of Cash Flows
There are TWO methods of preparing the statement of cash flows:
the indirect method and
the direct method
The indirect method (discussed in Chapter 5) derives cash flows from accrual basis statements.
The direct method determines cash flows directly for each source or use of cash
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

6. Statement of Cash Flows: Indirect Method - Concept
Earned
Revenues
Eliminate
noncash revenues
Net Income + -
Operating
cash flow
Eliminate
noncash charges
Expenses
Incurred
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

7. The Statement of Cash Flows: Indirect method
Accrual Basis Statements
Cash Flow Statement
Income Statement
items & Changes in
Current Assets and
Current Liabilities
Operating activities:
Adjust net income for accruals
and non cash charges to get
cash flows
Balance Sheet: Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets
Balance Sheet: Changes in
Non-Current Liabilities
and
Equity
Financing activities:
Inflows and outflows
from loan and equity
transactions
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

8. Direct Method (Operating Activities)
Inflows
Outflows
From sales of goods or services
From returns on loans (interest) and returns on equity securities (dividends)
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

9. Investing and Financing Activities
For the direct and indirect methods: the sections reporting investing and financing activities are the same
The net inflows or outflows for each section (under the two methods) are identical
The operating activities are reported differently, however.
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

10. Format of the Statement of Cash Flows: Indirect Method
Cash flows from operating activities:
Net Income $ XXX
Adjustments (to arrive at cash flow from operations) $ XX
(List of individual inflows and outflows)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

11. Format of the Statement of Cash Flows: Direct Method
Cash flows from operating activities:
Cash receipts (individually): Inflows $ XXX
Cash payments to suppliers (separately): outflows ($ XXX)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

12. Indirect Method: Example
Intelmarkets begins operations on The income statement
and balance sheet for year 2000 are as follows:
Income Statement
Revenues: $ 200,000
Less: Cost of goods sold ($ 110,000)
Gross Margin $ 90,000
Less: Operating expenses ($ 40,000)
Net Income before Tax: $ 50,000
less: Income Tax ($ 15,000)
Net Income after Tax $ 35,000
Operating expenses do not contain any non-cash charges
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

13. Indirect Method: Example
Balance Sheet
Dec 31, 2000 Jan 1, 2000
Assets:
Cash $ 25,000 $-0-
Accounts Receivable $ 32,000 $-0-
Inventory $ 29,000 $-0-
Land $110,000 $-0-
Total $196,000 $-0-
Liabilities and Equity:
Accounts Payable $ 24,000 $-0-
Common Stock $147,000 $-0-
Retained Earnings $ 25,000 $-0-
Total $196,000 $-0-
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

14. Operations: Net Outflow 2,000
Operating Activities
Net Income after Tax $35,000
Accounts Receivable +$ 32,000
Inventory +$ 29,000
Accounts Payable +$ 24,000
Accrual Basis
Net Income after Tax $35,000
Less: Increase in A/Rec ($ 32,000)
Less: Increase in Inventory($ 29,000)
Add: Increase in Accounts
Payable $ 24,000
Cash Flow
Changes between beginning
and ending balances
Operations: Net Outflow 2,000
See explanations next slide
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

15. Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)
Operating Activities
A/Rec increased
by $32,000
Cash collections are
less than revenue
recognized
Reduce net income
by $32,000 to derive
cash flows from
operations
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

16. Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)
Operating Activities
Inventory increased
by $29,000
Cost of goods sold
for the year decreases
by $29,000.
Reduce net income
by $29,000 to derive
cash flows from
operations
Net income for the year
increases by $29,000
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

17. Investing and Financing Activities
Land $110,000
Accrual Basis
Investing Activities:
Purchase of Land: ($110,000)
Outflow ($110,000)
Cash Flow
Financing Activities:
Issue of Common Stock: $147,000
Dividends paid: ($10,000)
Inflow $137,000
Common Stock $147,000
Retained Earnings +$ 25,000
Beg Bal: $0
Net Income: $35,000
less: Dividends ($10,000)
End Balance: $25,000
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

