1. C 22 The Statement of Cash Flows hapter
Intermediate Accounting 10th edition
Nikolai Bazley Jones
An electronic presentation
by Norman Sunderman
Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 1 1 1

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

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

4. Purpose of a Cash Flow Statement
Helps users assess
A firm’s ability to generate positive cash flows from operating activities.
A firm’s ability to meet its obligations and pay dividends.
The reasons for the difference between net income and net cash flows.
The effect of investing and financing on a firm’s financial position.
Both the cash and noncash investing and financing transactions during the period.

5. Operating Activities
Operating activities include transactions involving acquiring, selling, and delivering goods for sale, as well as providing services.
Operating activities include all transactions and other events that are not investing and financing activities.
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.

6. Investing Activities
Investing activities include transactions involving noncurrent assets and short-term investments.
Outflows (3) Inflows (3)
Lending money and collecting principal on the loans.
Acquiring and selling investments (both current and noncurrent).
Acquiring and selling property, plant, and equipment.

7. Financing Activities
Financing activities include transactions involving liabilities & equity:
Inflows (2)
Issuing stock for cash (new issue or treasury stock)
Borrowing money (bonds and notes)
Outflows (3)
Paying cash dividends
Repayments of amounts borrowed
Purchase of treasury stock

8. Cash and Cash Equivalents
The cash flow statement is prepared using cash and cash equivalents.
Cash equivalents
Within 3 months of maturity when purchased
No risk--treasury bonds, treasury notes, treasury bills, money market, commercial paper
Known amount of cash
Purchases of cash equivalents are not reported

9. Indirect and Direct Methods
FASB No. 95 allows two ways for a company to calculate and report its net cash flow from operating activities on its statement of cash flows.

10. Indirect and Direct Methods
Even though the FASB recommends the direct method, more than 98% of companies use the indirect method.
The first is called the direct method and the second is the indirect method.

11. Indirect Method Example

12. Steps in Visual Inspection Method-Indirect Method
Prepare the statement’s heading and list the three major sections.
Determine the net income and list it as the first item in the net cash flow from operating activities section.
Add back any non-cash expenses.
Adjust net income for gains and losses not related to operations.
Continued

13. Steps in Visual Inspection Method-Indirect Method
Adjust net income for the change in deferred taxes
Adjust net income for income and losses on investments carried under the equity method.
Continued

14. Steps in Visual Inspection Method-Indirect Method
Examine all working capital accounts, except cash, short-term non-trade notes payable and dividends payable.
A Debit to a noncash account is a Decrease in cash. (If the account had net debits during the year).
A Credit to a noncash account is an increase in cash. (if the account had net credits during the year).
Continued

15. Steps in Visual Inspection Method-Indirect Method
Calculate the cash provided or cash used by operating activities.
Examine comparative balance sheets for changes in non-current assets.
Calculate the cash provided or cash used by investing activities.
Examine long-term liabilities and equity accounts.
Continued

16. Steps in Visual Inspection Method-Indirect Method
Calculate the cash provided or cash used by financing activities.
Calculate the net change in cash that occurred during the accounting period.
Add the beginning cash
The total should equal the ending cash on the balance sheet
List interest and taxes paid.
List significant noncash investing and financing activities.

17. Simple Statement of Cash Flows
RYAN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2007
The statement’s heading

18. Adjustments to Net Income
Remember the adjustments to net income are:
Noncash expenses
Gains/losses on investments
Deferred taxes
Equity income
Working capital changes

19. Indirect Method- Ryan Corporation
Added back since depreciation is not an outflow of cash.
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
Credits to
noncash
accounts
Debits to
noncash
accounts
Same number as
direct method

20. Leyton Company Information
Page 1140
Leyton Company Information

21. Simple Statement of Cash Flows-Leyton Company
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) 1,100
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

22. Simple Statement of Cash Flows
Net cash provided by operating activities $8,100
Net cash used for investing activities (9,000)
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.

23. Sale of Equipment
Gains and losses from investing activities should be eliminated from operating activities by adding losses and deducting gains from net income.
Dack Company sold equipment with a cost of $2,200 and accumulated depreciation of $700 for $2,100.

24. Deduct $600 from net income to reconcile net income to operating cash.
Sale of Equipment
Historical cost 2,200
Less: Accumulated depreciation 700
Book value $1,500
Gain (not operating) ?
Cash proceeds $2,100
Deduct $600 from net income to reconcile net income to operating cash.

25. 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.

26. Interest Paid
= $1,000
Interest Expense
Interest Payable
Bal. 0
1,100
Cash Paid 500
$100 discount
amortization
will not require
cash
1,000
Bal
Jones Company had $1,100 of interest expense, including $100 amortization of bond discount. The beginning balance in Interest Payable was $0 and the ending balance was $500. How much cash was paid for interest?

