1. The Statement of Cash Flows21
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The Statement of Cash Flows 1 1 1 1

2. Objectives 1. Define operating, investing, and financing activities.
2. Know the categories of inflows and outflows of cash.
3. Classify cash flows as operating, investing, or financing.
4. Explain the direct and indirect methods for reporting operating cash flows.
5. Prepare a simple statement of cash flows. 2 2 2 4

3. Objectives
6. Use a worksheet for a statement of cash flows.
7. Compute and disclose interest paid and income taxes paid.
8. Identify the operating cash inflows and outflows under the direct method (Appendix).
9. Compute the operating cash flows under the direct method (Appendix).

4. Operating Activities
Operating activities include all transactions and other events that are not investing and financing activities.
Operating activities include transactions involving acquiring, selling, and delivering goods for sale, as well as providing services.
Cash receipts from the sale of goods or services and collections of accounts receivable are typical cash inflows from operating activities.
Cash payments to suppliers for inventory and on account, for wages, and for taxes are examples of cash outflows from operating activities.

5. Investing Activities
Typical investing activities include transactions involving:
Lending money and collecting on the loan.
Acquiring and selling investments (both current and noncurrent).
Acquiring and selling property, plant, and equipment.

6. Financing Activities
Typical financing activities include transactions involving:
Obtaining resources from owners.
Distributing returns to owners.
Obtaining resources from creditors.
Repaying creditors.

7. Equation for Change in Cash
Increases in Cash
= Increases in Liabilities
+ Increases in Stockholders’ Equity
+ Decreases in Assets Other Than Cash
This equation is based on the fundamental accounting equation:
A = L + SE

8. Equation for Change in Cash
And...
Decreases in Cash
= Decreases in Liabilities
+ Decreases in Stockholders’ Equity
+ Increases in Assets Other Than Cash

9. Inflows of Cash
Decreases in assets other than cash. The sale or disposal of a noncash asset causes an inflow of cash.
Increases in liabilities. The issuance or other incurrence of liabilities causes an inflow of cash.
Increases in stockholders’ equity. Net income and additional investments by owners result in an inflow of cash.

10. Outflows of Cash
Increase in assets other than cash. The acquisition of noncash assets causes an outflow of cash.
Decreases in liabilities. The payment of liabilities causes an outflow of cash.
Decreases in stockholders equity. The payment of dividends and the acquisition of treasury stock are two common transactions that result in an outflow of cash.

11. Operating Activities Decrease in Accounts Receivable
Increase in Accounts Receivable + - or =
Increase in Cash Inflows From Operating Activities
Sales Revenues

12. Operating Activities
Decrease in Accrued Payables and Increases in Inventory
Increase in Accrued Payables and Decrease in Inventory + - or
Expenses (including Cost of Goods Sold) =
Increase in Cash Outflows For Operating Activities

13. Operating Activities
Sales Revenue
Accounts Receivable
30,000
42,000
Bal
37,000
Smith Company made cash sales of $30,000 and credit sales of $42,000. During the year $37,000 was collected from creditors.

14. Operating Activities
Sales Revenue
Accounts Receivable
30,000
42,000
Bal ,000
Bal
42,000
Bal ,000
37,000
Smith Company made cash sales of $30,000 and credit sales of $42,000. During the year $37,000 was collected from creditors.

15. Operating Activities
Sales Revenue
Accounts Receivable
30,000
42,000
Bal ,000
Bal
Sales Revenue -
Increase in Accounts Receivable =
Increase in Cash Inflows from Operating Activities
$72, $5, = $67,000
42,000
Bal ,000
37,000

16. Operating Activities
Salaries Expense
Salaries Payable
13,000
1,000
Bal
Smith Company paid salaries of $13,000 and recorded salaries payable of $1,000 during the year. At year-end, the Salaries Expense account has a debit balance of $14,000.

17. Operating Activities
Salaries Expense
Salaries Payable
13,000
1,000
Bal. 14,000
Bal
1,000
Bal. 1,000
Smith Company paid salaries of $13,000 and recorded salaries payable of $1,000 during the year. At year-end, the Salaries Expense account has a debit balance of $14,000.

18. Operating Activities
Salaries Expense
Salaries Payable
13,000
1,000
Bal. 14,000
Bal
Expense -
Increase in Accrued (Salaries) Payable =
Increase in Cash Outflows for Operating Activities
$14, $1, = $13,000
1,000
Bal. 1,000

19. Direct Method
FASB Statement Number 95 allows a choice of the direct or indirect method to report cash flows from operations.

