1. Statement of Cash Flows
Chapter 16
Statement of Cash Flows
Accounting, 21st Edition
Warren Reeve Fess
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PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. What is “Cash Flow” Refer to Midstate Flooring Inc.
Where did their cash come from?
Where did their cash go?

3. Reporting Cash Flows
The statement of cash flows reports cash flows by three types of activities:
1. Cash flows from operating activities – transactions that affect net income.
2. Cash flows from investing activities – transactions that affect noncurrent assets.
3. Cash flows from financing activities – transactions that affect equity and debt of the entity.

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

5. Merchandise purchases Payments of wages and other expenses
Cash Flows from Operating Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from operating activities?`
What are some of the typical cash outflows from operating activities?
Sales of goods
and services
Merchandise purchases
Interest revenue
Payments of wages and other expenses
Dividend revenue
Tax payments

6. Cash Flows from Investing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from investing activities?
What are some of the typical cash outflows from investing activities?
Sales of fixed assets
Purchase of fixed assets
Sale of long-term investments
Purchase of long-term investments

7. Cash Flows from Financing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from financing activities?
What are some of the typical cash outflows from financing activities?
Paying cash dividends
Issuing bonds and long-term notes payable
Repaying debt
Issuing preferred and common stock
Acquiring treasury stock

8. Noncash Investing and Financing Activities
Issuing bonds to acquire land
Issuing common stock for convertible preferred stock
Issuing a long-term note to acquire equipment
Issuing a stock dividend

9. Statement of
Cash Flows--
The Indirect Method

10. Step 1 The Indirect Method
Start with the accrual basis net income (shown in the income statement, the Retained Earnings account, or the statement of stockholders’ equity).

11. The Indirect Method Find the net income. To statement Balance
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance ,300
Dec. 31 Net income 108, ,300
31 Cash dividends 28, ,300
To statement
2006

12. ..\Cash Flows Indirect template.xls

13. Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000

14. Step 2 The Indirect Method
Next, we need to determine depreciation expense for the year. If it isn’t given on the income statement, sometimes it can be found by analyzing the Accumulated Depreciation account.

15. Determine depreciation expense.
The Indirect Method
Determine depreciation expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 58,300
Dec. 31 Depreciation for year 7, ,300
2006
to statement

16. Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Depreciation $ 7,000
Add:
Because Depreciation Expense reduced net income but did not require an outflow of cash, it is added back to net income.

17. Step 3 The Indirect Method
Select current assets and current liabilities that impact cash flow and determine the increases and decreases.

18. Changes in Current Accounts
Accounts Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172, ,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
Determine the debit or credit change of each item above.

19. Changes in Current Accounts
Accounts Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172, ,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These debit changes are subtracted from net income in the operating activities section of the statement of cash flows. Think of these debits as deductions from net income in arriving at net cash flow from operations.

20. Changes in Current Accounts
Accounts Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172, ,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
These credit changes are added to net income in the operating activities section of the statement of cash flows. Think of these credits as additions to net income in arriving at net cash flow from operations.

21. Operating Activities—Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2, ,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Add:

22. Step 4 The Indirect Method
Analyze the income statement to determine if there are any gains or losses from selling investments, equipment, etc.

23. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,0000
Income before income tax $ 191,000
Income tax ,000
Net income $ 108,000
Gain on sale of land $12,000

24. Operating Activities—Indirect Method
Cash flows from operating activities:
Net income, per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2, ,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12, ,700
Net cash flow from operating
activities $100,500
Add:
This gain was included in net income, but did not represent an operating cash flow.

25. The Indirect Method
If there had been a loss on this sale, the loss would have been added to net income.

26. Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2, ,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12, ,700
Net cash flow from operating activity $100,500
Add:
Deduct:

27. Cash Flows from Investing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from investing activities?
What are some of the typical cash outflows from investing activities?
Sales of fixed assets
Purchase of fixed assets
Sale of long-term investments
Purchase of long-term investments

28. Cash Flows from Investing Activities
Purchased a Building
ACCOUNT Building ACCOUNT NO. 18
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 200,000
Dec. 27 Purchased for cash 60, ,000
2006

29. Cash Flows from Investing Activities
Purchased a Building
Purchasing a building involves a noncurrent asset, so this is a negative cash flows from investing activities item.

30. Cash Flows from Investing Activities
Land Transactions
ACCOUNT Land ACCOUNT NO. 16
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 125,000
June 8 Sold for $72,000 cash 60,000 65,000
Oct. 12 Purchased for $15,000 cash 15, ,000
2006

31. Cash Flows from Investing Activities
Land Transactions
The first transaction, the sale of land, results in a positive cash flow from investing activities because land is a noncash asset.

32. Cash Flows from Investing Activities
Land Transactions
The $12,000 gain was recorded earlier on Slide 29 as an operating activity. The purchase of land also is an investing activity.
Click here to return to Slide 29. To return to this slide, type “43” and press the “Enter” key.

