2. REPORTING CASH FLOWS APPENDIX B Warfield Wyegandt Kieso
INTERMEDIATE ACCOUNTING
Principles and Analysis
2nd Edition

3. Learning Objectives
Identify sources of information for a statement of cash flows.
Prepare a statement of cash flows.
Discuss special problems in preparing a statement of cash flows.
Understand the direct method of calculating net cash flow from operating activities.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Section One – Indirect Method
Sources of Information
Comparative balance sheets.
An analysis of the Retained Earnings.
All changes that have passed through cash or have resulted in an increase or decrease in cash.
Writedowns, amortization charges, and similar “book” entries, such as depreciation.
LO 1 Identify sources of information for a statement of cash flows.

5. Preparing the Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Income Statement Items
Generally Long-Term Asset Items
Generally Long-Term Liability and Equity Items
The term “Cash” = Cash and cash equivalents.
LO 1 Identify sources of information for a statement of cash flows.

6. Preparing the Statement of Cash Flows
Order of Presentation:
Operating activities.
Investing activities.
Financing activities.
Report inflows and outflows from investing and financing activities separately.
Direct Method
Indirect Method
LO 1 Identify sources of information for a statement of cash flows.

7. Preparing the Statement of Cash Flows
Three Major Steps:
Step 1. Determine net increase/decrease in cash.
Step 2. Determine net cash flow provided/used by operating activities.
Step 3. Determine net cash provided/used by investing and financing activities.
LO 2 Prepare a statement of cash flows.

8. Preparing the Statement of Cash Flows
EB-3 Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented on the next slide.
Additional Information:
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Investments were sold for cash. No additional investments were purchased in 2008.
Cash was paid to retire bonds. No additional bonds were sold in 2008.
All the dividends declared were paid.
Prepare a statement of cash flows using the Indirect Method.
LO 2 Prepare a statement of cash flows.

9. Prepare a statement of cash flows.
EB-3
Indirect Method
Prepare a statement of cash flows.
Steps 1 and 2
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Step 1
Net Change in Cash 650

10. EB-3
Indirect Method
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Steps 2 and 3
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Depreciation expense 30
Analysis of Plant Assets
+ Purchases 130
Purchase of plant assets (130)
Analysis of Accumulated Depreciation
+ Depreciation expense 30
Net Change in Cash 650

11. EB-3
Indirect Method
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Steps 2 and 3
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Depreciation expense 30
Purchase of plant assets (130)
Analysis of Capital Stock
Issuance of stock 130
+ Sale of stock 130
Net Change in Cash 650

12. EB-3
Indirect Method
Investments were sold for cash. No additional investments were purchased in 2008.
Steps 2 and 3
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Depreciation expense 30
Gain on sale (80)
Analysis of Investments
Purchase of plant assets (130)
- Sale of investments 120
Sale of investments 200
Calculation of Proceeds from Sale
Decrease in cost from sale 120
Gain on sale (income statement) 80
Proceeds from sale $
Net Change in Cash 650

13. Cash was paid to retire bonds. No additional bonds were sold in 2008.
Indirect Method
Cash was paid to retire bonds. No additional bonds were sold in 2008.
Steps 2 and 3
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Depreciation expense 30
Gain on sale (80)
Purchase of plant assets (130)
Sale of investments 200
Analysis of Bonds Payable
Issuance of stock 130
Retirement of bonds (150)
- Retirement of bonds 150
Net Change in Cash 650

14. All the dividends declared were paid.
EB-3
Indirect Method
All the dividends declared were paid.
Steps 2 and 3
Net income 810
Analysis of Retained Earnings
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
- Dividends (paid) 260
Depreciation expense 30
Gain on sale (80)
Purchase of plant assets (130)
Sale of investments 200
Issuance of stock 130
Retirement of bonds (150)
Dividends paid (260)
Net Change in Cash 650

15. Statement of cash flows.
EB-3
Indirect Method
Statement of cash flows.
Net income 810
Increase in receivables (450)
Decrease in inventory 300
Increase in accounts payable 300
Decrease in accrued liabilities (50)
Depreciation expense 30
Gain on sale (80)
860
Purchase of plant assets (130)
Sale of investments 200 70
Issuance of stock 130
Retirement of bonds (150)
Dividends paid (260)
(280)
Net Change in Cash 650

16. Net Cash Flows from Operating Activities
Indirect Method
Net Income
Net Cash Flows from Operating Activities

17. Special Problems in Statement Preparation
1. Adjustments similar to depreciation
Amortization of limited-life intangible assets.
Amortization of deferred costs.
Amortization of bond discount or premium.
Changes in deferred income taxes.
Change related to an investment when recording income or loss under the equity method.
LO 3 Discuss special problems in preparing a statement of cash flows.

