1. Statement of Cash Flows answers questions such as:
Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?
Will the company be able to meet its financial obligations to creditors?
Will the company be able to pay its customary cash dividend?
Why is there a difference between net income and net cash flow for the year?
To what extent will the company have to borrow money in order to make needed investments?

2. Statement of Cash Flows
Reports the Cash Effects
of an enterprise’s operations (through CA & CL generally)
its investing transactions (LT Assets)
its financing transactions (LT Liabilities & Owners’ Equity)
Should Reconcile Net Income to Net Cash Flow from operating activities
Should report significant noncash investing & financing transactions
Cash includes both cash & cash equivalents

3. Cash Flows Cash Increases in Cash Decreases in Cash Operating
(receipts from revenues)
(payments for expenses)
Cash
Investing
Investing
(receipts from sales of noncurrent assets)
(payments for aquiring noncurrent assets)
Financing
Financing
(receipts from issuing equity and debt securities)
(payments for dividends, and redemption of debt securities)

4. Statement of Cash Flows: Investing Activities
Cash Received From:
Collection of principal from debtors
Sale of loans to third parties
Sale of debt or equity securities of other entities
Returns of investment in those investments
Sale of property, plant & equipment
Cash Paid For:
Loans made or purchased by the entity
Purchase of debt or equity securities of other entities
Purchase of property, plant & equipment

5. Statement of Cash Flows: Financing Activities
Cash Received From:
Issuance of equity securities (stock)
Issuance of bonds, mortgages, notes & other short-term or long-term borrowings
Cash Paid For:
Cash dividends
Purchase of treasury stock
Repayment of principal on amounts borrowed, including capital lease obligations

6. Statement of Cash Flows: Operating Activities
Cash Received From:
Producing & selling goods
Providing services
Interest
Dividends
Other (includes sale of investments in trading portfolio)
Cash Paid For:
Inventory
Salaries & wages
Taxes, duties, fines, fees, penalties
Other (includes purchase of investments in trading portfolio)

7. Noncash: Investing & Financing Activities
Acquiring an asset through a capital lease
Conversion of debt to equity
Exchange of noncash assets or liabilities for other noncash assets or liabilities
Issuance of stock to acquire assets

8. Statement of Cash Flows: Direct vs. Indirect Methods
Requires a supplemental reconciliation of net income to cash flow from operating activities.
Net income is reconstructed on a cash basis.
Used by 2.5% of companies.
Indirect Method
No supplemental schedule is required.
Net income is reconciled to cash flow from operating activities.
Used by 97.5% of companies. 31

9. Accounts Receivable Beginning Balance + Net Credit Sales
- Net Cash Collected
from Customers
-A/R written off
= Ending Balance

10. Accounts Payable Beginning Balance + COGS (net of Factory
Depreciation & Amortization)
+ Ending Inventory
- Beginning Inventory
- Net Cash Paid
to suppliers
= Ending Balance

11. Accrued Expenses Payable
Beginning Balance
+ Operating Expenses
- Cash Paid for Operating Expenses
- Depr. & Amortization
- Beg. Prepaid Expense
+ Ending Prepaid Expenses
= Ending Balance

12. Statement of Cash Flows: Indirect Method
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income
+ “Non-cash” Expenses
- “Non-cash” Revenues
- Increases in Current Assets
+ Decreases in Current Assets
- Decreases in Current Liabilities
+ Increase in Current Liabilities
+/- Losses & Gains Reported on the Income Statement
= Net Cash Flow from Operating Activities
CASH FLOW FROM INVESTING ACTIVITIES:
+ Net Decrease in all other Long Term Assets
- Net Increase in all other Long Term Assets
= Net Cash Flow from Investing Activities
CASH FLOW FROM FINANCING ACTIVITIES:
+ Net Decrease in all other LT Liabilities & Equities
- Net Increase in all other LT Liabilities & Equities
= Net Cash Flow from Financing Activities
Statement of Cash Flows: Indirect Method 31

13. “Ada” Memory Tool
Asset
Decreases --
Add to Income

14. Prepare a
Statement of
Cash Flows:
Indirect Method
using a
worksheet

15. Interpretation of the Statement of Cash Flows
Examine the operating activities section carefully.
Negative cash flow is usually a sign of fundamental difficulties.
Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities. 32

16. DIRECT METHOD STATEMENT OF CASH FLOWS
Cash flows from operating activities
Cash collections from Customers
Less: Cash paid for merchandise
Less: Cash paid for operating expenses
Less: Cash paid for income taxes
Net cash provided by operating activities
CASH FLOW FROM INVESTING ACTIVITIES:
Plus cash received from acquiring Long Term Assets
Less cash paid from selling Long Term Assets
= Net Cash Flow from Investing Activities
CASH FLOW FROM FINANCING ACTIVITIES:
Plus cash received from securing LT Liabilities & Equities
Less cash paid to reduce LT Liabilities & Equities
= Net Cash Flow from Financing Activities
Net increase in cash
Cash, BOY
Cash, EOY
DIRECT METHOD STATEMENT OF CASH FLOWS

17. Accounts Receivable Direct Method: Beginning Balance
Finding Cash Collected from Customers
Accounts Receivable
Beginning Balance
+ Net Credit Sales
- Net Cash Collected
from Customers
-A/R written off
= Ending Balance
Cash
Collected
from Customers =
Net
Sales
Direct Method:
+ Decrease in A/R
- Increase in A/R

18. Accounts Payable Direct Method: Beginning Balance
Finding Cash Paid to Suppliers
Accounts Payable
Beginning Balance
+ COGS (net of Factory
Depreciation & Amortization)
+ Ending Inventory
- Beginning Inventory
- Net Cash Paid
to suppliers
= Ending Balance
Cash
Payments
to Suppliers =
COGS
Direct Method:
+ Incr in Inventory
- Decr in Inventory
+ Decrease in A/P
- Increase in A/P

19. Accrued Expenses Payable
Finding Cash Paid for Operating Expenses
Accrued Expenses Payable
Beginning Balance
+ Operating Expenses
- Cash Paid for Operating Expenses
- Depr. & Amortization
- Beg. Prepaid Expense
+ Ending Prepaid Expenses
= Ending Balance
Cash
Payments
for Operating
Expenses =
Operating
net of
depreciation
Direct Method:
+ Increase in Prepaid Expenses
- Decrease in Prepaid Expenses
+ Decrease in Accrued Expenses
- Increase in Accrued Expenses