1. Chapter 6
Financial Statements

2. 6-1 Multi-Step vs. Single-Step Income Statement
Multiple-step
Single-step
Sales Revenue
Net Sales a
Total Revenue
Cost of Goods Sold
Gross Profit b
Total Expenses
Operating Expenses
Income from operations c
Non-operating items
Net Income d
a Sales - Sales returns - Sales Discounts
b Net sales - Cost of goods sold
c Gross profit - Operating expenses
d Income from operations + Other revenue/gains - other expenses/losses
Other Revenues and Gains
Other Expenses and Losses
Interest revenue from notes receivable and marketable securities
Interest expense on notes and loans payable
Dividend revenue from investments in capital stock
Casualty losses from recurring causes such as vandalism and accidents
Rent revenue from subleasing a portion of the store
Losses from the sales of abandonment of property, plant, and equipment
Gain from sale of property, plant and equipment
Loss from strikes by employees and suppliers

3. 6-2 Typical Receipts and Payments Classified by Activity
Operating activities
Cash inflows:
From sale of goods or services.
From returns on loans (interest) and on equity securities (dividends).
Cash outflows:
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
Investing activities
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.
Financing activities
From sale of equity securities (company’s own stock).
From issuance of debt (bonds and notes).
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock.

4. 6-3 Information Sources for Activities
OPERATING ACTIVITIES
Analyze Income statement items
Changes in noncash current asset and current liability items
INVESTING ACTIVITIES
Analyze increases and decreases in investments
and long-term asset items
FINANCING ACTIVITIES
Analyze increases and decreases in long-term
liability and stockholders’ equity items

5. 6-4 Format of the Statement of Cash Flows
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items)
Net cash provided (used) by operating activities XX
XXX
Cash flows from investing activities
(List of individual inflows and outflows)
Net cash provided (used) by investing activities
Cash flows from financing activities
(Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Noncash investing and financing activities
(List of individual noncash transactions)

6. 6-5 Converting Net Income to Net Cash Provided (Used) by Operating Activities
Accrual Basis of Accounting
Cash Basis of Accounting
Earned Revenue
Net
Income
Adjust Revenues to Cash Receipts
Net Cash
Provided by
Operating
Activities
Incurred Expenses
Adjust Expenses to Cash Disbursements
INDIRECT METHOD
Begin with net income and adjust for income statement items that did not effect cash.
Reconcile net income to net cash provided (used) by operating activities.
DIRECT METHOD
Adjust each item on the income statement from the accrual basis to the cash basis.
Major classes of operating cash receipts and cash payments are reported. OR

7. Noncash charges and credits Add to (Deduct from) Net Income
6-6 Operating Activities – Indirect Method Adjustments for Noncash Items
Adjustments to convert net income to net cash provided by operating activities.
Adjustments for noncash charges and credits
Noncash charges and credits
Add to (Deduct from) Net Income
Depreciation Expense
Add
Patent amortization expense
Depletion expense
Loss on sale of equipment
Gain on sales of equipment
Deduct
All noncash expenses are added to net income, and all noncash revenues are subtracted from net income.

8. 6-7 Operating Activities – Indirect Method Adjustments For Current Assets and Liabilities
Adjustments to convert net income to net cash provided by operating activities.
Adjustments for Current Items
For Changes In:
Add to Net Income
Deduct from Net Income
Current assets
Decreases
Increases
Current liabilities
For Changes in Individual Accounts:
Accounts receivable
Decrease
Increase
Inventory
Prepaid expenses
Accounts payable
Accrued expenses payable
All changes in current assets are handled in a similar manner and all changes in current liabilities are handled in a similar manner, but the adjustments are exactly the opposite.

9. 6-8 Cash Flows from Operating Activities – Indirect Method
DEMONSTRATION COMPANY
Comparative Balance Sheet Accounts
December 31
Current Assets
2003
2002
Change
Accounts receivable
$30,000
$39,000
$9,000 Decrease
Prepaid rent
15,000
10,000
5,000 Increase
Inventory
20,000
18,000
2,000 Increase
Current Liabilities
Accounts payable
12,000
6,000 Increase
Interest payable
6,000
2,000
4,000 Increase
Taxes payable
3,000
5,000
2,000 Decrease
Problem Data
DEMONSTRATION COMPANY
Income Statement
For the Year Ended December 31, 2008
Revenues
Sales revenue
Gain on sale of land
Total revenues
$400,000
20,000
$420,000
Expenses
Cost of goods sold
Operating expenses
Depreciation expense
Interest expense
Income tax expense
Total expenses
280,000
75,000
15,000
8,000
7,000
385,000
Net Income
$35,000
Using the data provided, prepare the cash flows from operating activities section of the statement of cash flows using the indirect method.

10. 6-8 Cash Flows from Operating Activities – Indirect Method (continued)
DEMONSTRATION COMPANY
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2008
Cash flows from operating activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expense
Gain on sale of land
Decrease in accounts receivable
Increase in prepaid rent
Increase in inventory
Increase in accounts payable
Increase in interest payable
Decrease in taxes payable
Net cash provided by operating activities
$15,000
(20,000)
9,000
(5,000)
(2,000)
6,000
4,000
$35,000
5,000
$40,000