18. Special Problems in Statement Preparation
2. Accounts receivable, net
3. Other working capital changes
4. Net losses
5. Gains
6. Stock options
7. Postretirement benefits
8. Extraordinary items
9. Significant noncash transactions
LO 3 Discuss special problems in preparing a statement of cash flows.

19. Section Two – Direct Method
Under the Direct Method, companies adjust each item in the income statement from accrual basis to the cash basis.
Illustration B-15
LO 4 Understand the direct method of calculating net cash flows from operating activities.

20. Preparing the Statement of Cash Flows
EB-4 Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented on the next slide.
Additional Information:
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Investments were sold for cash. No additional investments were purchased in 2008.
Cash was paid to retire bonds. No additional bonds were sold in 2008.
All the dividends declared were paid.
Prepare a statement of cash flows using the Direct Method.
LO 4 Understand the direct method of calculating net cash flows from operating activities.

21. Preparing a Statement of Cash Flows
EB-4
Direct Method
Preparing a Statement of Cash Flows
Step 1
Step 1
Net Change in Cash 650

22. Cash Collections from Customers
EB-4
Direct Method
Cash Collections from Customers
Step 2
Cash collections from customers 6,450
Analysis of Accounts Receivables
- Collections from customers 6,450
Net Change in Cash 650

23. Cash payments for merchandise
EB-4
Direct Method
Illustration B-17
Cash payments for merchandise
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Analysis of Inventory & Accounts Payable
Cash paid for merchandise 4,100
Net Change in Cash 650

24. Cash Paid for Selling and Administrative Expense
EB-4
Direct Method
Cash Paid for Selling and Administrative Expense
Step 2
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Analysis of Accrued Liabilities
- Cash paid for selling/admin. exp. (950)
Net Change in Cash 650

25. Cash Paid for Income Taxes
EB-4
Direct Method
Cash Paid for Income Taxes
Step 2
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
Analysis of Income Tax Payable $
- Cash paid for income taxes (540) $
Net Change in Cash 650

26. Net Cash Provided by Operating Activities
EB-4
Direct Method
Net Cash Provided by Operating Activities
Step 2
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
860
Net Change in Cash 650

27. EB-4
Direct Method
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Step 3
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
Analysis of Plant Assets
860
+ Purchases 130
Purchase of plant assets (130)
Analysis of Accumulated Depreciation
+ Depreciation expense 30
Net Change in Cash 650

28. EB-4
Direct Method
$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
Step 3
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
860
Purchase of plant assets (130)
Analysis of Capital Stock
Issuance of stock 130
+ Sale of stock 130
Net Change in Cash 650

29. EB-4
Direct Method
Investments were sold for cash. No additional investments were purchased in 2008.
Step 3
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
Analysis of Investments
860
Purchase of plant assets (130)
- Sale of investments 120
Sale of investments 200
Calculation of Proceeds from Sale
Decrease in cost from sale 120
Issuance of stock 130
Gain on sale (income statement) 80
Proceeds from sale $
Net Change in Cash 650

30. Cash was paid to retire bonds. No additional bonds were sold in 2008.
Direct Method
Cash was paid to retire bonds. No additional bonds were sold in 2008.
Step 3
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
860
Purchase of plant assets (130)
Sale of investments 200
Analysis of Bonds Payable
Issuance of stock 130
Retirement of bonds (150)
- Retirement of bonds 150
Net Change in Cash 650

31. All the dividends declared were paid.
EB-4
Direct Method
All the dividends declared were paid.
Step 3
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
860
Purchase of plant assets (130)
Sale of investments 200
Analysis of Retained Earnings
Issuance of stock 130
Retirement of bonds (150)
- Dividends (paid) 260
Dividends paid (260)
Net Change in Cash 650

32. Statement of Cash Flows
EB-4
Direct Method
Statement of Cash Flows
Cash collections from customers 6,450
Cash paid for merchandise (4,100)
Cash paid for selling/admin. exp. (950)
Cash paid for income taxes (540)
860
Purchase of plant assets (130)
Sale of investments 200 70
Issuance of stock 130
Retirement of bonds (150)
Dividends paid (260)
(280)
Net Change in Cash 650

33. Operating Activities
Summary of Net Cash Flow from Operating Activities—Direct Method =
Indirect Method
Direct Method
LO 4 Understand the direct method of calculating net cash flows from operating activities.

34. Copyright
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