27. Taxes Payable/Deferred Taxes
Taxes Paid
Taxes Payable and Deferred Taxes can be combined to find taxes paid.
Taxes Payable/Deferred Taxes
= $7,050
Cash Paid 2,820
1,500 Bal.--Taxes Payable
1,920 Bal.--Deferred Taxes
2,130 Bal.--Taxes Payable
2,100 Bal.--Deferred Taxes
3,630 Taxes Expense
= $7,050
The beginning and ending balances in Taxes Payable were $1,500 and $2,130 and the beginning and ending balances in Deferred Taxes were $1,920 and $2,100. Tax Expense was $3,630. How much cash was paid?

28. Direct Method
Under the direct method, a company deducts its operating cash outflows from its operating cash inflows to determine its net cash flow from operating activities.

29. Direct Method Inflows (3) Cash from customers (A/R)
Cash from interest revenue (Interest Receivable)
Cash from dividend revenue (Dividends Rec.)
Outflows (5)
Cash paid to suppliers (A/P)
Cash paid for wages (Wages Payable)
Other cash expenses (Prepaid/Accrued)
Cash paid for interest expense (Interest Payable)
Cash paid for taxes (T/P and Deferred Tax)

30. Direct Method
Use T accounts to examine the 3 inflows and 5 outflows in the direct method.

31. Cash From Customers
Sales Revenue
Accounts Receivable
30,000
42,000
Bal. 0
37,000
42,000
Bal ,000
Smith Company made cash sales of $30,000 and credit sales of $42,000. How much cash was collected from customers?
$67,000

32. Dividends and Interest Collected
Interest Receivable
Dividends Receivable
Bal ,000
Revenue 42,000
Bal ,000
Bal
Revenue 4,000
Bal ,000
Ives Company earned interest revenue of $42,000 & dividend revenue of $4,000. Interest Receivable had a beginning balance of $30,000 and an ending balance of $12,000. Dividends receivable had a beginning balance of $0 and an ending balance of $1,000. How much cash from interest and dividends was collected?

33. Dividends and Interest Collected
Interest Receivable
=4,000
=72,000
Dividends Receivable
Bal ,000
Revenue 42,000
Bal ,000
60,000
Bal
Revenue 4,000
Bal ,000
3,000
=4,000
=72,000
Ives Company earned interest revenue of $42,000 and dividend revenue of $4,000. During the year $60,000 of interest and $3,000 of dividends was collected.

34. Cash Paid to Suppliers 62,000 Accounts Payable Inventory 62,000
$47,700
10,300
12,100
59,800
Bal. 12,500
Bal. 11,000
51,000 Cost of goods sold
49, Purchases 49,500
59,800
Copeland Company had beginning and ending balances in Accounts Payable of $10,300 and $12,100, respectively. The beginning and ending balances in inventory were $12,500 and $11,000 respectively. The cost of goods sold was $51,000. How much cash was paid to suppliers?

35. Prepaid/Accrued Expenses
Cash Expenses
Prepaid and accrued expenses can be combined to calculate the cash paid. Cash operating expenses exclude depreciation, amortization and depletion.
Prepaid/Accrued Expenses
=$372,000
Prepaid Bal ,000
Prepaid Bal ,000
60,000 Accrued Bal.
300,000 Cash operating expenses
32,000 Accrued Bal.
=$372,000
Wolverine Company had beginning and ending balances in accrued expenses of $60,000 and $32,000, respectively. It had beginning and ending balances in prepaid expenses of $20,000 and $12,000, respectively. It had cash operating expenses of $300,000. How much cash was paid for expenses?

36. Prepaid/Accrued Expenses Wolverine Company paid $320,000 for expenses.
Cash Expenses
Prepaid/Accrued Expenses
Prepaid Bal ,000
Cash paid 320,000
Prepaid Bal ,000
60,000 Accrued Bal.
300,000 Cash operating expenses
32,000 Accrued Bal.
Wolverine Company paid $320,000 for expenses.

37. Cash Paid to Employees
Salaries Payable
Cash paid 13,000
0 Bal.
14,000 Salaries expense
1,000 Bal.
Smith Company had beginning and balances in Salaries Payable of $0 and $1,000. respectively. Salary expense for the year was $14,000. How much cash was paid to employees?