20. Direct Method Cash flows From Operating Activities: Cash Inflows:
Cash received from customers $72,600
Cash inflows from operating
activities $72,600
Cash Outflows:
Cash paid to suppliers $(38,000)
Cash paid to employees (12,200)
Cash paid for income taxes (6,000)
Cash outflows for operating
activities (56,200)
Net cash provided by operating activities $16,400
Decrease in accounts receivable ($2,600) + sales revenue ($70,000)
Salaries expense - increase in salaries payable
Amount paid in cash.
Increase in inventory ($2,000) + decrease in accounts payable ($7,000) + cost of goods sold ($29,000).

21. Indirect Method Net Cash flows From Operating Activities:
Net income $14,000
Adjustments for differences
between income flows and cash
flows for operating activities:
Add: Depreciation expense 8,000
Decrease in accounts receivable 2,600
Increase in salaries payable 800
Less: Increase in inventory (2,000)
Decrease in accounts payable (7,000)
Net cash provided by operating
activities $16,400
Added back since depreciation is not an outflow of cash.
Same amount as the direct method

22. Steps in Visual Inspection Method
Prepare the statement’s heading and list the three major sections.
Calculate the net change in cash that occurred during the accounting period.
Determine the net income and list it as the first item in the net cash flow from operating activities section.
Calculate the increase or decrease in each balance sheet account (except cash).
Continued

23. Steps in Visual Inspection Method
Determine whether the increase or decrease in each balance sheet account (except cash) caused an inflow or outflow of cash and whether the cash flow was related to an operating, investing, or financing activity.
If no cash flow occurred in Step 5, determine whether the increase or decrease in each balance sheet account (except cash) was the result of a noncash income statement item or a simultaneous investing and/or financing transaction.
Continued

24. Steps in Visual Inspection Method
Complete the various sections of the statement and check that the subtotals of the sections sum to the net change in cash and that the sum of the net change in cash and the beginning cash balance is equal to the ending cash balance reported on the balance sheet.

25. Simple Statement of Cash Flows
LEYTON COMPANY
Statement of Cash Flows
For Year Ended December 31, 2001
The statement’s heading
Continued

26. Simple Statement of Cash Flows
Net Cash Flow From Operating Activities
Net income $ 7,000
Adjustments for differences between income
and cash flows from operating activities:
Add: Depreciation expense 2,300
Increase in accounts payable 1,500
Less: Increase in accounts receivable (2,700)
Net cash provided by operating activities $8,100
Cash Flows From Investing Activities
Payment for purchase of building $(12,000)
Proceeds from sale of land, at cost 3,000
Net cash used for investing activities (9,000)
Continued

27. Simple Statement of Cash Flows
Cash Flows From Financing Activities
Proceeds from issuance of bonds $ 7,000
Payment of dividends (3,500)
Net cash provided by financing activities 3,500
Net increase in Cash $2,600
Cash, January 1, ,000
Cash, December 31, $6,600
This amount should match the balance of the Cash account in the ledger.

28. Steps 1-3: Setting up the worksheet.
Worksheet Method
Steps 1-3: Setting up the worksheet.
Step 1: Prepare the column headings on a worksheet. Then enter the account title Cash on the first line of the account titles column and list the beginning balance, ending balance, and the change in cash in the respective columns.
Step 2: Enter the titles of all the remaining accounts from the balance sheets on the worksheet and list each beginning and ending account balance, and the change in the account balance directly below the cash information.

29. Worksheet Method Steps 1-3: Setting up the worksheet.
Step 3: Directly below these accounts, add the following headings:
A. Net Cash Flow From Operating Activities
B. Cash Flows From Investing Activities
C. Cash Flows From Financing Activities
D. Investing and Financing Activities Not Affecting Cash
Leave sufficient room below each heading.
Continued

30. Steps 4: Completion of the worksheet.
Worksheet Method
Steps 4: Completion of the worksheet.
Account for all the changes in the noncash accounts. Reconstruct the journal entries that caused the changes in the noncash accounts directly on the worksheet. Use these general rules: (A) Start with net income. (B) Account for the changes in the current assets (except cash) and current liability accounts. (C) Account for the changes in the noncurrent accounts.
Continued

31. Worksheet Method Steps 5: Record the net change in cash.
Make a final worksheet entry to record the net change in cash. The difference between the total cash inflows and outflows must be equal to the change in the Cash account.
Steps 6: Prepare the formal statement.
Prepare the statement of cash flows and the accompanying schedule from the information developed on the worksheet.