18. Cash Flow Statement: (Indirect Method) - Summary
Cash used by operating activities:($ 2,000)
Cash used by investing activities:($110,000)
Cash from financing activities: $137,000
Net inflow for the year $ 25,000
Beginning cash balance: $ -0-
Ending cash balance $ 25,000
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

19. Special Items: Depreciation
Given:
Property, plant, and equipment $277, $247,000
Accumulated depreciation (178,000) (167,000)
Other information:
Depreciation expense $ 33,000
Gain on sale of equipment $ 14,500
During 2002, equipment costing $45,000 was sold for cash
Present relevant T- accounts and cash flow information
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

20. Special Items: Depreciation - Steps
Prepare the T-Account for accumulated depreciation and determine the accumulated depreciation on asset sold
Determine the cash flow from sale of equipment
Determine any purchases of plant and equipment (at cost)
Identify the inflows and outflows affecting the operating and investing sections
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

21. Special Items: Depreciation
Accu depr(beg) : $167,000
Plus: depreciation expense $ 33,000
less: depreciation on equip
sold (?) $ 22,000
Accu. Depr (ending): $178,000
Accumulated Depreciation 1
Equipment sold (cost): $45,000
less: Accu depr on equipment $22,000
Book value of equipment sold $23,000
Add: Gain on sale $14,500
Cash from sale of equipment $37,500
Equipment Sold 2
Operating Activities:
Depreciation - Inflow $33,000
Gain on sale ($14,500)
Investing Activities:
Sale of equipment - inflow $37,500
Asset purchases - outflow ($75,000)
Cash Flow Statement 4
Beginning balance: $247,000
Add: Purchases (?) $ 75,000
Less: Equipment Sold $ 45,000
Ending balance: $277,000
Prop, Plant, & Equipment 3
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

22. Indirect Method: Special Items - Summary
Note the following adjustments to net income in deriving operating cash flow:
Loss on sale of assets is added to net income
Gain on sale of assets is deducted from net income
Discount on bonds payable (as amortized) is added to net income
Premium on bonds payable (as amortized) is deducted from net income
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

23. Cash Flow Statement: Direct Method - Example
Refer to the data for the Indirect method.
Note that the presentation of the Operating Activities under the direct method is different
Note also that the net outflow for operating activities is the same under both methods
Cash flows for Investing and Financing activities are identical under both methods.
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

24. Direct Method: Concept
Cash Receipts
From sale of
goods and
services to
customers
From receipts
of interest and
dividends
Cash Payments
To suppliers
To employees
For operating exp
For interest
For taxes
Cash
flow
from
opera-
tions
less
equals
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

25. Cash Flow Statement: Direct Method
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/Rec balances
- Increase in A/Rec balances
= $200,000 - $32,000 = $168,000
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

26. Cash Flow Statement: Direct Method
Cash payments to suppliers:
= cost of goods sold increase in inventory
- decrease in inventory
+ decrease in accounts payable
- increase in accounts payable
= $110,000 + $29,000 - $24,000 = $115,000
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

27. Cash Flow Statement: Direct Method
Cash payments for operating and other expenses:
= Operating expenses increase in prepaid expenses
- decrease in prepaid expenses
+ decrease in accrued expenses payable
- increase in accrued expenses payable
$40,000 operating + $15,000 tax = $55,000
Note: There are no accruals in the balance sheet for these
accounts. So, these are deemed cash payments.
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

28. Direct method: Operating Activities
Cash receipts from sales $ 168,000
Cash paid to suppliers for merchandise ($ 115,000)
Cash paid for income taxes ($ 55,000)
Net cash outflow ($ 2,000)
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

29. Reporting Significant Non Cash Transactions
Transactions, not involving cash inflows or cash outflows, are non cash transactions
They are not reported in the body of the cash flow statement
If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements
Example is: issue of bonds (payable) for purchase of land
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Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)

30. Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)
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11/13/2018
Intermediate Accounting, 10t edition, Chapter 24 (Kieso et al.)