38. Ryan Corporation’s Income Statement
Direct Method
Ryan Corporation’s Income Statement
Sales revenue (cash and A/R) $70,000
Less:
Cost of goods sold (cash and A/P) $(29,000)
Salaries expense (cash and S/P) (13,000)
Depreciation expense (8,000) (50,000 )
Income before income taxes $20,000
Income tax expense (cash) (6,000 )
Net income $14,000

39. Cash From Customers- Ryan Company
Sales Revenue
Accounts Receivable
70,000
Bal. 22,600
72,600
70,000
Bal ,000
Accounts receivable decreased by $2,600 for Ryan Company. How much cash was collected from customers?
$72,600

40. Direct Method Remember to check for these cash flows. Inflows (3)
Cash from customers (A/R)
Cash from interest revenue (Interest Receivable)
Cash from dividend revenue (Dividends Rec.)
Outflows (5)
Cash paid to suppliers (A/P)
Cash paid for wages (Wages Payable)
Other cash expenses (Prepaid/Accrued)
Cash paid for interest expense (Interest Payable)
Cash paid for taxes (T/P and Deferred Tax)

41. Cash Paid to Suppliers- Ryan Company
Accounts Payable
Inventory
Cash paid
$38,000
10,300
3,300
Bal. 9,000
Bal. 11,000
29,000 Cost of goods sold
31, Purchases 31,000
Ryan Company had beginning and ending balances in Accounts Payable of $10,300 and $3,300, respectively. The beginning and ending balances in inventory were $9,000 and $11,000 respectively. The cost of goods sold was $29,000. How much cash was paid to suppliers?

42. Cash Paid to Employees- Ryan Company
Ryan Company had beginning and balances in Salaries Payable of $200 and $1,000. respectively. Salary expense for the year was $13,000. How much cash was paid to employees?
Salaries Payable
Cash paid 12,200
200 Bal.
13,000 Salaries expense
1,000 Bal.
Ryan Company had no change in the Taxes Payable and Deferred Taxes accounts.

43. Direct Method-Ryan Company
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

44. Reconciliation of Net Income to Cash Provided by Operations- Direct Method
In other words, the indirect method is required even when using the direct method.
When the direct method is used, a schedule to reconcile net income to cash provided by operations is required.
Yes.

45. 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.

46. Leave sufficient room below each heading.
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

47. Worksheet Method Step 4: Completion of the worksheet Continued
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

48. Worksheet Method Step 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.
Step 6: Prepare the final worksheet entry
Prepare the statement of cash flows and the accompanying schedule from the information developed on the worksheet.

49. Worksheet

50. Worksheet

51. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
First, let’s reconstruct the original entry.
During the year the company sold land that cost $2,200 for $3,900.

52. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Now, we can analyze the entry to help us with recording it on the worksheet.
Cash 3,900
Land 2,200
Gain on Sale of Land 1,700
Cash Flows From Investing Activities: Proceeds From Sale of Land 3,900
Land 2,200
Net Cash Flow From Operating Activities: Gain 1,700

53. Analyzing Complex Transactions
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.
This is a tougher one.

54. Analyzing Complex Transactions
Worksheet Method
Analyzing Complex Transactions
Cash 3,100
Accumulated Depreciation: Buildings 4,800
Extraordinary loss 2,100
Buildings 10,000
Now, we can reconstruct the entry.
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

55. 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.

56. 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

57. 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

58. 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.

59. Analyzing Complex Transactions Now reconstruct the entry.
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
Now reconstruct the entry.

60. Partial Cash Investing and Financing Activities
A company acquired land for $10,000 by paying $1,000 down and signing a $9,000 note payable.

61. Partial Cash Investing and Financing Activities
Land 10,000
Cash 1,000
Notes Payable 9,000
Make the worksheet entry in journal entry format.
Land 10,000
Cash Used For Investing Activities: Purchased Land 1,000
Note Payable 9,000
Reconstruct the entry for the worksheet.

62. Partial Cash Investing and Financing Activities
…and the issuing of the note is shown as a $9,000 financing activity.
The purchase of the land is shown as a $9,000 investing activity…
Schedule of Noncash Transactions

63. Partial Cash Investing and Financing Activities
A company acquired land for $18,000 by paying $15,000 down and signing a $3,000 note payable.
Cash Flows From Investing Activities
Purchase of land by issuance of note and cash $(18,000 )
Less: Issuance of note ,000
Cash payment for purchase of land $15,000

64. Partial Cash Investing and Financing Activities
Land 10,000
Cash 1,000
Notes Payable 9,000
Make the worksheet entry in journal entry format.
Land 10,000
Cash Used For Investing Activities: Purchased Land 1,000
Notes Payable 9,000
Reconstruct the entry for the worksheet.

65. Temporary and Long-Term Investments
On November 28, 2007, 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, 2007, 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.

66. Temporary and Long-Term Investments
Temporary Investment in Available-for- Sale Securities 40,000
Cash 40,000
(1)
Temporary Investment in Available-for
Sale Securities 40,000 Cash Flows From Investing
Activities: Payment for Purchase of Temporary Investment 40,000
(2)
Continued

67. 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
(1)
Allowance for Change in Value of
Investment 2,000
Unrealized Increase in Value of
Available-for-Sale Securities 2,000
(2)
No change! The debit portion appears only in the upper portion of the worksheet.

68. Temporary and Long-Term Investments
On January 16, 2008, 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

69. 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.

70. C 22
hapter
The End
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