32. Worksheet Method Analyzing Complex Transactions
During the year, an earthquake (extraordinary event) occurred that destroyed a building owned by the company with a cost of $10,000 and a book value of $5,200. The company received after-tax proceeds of $3,100 from its insurance company.
First, let’s reconstruct the original entry.

33. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Now, we can analyze the entry to help us with recording it on the worksheet.
Cash 3,100
Accumulated Depreciation: Buildings 4,800
Extraordinary loss 2,100
Buildings 10,000
Cash Flows From Investing Activities: Proceeds From Building Destroyed by Earthquake 3,100
Accumulated Depreciation: Buildings 4,800
Net Cash Flow From Operating Activ. 2,100
Buildings 10,000

34. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Let’s reconstruct both entries related to the bond issue and prepare them for the worksheet.
On January 1 the company issued bonds payable with a face value of $10,000, receiving proceeds of $9,000. The company amortized $100 of the discount during the year.

35. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Cash 9,000
Discount on Bonds Payable 1,000
Bonds Payable, 10% 10,000
Cash Flows From Financing Activities: Proceeds From Issuance of Bonds 9,000
Discount on Bonds Payable 1,000
Bonds Payable, 10% 10,000
Continued

36. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Bond Discount Amortization 100
Discount on Bonds Payable 100
Cash Flows From Operating Activities: Bond Discount Amortization 100
Discount on Bonds Payable 100

37. Analyzing Complex Transactions
Special Topics
Analyzing Complex Transactions
Here is another situation that was not part of the chapter’s comprehensive problem.
A company sold equipment with a cost of $2,200 and accumulated depreciation of $700 for $2,100.

38. Special Topics Analyzing Complex Transactions Cash 2,100
Accumulated Depreciation 700
Equipment 2,200
Gain on Sale of Equipment 600
Cash Flows From Investing Activities: Proceeds From Sale of Equipment 2,100
Accumulated Depreciation 700
Equipment 2,200
Net Cash Flow From Operating Activities: Gain on Sale of Equip. 600
Make the worksheet entry in journal entry format.

39. Interest Paid and Income Taxes Paid
FASB Statement Number 95 requires that a company using the indirect method also disclose its interest paid and income taxes paid.

40. Interest Paid and Income Taxes Paid
Interest expense
+ Decrease in interest payable or
- Increase in interest payable
+ Amortization of premium on bonds payable or
- Amortization of discount on bonds payable
= Interest paid

41. Interest Paid and Income Taxes Paid
Income tax expense
+ Decrease in income taxes payable or
- Increase in income taxes payable
+ Decrease in deferred tax liability or
- Increase in deferred tax liability
+ Increase in deferred tax asset
- Decrease in deferred tax asset
= Income taxes paid
Income Taxes Paid

42. Temporary and Long-Term Investments
On November 28, 2000, Dougherty Company purchased 1,000 shares of Bear Company common stock for $40,000 as a temporary investment in available-for-sale securities. On December 31, 2000 the fair value of the stock was $42 per share.
(1) Reconstruct the two entries related to this investment.
(2) Make the worksheet entry in journal format.

43. Temporary and Long-Term Investments
Temporary Investment in Available-for- Sale Securities 40,000
Cash 40,000
Temporary Investment in Available-for
Sale Securities 40,000 Cash Flows From Investing
Activities: Payment for Purchase of Temporary Investment 40,000
Continued

44. Temporary and Long-Term Investments
Allowance for Change in Value of
Investment 2,000
Unrealized Increase in Value of
Available-for-Sale Securities 2,000
Allowance for Change in Value of
Investment 2,000
Unrealized Increase in Value of
Available-for-Sale Securities 2,000
No change! This entry appears only in the upper portion of the worksheet.

45. Temporary and Long-Term Investments
On January 16, 2001 Dougherty Company sold its investment in Bear Company stock for $45,000.
Cash 45,000
Temporary Investment in
Available-for-Sale Securities 40,000
Gain on Sale of Temporary Invest. 5,000
Unrealized Increase in Value of
Available-for-Sale Securities 2,000
Allowance for Change in Value
of Investment 2,000

46. Temporary and Long-Term Investments
Cash Flows From Investing Activities:
Proceeds From Sale of Temporary
Investment 45,000
Temporary Investment in
Available-for-Sale Securities 40,000
Net Cash Flow From Operating
Activities: Gain on Sale of Temporary
Investment 5,000
The second entry is unchanged.

47. C 21
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The End