1. 14
C H A P T E R
Statement of
Cash Flows

2. Learning Objective 1
Understand the purpose of a statement of cash flows.

3. What Does The Statement of Cash Flows Do?

4. Learning Objective 2
Recognize the different types of information reported in the statement of cash flows.

5. What Are Cash Equivalents?

6. The Flow of Cash inflows outflows Cash received from operating
activities
from investing
from financing
Cash and
cash
equivalents
inflows
Cash paid
for operating
activities
for investing
for financing
outflows

7. Match Classifications of Cash Flows
1.Transactions and events that enter into the determination of net income.
2.Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.
3.Transactions and events whereby resources are obtained from, or repaid to, owners and creditors.
Operating Activities
Financing Activities
Investing Activities

8. Statement of Cash Flows
Operating Activities
Financing Activities
Cash Inflows
Investing Activities
Cash 4

9. Statement of Cash Flows
Cash Outflows
Operating Activities
Financing Activities
Investing Activities 5

10. What Items Are Classified as Operating Activities?
Cash Inflow
Cash Outflow 14

11. What Items Are Classified as Investing Activities?
Cash Inflow
Cash Outflow 16

12. What Items Are Classified as Financing Activities?
Cash Inflow
Cash Outflow 18

13. Define Noncash Items

14. You Can Do It! Learning Objective 3 Prepare a simple
statement of cash flows.

15. What is the Format of the Statement of Cash Flows?12

16. A Simple Example

17. A Simple Example
The following transactions were conducted by Red Bull Corp during 2003:
1. Sales on account, $1,300
2. Collections on account, $1,800
3. Paid accounts payable, $1,000
4. Paid long-term debt, $100
5. Issued stock at par value, $200
6. Paid interest on debt, $50
7. Sold equipment, $100 (original cost, $250, accumulated depreciation, 225)
Record the appropriate journal entries.

18. A Simple Example

19. A Simple Example Red Bull Corporation Trial Balance, 12/31/03 Debit
Credit
Cash
$1,450
Accounts Receivable
800
Property, Plant &
Equipment
250
Accumulated Depreciation
$ 125
Accounts Payable
100
Long-Term Debt
150
Common Stock
500
Retained Earnings
300
Sales
1,300
Gain on Sale 75
Interest Expense 50
Totals
$2,550
$2,550

20. A Simple Example STATEMENT OF CASH FLOWS
Operating activities: Collections on account $ 1,800 Payment of accounts payable $1, Payment for interest (1,050) Cash flows from operating activities $
Investing activities: Sold equipment $ Cash flows from investing activities
Financing activities: Issued stock $ Repayment of debt (100)
Cash flows from financing activities

21. A Simple Example Statement of Cash Flows (continued)
Net increase in cash $ 950
Beginning cash balance
Ending cash balance $1,450

22. Learning Objective 4 Analyze financial statements to prepare a
statement of cash flows.

23. 6-Step Process for Preparing a Statement of Cash Flows
Compute the change in the cash and cash-equivalent accounts for the period of the statement.
Convert the income statement from an accrual-basis to a cash-basis summary of operations.
Analyze the long-term assets to identify the cash flow effects of investing activities.
Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

24. Example: Change in Cash
Red Bull Corporation
Beginning cash balance $ 500
Ending cash balance ,450
Net increase in cash $ 950

25. Cash Flow Statements—Match
A method of reporting net cash flows from operations that shows the major classes of cash receipts and payments for a period of time.
A method of reporting net cash flows from operations that involves converting accrual-basis net income to a cash basis.
Indirect Method
Direct Method

26. 6-Step Process for Preparing a Statement of Cash Flows
Compute the change in the cash and cash-equivalent accounts for the period of the statement.
Convert the income statement from an accrual-basis to a cash-basis summary of operations.
Analyze the long-term assets to identify the cash flow effects of investing activities.
Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

27. Income Statement Conversion
Cash Flows from Operations
Income Statement
Adjustments
Sales $1, $1,800
Accounts payable -1,000 (1,000)
Interest expense (50) No change (50)
$1, net adjustment $ 750

28. 6-Step Process for Preparing a Statement of Cash Flows
Compute the change in the cash and cash-equivalent accounts for the period of the statement.
Convert the income statement from an accrual-basis to a cash-basis summary of operations.
Analyze the long-term assets to identify the cash flow effects of investing activities.
Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

29. Investing Activities
Red Bull Corporation sells a piece of equipment for $100 during the year. The T-accounts relating to the equipment and the associated depreciation are given as follows.
PP&E
500 ?
250
PP&E
500
250
Acc. Dep.
350 ?
125
Acc. Dep.
350
225
125

30. Investing Activities
From the preceding T-Accounts make Red Bull Corporation’s journal entries relating to Property, Plant, & Equipment for the year:

31. Investing Activities
Record the investing activities section of Red Bull Corporation’s statement of cash flows:

32. 6-Step Process for Preparing a Statement of Cash Flows
Compute the change in the cash and cash-equivalent accounts for the period of the statement.
Convert the income statement from an accrual-basis to a cash-basis summary of operations.
Analyze the long-term assets to identify the cash flow effects of investing activities.
Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

33. Investing Activities
Red Bull Corporation’s financing activities section of its statement of cash flows is as follows:

34. 6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

35. A Simple Example STATEMENT OF CASH FLOWS
Operating activities: Collections on account $1,800 Payment of accounts payable $1, Payment for interest (1,050) Cash flows from operating activities
Investing activities: Sold equipment $ Cash flows from investing activities
Financing activities: Issued stock $ Repayment of debt (100)
Cash flows from financing activities
Net increase in cash $950
Beginning cash balance
Ending cash balance $1,450

36. 6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

37. Define Noncash Transactions

38. Learning Objective 5 Use information from the statement of cash flows
to make decisions.

39. Analysis of Statement of Cash Flows
continued

40. Analysis of Statement of Cash Flows
General
from
from
from
Explanation
Operating
Investing
Financing
Operating cash flow
problems covered by sale 5. – + +
of fixed assets, borrowing,
and contributions.
Rapid growth, short falls in 6. – – +
operating cash flow, and
purchase of fixed assets.
Sale of fixed assets is 7. – + –
financing operating cash
flow shortages.
Company is using cash
reserves to finance cash 8. – – –
flow short falls and pay
creditors.

41. Chapter 14 is Complete
We must be the change
we wish to see in the
world.
Ghandi