1. The Statement of Cash Flows
Chapter 12
The Statement of Cash Flows
Financial Accounting 4e by Porter and Norton

2. Cash Flows and Net Income for Four Computer Companies in 2001
(in millions)
Increase
(Decrease) Net Income
in Cash (Loss)
$ 2, $ 7,723
(377)
(1,034)
(16) (99)
IBM
Sun Microsystems
Gateway, Inc.
Western Digital

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
Investing
Activities
Financing
Activities

4. Cash Equivalents Readily convertible to cash
Little risk of price change
Original maturity to investor of three months or less 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Examples:
Commercial paper
U.S. Treasury bills
Certain money market funds

5. Statement of Cash Flows Format
outflows
Cash
inflows
Classified by:
Operating activities
Investing activities
Financing activities =
Beginning
Cash +
= Ending
Cash
Increase or decrease in cash

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
from balance sheets

7. Operating Activities
Incur Employee
Salaries and Wages
Cash transactions concerned with acquiring and selling products and services
Sell Products
and Services
Incur Utility and
other Operating
Costs
Make Inventory
Purchases

8. Purchase/Sell Intangible Assets (i.e. Patents, trademarks, etc.)
Investing Activities
Purchase/Sell
Long-Term
Investments
Cash transactions concerned with acquiring and disposing of long-term assets
Buy/Sell
Property, plant
& equipment
Purchase/Sell Intangible Assets
(i.e. Patents, trademarks, etc.)

9. Financing Activities
Sell/Repurchase
Stocks
Cash transactions concerned with internal and external financing of the business
Borrow $/
Repay Loans
Issue/Retire
Bonds
Issue Dividends
Paycheck for
Date
Dept. of Treasurer
Jane Doe

10. Categorizing Cash Flow Activities
Income
Statement
Transactions
Current
Assets
and
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
Indirect Method
both methods arrive at same cash from operating activities
reports major classes of cash receipts and payments
adjusts net income to remove effect of accruals and deferrals

12. Preparing the Statement of Cash Flows: Direct Method
Step 1
Set up three master T accounts
Cash Flows from
Operating Activities
Cash Flows from
Investing Activities
Cash Flows from
Financing Activities
Step 2
Determine the cash flows from operating activities

13. Direct Method - Operating Activities
Review journal entries recorded during period:
Accounts receivable 670,000
Sales (from income statement) ,000
Sales on
account ,000
Bal. Jan ,000
Bal. Dec ,000
From Balance
Sheet
Accounts Receivable
??? Cash
collections

14. Direct Method - Operating Activities
Review journal entries recorded during period:
Accounts receivable 670,000
Sales (from income statement) ,000
From Balance
Sheet
Accounts Receivable
Bal. Jan ,000
664, Cash
collections
Sales on
account ,000
Bal. Dec ,000

15. Direct Method - Operating Activities
Review journal entries recorded during period:
Cash 15,000
Interest Revenue ,000
Interest Revenue
15, Interest earned
and received

16. Direct Method - Operating Activities
Review journal entries recorded during period:
Cost of Goods Sold (from Inc. Stmt.) 390,000
Inventory ,000
Bal. Jan ,000
Bal. Dec ,000
From Balance
Sheet
Inventory
390, Cost of goods
sold
Purchases on
account ???

17. Direct Method - Operating Activities
Review journal entries recorded during period:
Inventory 382,000
Accounts Payable ,000
Accounts Payable
From Balance
Sheet
31, Bal. Jan. 1
382, Purchases
Cash payments ???
38, Bal. Dec. 31

18. Direct Method - Operating Activities
Review journal entries recorded during period:
Accounts Payable 375,000
Cash 375,000
Accounts Payable
From Balance
Sheet
31, Bal. Jan. 1
382, Purchases
Cash payments ,000
38, Bal. Dec. 31

19. Direct Method - Operating Activities
Review journal entries recorded during period:
Salary and Wages Expense ,000
Salaries and Wages Payable ,000
60, Expense
Salaries and Wages Payable
From Balance
Sheet
9, Bal. Jan. 1
Cash payments ???
7, Bal. Dec. 31

20. Direct Method - Operating Activities
Review journal entries recorded during period:
Salary and Wages Payable 62,000
Cash ,000
Salaries and Wages Payable
From Balance
Sheet
9, Bal. Jan. 1
Cash payments 62,000
60, New unpaid
wages
7, Bal. Dec. 31

21. Direct Method - Operating Activities
Review journal entries recorded during period:
Depreciation Expense ,000
Accumulated Depreciation ,000
There is no effect on cash flow from depreciation.

22. Direct Method - Operating Activities
Review journal entries recorded during period:
Insurance Expense ,000
Prepaid Insurance ,000
Bal. Jan ,000
Bal. Dec ,000
From Balance
Sheet
12, Expense
Prepaid Insurance
Cash payments ???

