1. The Cash Flow Statement
Chapter 18
The Cash Flow Statement

2. PURPOSE OF THE CASH FLOW STATEMENT
The primary purpose of the cash flow statement is to provide information about the cash receipts and cash payments of an entity during a period.
A secondary objective is to provide information about its
Operating activities
Investing activities
Financing activities

3. MEANING OF CASH FLOWS
The cash flow statement is usually prepared using cash and cash equivalents as its basis.
Cash equivalents are short-term, highly liquid investments that are both
1. readily convertible to known amounts of cash, and
2. so near to their maturity that their market value is relatively insensitive to changes in interest rates.

4. OPERATING ACTIVITIES Include
Cash effects of transactions that create revenues and expenses and
Enter into determination of net income (loss)
Balance Sheet: Noncash Current Assets and Current Liabilities; Income Statement Items

5. Balance Sheet: Investment and Long-Term Asset Items
INVESTING ACTIVITIES
Include
Purchasing and disposing of investments and productive long-lived assets using cash and
Lending money and collecting the loans
Balance Sheet: Investment and Long-Term Asset Items

6. Balance Sheet: Long-Term Liability and Equity Items
FINANCING ACTIVITIES
Include
Obtaining cash from issuing debt and repaying the amounts borrowed and
Obtaining cash from owners/shareholders and paying them drawings/dividends
Balance Sheet: Long-Term Liability and Equity Items

7. FORMAT OF CASH FLOW STATEMENT
COMPANY NAME
Cash Flow Statement
Period Covered
Operating, investing, and financing plus the significant noncash investing and financing activities constitute the general format of the cash flow statement, an example of which is shown on the right.
Cash flows from operating activities
(List of individual items) XX
Net cash provided (used) by operating activities XXX
Cash flows from investing activities
(List of individual items) XX
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 XXX
Cash at beginning of period XXX
Cash at end of period XXX
Note x:
Noncash investing and financing activities
(List of significant noncash transactions) XXX

8. PREPARING THE CASH FLOW STATEMENT
The cash flow statement is prepared differently from the three other basic financial statements.
1. It is not prepared from the adjusted trial balance.
2. The cash flow statement deals with cash receipts and payments, so the accrual concept is not used in the preparation of this statement.
The information to prepare this statement usually comes from three sources:
1. Comparative balance sheet
2. Current income statement
3. Additional information

9. OPERATING ACTIVITIES – INDIRECT METHOD

10. NET INCOME VS. NET CASH PROVIDED BY OPERATING ACTIVITIES
ILLUSTRATION 18-6
NET INCOME VS. NET CASH PROVIDED BY OPERATING ACTIVITIES
The indirect method starts with net income and converts it to net cash provided by operating activities. In other words, it adjusts net income for items that affect reported net income but do not affect cash, as shown below.
Accrual Basis of Accounting
Cash Basis of Accounting
Earned Revenues
Eliminate noncash revenues
Net Income
Net Cash Provided (Used) by Operating Activities
Incurred Expenses
Eliminate noncash expenses

11. NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (B/S: Noncash Current Assets and Current Liabilities)
Adjustments to Convert Net Income
to Net Cash Provided (Used) by Operating Activities
Add* Deduct*
Change in Current Asset Account Balance
Accounts receivable Decrease Increase
Inventory Decrease Increase
Prepaid expenses Decrease Increase
Other current assets Decrease Increase
Change in Current Liability Account Balance
Accounts payable Increase Decrease
Accrued expenses payable Increase Decrease
Other current liabilities Increase Decrease
* Add (deduct) change in account balance to net income

12. NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES