1. Gary A. Porter and Curtis L. Norton
Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition
Gary A. Porter and Curtis L. Norton
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Cash Flows and Net Income for Four Companies in 2004
Increase
(Decrease) Net Income
in Cash (Loss)
$ $ 984
(196.8)
(567.6)
(439) (862)
(in millions)
Best Buy
Radio Shack
Gateway
Northwest Airlines

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
Financing
Activities
Investing
Activities
LO1

4. Cash Equivalents Readily convertible to cash
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

5. 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

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

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

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

10. Categorizing Cash Flow Activities
Current
assets
and
current
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
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:
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. Noncash Investing and Financing Activities
Disclose important financing and investing activities
which do not require cash
Examples:
Exchange stock for assets
Buy assets through debt financing from supplier

14. Preparing the Statement Cash Flows: Direct Method
Step 1: Set up three 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
LO5

15. 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 (from income statement) ,000
(X)
= Accounts receivable, December $ 63,000
??? Cash collections
From Balance
Sheet

16. Direct Method – Operating Activities
Accounts receivable, January $ 57,000
+ Sales revenue ,000
- Accounts receivable, December ,000
Cash collections ,000

17. Direct Method – Operating Activities
15, Interest Revenue = Cash collected
since there was no Interest Receivable
account on Balance Sheet
Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:

18. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Inventory, Bal., Jan ,000
- Cost of Goods Sold (390,000)
Inventory, Bal., Dec ,000
From Balance
Sheet
+ Purchases on account ???

19. Direct Method – Operating Activities
Inventory, January $ 92,000
Less: Cost of Goods Sold (390,000) Inventory, December ,000
Purchases $ 382,000

20. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Accounts Payable, January 1 $ 31,000
+ Purchases ,000
- Cash payments ???
Accounts Payable, December $ 38,000

21. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Accounts Payable, January $ 31,000
+ Purchases ,000
- Accounts Payable, December (38,000)
Cash collections $ 375,000

22. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Salaries and Wages Payable, January $ 9,000
+ Salaries and Wages Expense ,000
- Cash payments ???
Salaries and Wages Payable, December 31 $ 7,000

23. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Salaries and Wages Payable, January $ 9,000
+ Salaries and Wages Expense ,000
- Salaries and Wages Payable, December ,000
Cash payments for Salaries and Wages $ 62,000

24. Direct Method – Operating Activities
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses
Equity
Accumulated Depreciation Expense
Depreciation (40,000)
(40,000)
There is no effect on cash flow from depreciation.

25. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Prepaid Insurance, January $ 18,000
+ Cash payments for insurance ???
Insurance expense (12,000)
Prepaid Insurance, December $ 12,000

26. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Prepaid Insurance, January $ 18,000
Insurance expense ,000
- Prepaid Insurance, December ,000
Cash paid for Insurance $ 6,000

27. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Income Taxes Payable, January $ 5,000
+ Income Tax Expense ,000
- Cash payments for Income Taxes ???
Income Taxes Payable, December $ 8,000

28. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
From Balance
Sheet
Income Taxes Payable, January $ 5,000
+ Income Tax Expense ,000
- Income Taxes Payable, December ,000
Cash paid for Income Taxes $ 47,000

29. Direct Method – Operating Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Income Taxes Payable, January $ 5,000
+ Income Taxes Expense ,000
- Income Taxes Payable, December ,000
Cash paid for Income Taxes $47,000

30. Schedule for Cash Flows from Operating Activities
Cash receipts from:
Less: 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

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

32. Direct Method – Investing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Property and Equipment, January $ 280,000
+ Acquisitions ,000
- Disposals ???
Property and Equipment, December $ 320,000

33. Direct Method – Investing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
From Balance
Sheet
Property and equipment, January $ 280,000
+ Acquisitions ,000
- Property and equipment, December 31 (320,000)
Disposals $ 35,000

34. Direct Method – Investing Activities
Book value of equipment sold was $20,000.
Original cost of equipment was $35,000.
From Balance
Sheet
Accumulated Depreciation, January $ 75,000
+ Depreciation Expense ,000
- Accumulated Depreciation on assets sold ( ???)
Accumulated Depreciation, December $100,000

35. Direct Method – Investing Activities
From Balance
Sheet
Accumulated Depreciation, January $ 75,000
+ Depreciation Expense ,000
- Accumulated Depreciation, December (100,000)
Accumulated Depreciation on assets sold $ 15,000

36. Direct Method – Investing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’+ Revenues - Expenses
Equity
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.

37. Schedule for Cash Flows from Investing Activities
Cash receipts from:
Cash payments for:
Sale of machine 25,000
30, Purchase of
investments
75, Purchase of
property and
equipment
Net cash outflows from Investing Activities $80,000

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

39. Direct Method – Financing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses
Equity
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.

40. Direct Method – Financing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Bonds Payable
From Balance
Sheet
$ 260, January 1 balance
??? Retirements
$ 200, December 31 balance
Retirements for the year were $60,000

41. Direct Method – Financing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Capital Stock
$ 75, January 1 balance
From Balance
Sheet
??? Stock issued
$ 100, December 31 balance
Stock issued during the year was $25,000

42. Direct Method – Financing Activities
Consider each of the items on the income statement
and any related current assets or liabilities from the
balance sheet:
Retained Earnings
From Balance
Sheet
$ 193, January 1 balance
+ 120, Net income 2007
(???) Cash dividends
$ 246, December 31 balance
Cash dividends paid during the year was $67,000

43. Schedule for 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

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

45. 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

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 $8,000
Inventory
Bal. Jan ,000
Bal. Dec ,000
Net decrease 8,000

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
Increase $7,000
Accounts Payable
31, Bal. Jan. 1
7, Net Increase
38, Bal. Dec. 31

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)
Increase $2,000
Salaries and Wages Payable
9, Bal. Jan. 1
7, Bal. Dec. 31
2, Net decrease

49. 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 ,000
Bal. Dec ,000
Net decrease 6,000

50. 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
5, Bal. Jan. 1
8, Bal. Dec. 31
3, Net increase

51. 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

52. 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

53. 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

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

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

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

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

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

59. Indirect Method: Using a Work Sheet
Total columns

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

61. End of Chapter 12