23. Direct Method - Operating Activities
Review journal entries recorded during period:
Prepaid Insurance 6,000
Cash 6,000
Bal. Jan ,000
Bal. Dec ,000
From Balance
Sheet
Prepaid Insurance
12, Expense
Cash payments 6,000

24. Direct Method - Operating Activities
Review journal entries recorded during period:
Interest Expense 15,000
Cash 15,000
Bal. Jan
Bal. Dec
From Balance
Sheet
Interest Expense
15, Expense
Cash payments 15,000

25. Direct Method - Operating Activities
Review journal entries recorded during period:
Income Taxes Expense 50,000
Income Taxes Payable 50,000
From Balance
Sheet
Income Taxes Payable
5, Bal. Jan. 1
50, Expense
Cash payments ???
8, Bal. Dec. 31

26. Direct Method - Operating Activities
Review journal entries recorded during period:
Income Taxes Payable 47,000
Cash 47,000
From Balance
Sheet
Income Taxes Payable
5, Bal. Jan. 1
50, Expense
Cash payments 47,000
8, Bal. Dec. 31

27. Master T Account for Cash Flows from Operating Activities
Cash receipts from:
Cash payments for:
375,000 Inventory purchases
62,000 Salaries and wages
6,000 Insurance
15,000 Interest
47,000 Taxes
Sales on account ,000
Interest ,000
Net cash
inflows 174,000

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

29. Direct Method – Investing Activities Long-Term Investments
Review journal entries recorded during period:
Long-Term Investments 30,000
Cash ,000
From Balance
Sheet
Long-Term Investments
Bal. Jan ,000
Purchases ,000
Bal. Dec ,000

30. Direct Method – Investing Activities Statement of Cash Flows
Review journal entries recorded during period:
Land ,000
Notes Payable 50,000
No cash was involved in this transaction so it should be reported in a separate schedule instead of on the
Statement of Cash Flows

31. Direct Method – Investing Activities
Review journal entries recorded during period:
Property & Equipment 75,000
Cash 75,000
From Balance
Sheet
Property & Equipment
Bal. Jan ,000
Acquisitions ,000
??? Disposals
Bal. Dec ,000

32. Direct Method – Investing Activities
Book value of equipment sold was $20,000.
Original cost of equipment was $35,000.
From Balance
Sheet
Accumulated Depreciation
75, Bal. Jan. 1
40, Expense
Disposals ,000
100, Bal. Dec. 31

33. Master T Account for Cash Flows from Investing Activities
Cash receipts from:
Cash payments for:
30,000 Purchase of
investments
75,000 Purchase of
property and
equipment
Sale of machine ,000
80,000 Net cash
outflows

34. Preparing the Statement of Cash Flows: Direct Method
Step 4
Determine the cash flows from financing activities
Paycheck for
Date
Dept. of Treasurer
Jane Doe

35. Direct Method – Financing Activities Statement of Cash Flows
Review journal entries recorded during period:
Land ,000
Notes Payable 50,000
No cash was involved in this transaction so it should be reported in a separate schedule instead of on the
Statement of Cash Flows

36. Direct Method – Financing Activities
Review journal entries recorded during period:
Loss on Retirement of Bonds ,000
Bonds Payable 60,000
Cash 63,000
Bonds Payable
From Balance
Sheet
260,000 Bal. Jan. 1
Retirement ,000
200, Bal. Dec. 31

37. Direct Method – Financing Activities
Review journal entries recorded during period:
Cash 25,000
Capital Stock 25,000
Capital Stock
From Balance
Sheet
75, Bal. Jan. 1
25,000 Stock issued
100, Bal. Dec. 31

38. Direct Method – Financing Activities
Review journal entries recorded during period:
Retained Earnings 67,000
Cash 67,000
Retained Earnings
From Balance
Sheet
193, Bal. Jan. 1
120, Net income 2004
Cash dividends ,000
246, Bal. Dec. 31

39. Net cash inflows Net cash outflows
Master T Account for Cash Flows from Financing Activities
Cash Flows From Financing Activities
Cash receipts from:
Cash payments for:
Sale of Stock
Borrowings
Debt Retirements
Dividends
Stock Repurchases
Net cash
inflows
Net cash
outflows
-OR-

40. Master T Account for Cash Flows from Financing Activities
Cash receipts from:
Cash payments for:
63,000 Retirement of
bonds
67,000 Payment of
cash dividends
Issuance of stock ,000
105,000 Net cash
outflows

41. Noncash Investing and Financing Activities
Disclose important financing and investing activities which do not require cash
Exchange Stock for Assets
Certificate of Stock
Examples:
Buy Assets through Debt Financing from Supplier

42. 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)

43. Indirect Method - Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities

44. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable (6,000)
Accounts Receivable
Bal. Jan ,000
Net increase ,000
Decrease $6,000
Bal. Dec ,000

45. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Inventory
Bal. Jan ,000
Bal. Dec ,000
8, Net decrease
Increase $8,000

46. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Accounts Payable
31, Bal. Jan. 1
7, Net increase
38, Bal. Dec. 31
Increase $7,000

47. Indirect Method - Operating Activities Salaries & Wages Payable
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Salaries & Wages Payable
9, Bal. Jan. 1
Net decrease 2,000
7, Bal. Dec. 31
Decrease $2,000

48. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Prepaid Insurance
Bal. Jan ,000
6, Net decrease
Bal. Dec ,000
Decrease $6,000

49. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Income Taxes Payable
5, Bal. Jan. 1
3, Net increase
8, Bal. Dec. 31
Increase $3,000

50. Indirect Method - Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income:
Increase in accounts receivable ( 6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries & wages payable ( 2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Gain on sale of machine ( 5,000)
Depreciation expense 40,000
Loss on retirement of bonds 3,000
Add back noncash expense
Report entire outflow as a financing activity
Gain is not part of operating activities

51. 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 its long-term assets
Cash Flow from Operating Activities
- Capital Expenditures
Avg. Debt Maturing over Next Five Years

52. A Work-Sheet Approach to the Statement of Cash Flows
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows

53. Indirect Method: Using a Work Sheet
Enter account balances

54. Indirect Method: Using a Work Sheet
Record investing & financing activities

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

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

57. Indirect Method: Using a Work Sheet
Extend current assets
& current liabilities

58. Indirect Method: Using a Work Sheet
Total columns

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

60. End of Chapter 12