33. Cash Flows from Financing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from financing activities?
What are some of the typical cash outflows from financing activities?
Paying cash dividends
Issuing bonds and long-term notes payable
Repaying debt
Issuing preferred and common stock
Acquiring treasury stock

34. Cash Flows from Financing Activities
Dividends
ACCOUNT Dividends Payable ACCOUNT NO. 23
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 10,000
10 Cash paid 10,
June 20 Dividends declared 14, ,000
July 10 Cash paid 14,
Dec. 20 Dividends declared 14, ,000
2006
Total cash paid $24,000

35. Cash Flows from Financing Activities
Because paying of dividends affects equity, it is a negative $24,000 cash flow from financing activities transaction.

36. Cash Flows from Financing Activities
Sale of Common Stock
ACCOUNT Common Stock ACCOUNT NO. 33
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 16,000
Nov. 1 4,000 shares issued for cash 8, ,000
2006

37. Cash Flows from Financing Activities
Sale of Common Stock
ACCOUNT Paid-In Capital in Excess of Par--Common ACCT. NO. 34
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance 80,000
Nov. 1 4,000 shares issued for cash 40, ,000
2006

38. Cash Flows from Financing Activities
Issuing common stock affects equity; therefore, we have a total positive cash flow of $48,000 from this financing activities transaction.

39. Cash Flows from Financing Activities
Retirement of Bonds Payable
ACCOUNT Bonds Payable ACCOUNT. NO. 25
Balance
Date Item Debit Credit Debit Credit
Jan. 1 Balance ,000
June 30 Retired by payment of cash at face amount 50, ,000
2006

40. Cash Flows from Financing Activities
This transaction is a negative cash flows from financing activities item because long-term debt is involved.

42. Statement of
Cash Flows--
The Direct Method

43. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
This is an accrual basis income statement.
The direct method of reporting cash flows will essentially convert this to a cash basis statement.

44. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000
Cost of merchandise sold 790,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax ,000
Net income $ 108,000
Cash collected
from customers
Changes
Debit Credit
Sales 1,180,000
Receivables ,000
Note: The changes in the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period.

45. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000
Cost of merchandise sold 790,000
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
$1,171,000
Cash collected
from customers
Changes
Debit Credit
Sales 1,180,000
Receivables ,000
Cash ,171,000
The increase in receivables represents a reduction in cash inflow relative to the accrual revenue reported on the income statement.

46. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Cash payments for
merchandise
Changes
Debit Credit
Cost of mdse. sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash

47. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000
Gross profit $390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
(785,200)
Cash payments for
merchandise
Changes
Debit Credit
Cost of mdse. sold 790,000
Inventories 8,000
Accounts payable 3,200
Cash 785,200
minus
plus
A decrease in Inventories (credit change) and an decrease in Accounts Payable (debit change) have the opposite effects.

48. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Depreciation
Changes
Debit Credit
Depreciation expense 7,000
Accumulated depreciation 7,000
There is no cash flow for depreciation expense.

49. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
(193,800)
Cash payments for
operating expenses
Changes
Changes
Debit Credit
Operating expenses 196,000
Accrued expenses 2,200
Cash
minus
193,800

50. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax ,000
Net income $ 108,000
Changes
Gain on sale of investments
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest. 12,000
The cash inflow of $72,000 will be shown in the investing section of the statement of cash flows and the gain is ignored.

51. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold ,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,
Other expense:
Interest expense 8,000 4,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Cash paid for
interest expense
Changes
Debit Credit
Interest expense
Cash
8,000
(8,000)
There is no interest payable account at the end of the year.

52. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold ,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
Other expense:
Interest expense 8, ,000 (8,000)
Income before income tax $ 191,000
Income tax ,000
Net income $ 108,000
Debit Credit
Income tax expense
Income tax payable 500
Cash
Changes
Cash paid for
income taxes
83,000
plus
(83,500)
(83,500)

53. Rundell Inc. Income Statement For the Year Ended December 31, 2006
Cash Basis
Sales $1,180,000 $1,171,000
Cost of merchandise sold 790,000 (785,200)
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000 0
Other expense:
Interest expense 8, ,000 (8,000)
Income before income tax $ 191,000
Income tax 83,000 (83,500)
Net income $ 108,000 $ 100,500
Two different viewpoints
of income from operations
Accrual Basis
Cash Basis

54. Operating Activities—Direct Method
Cash flows from operating activities:
Cash inflows:
Cash received from customers $1,171,000
Cash outflows:
Cash payments for merchandise $785,200
Cash payments for operating expenses 193,800
Cash payments for interest 8,000
Cash payments for income tax 83,500 1,070,500
Net cash flow from operating activities $ 100,500

55. Financial Analysis and Interpretation
Free Cash Flow
Dell Corporation
Cash flow from operations $4,195,000
Less: Cash used to purchase fixed assets to maintain productive
capacity used up in producing
income during the period (482000)
Less: Cash used for dividends —–
Free cash flow $3,713,000
Free cash flow as a percent of cash
flow from operating activities 89%

56. Financial Analysis and Interpretation
Free Cash Flow
Cash flow from operations $4,195,000
Less: Cash used to purchase fixed assets to maintain productive
capacity used up in producing
income during the period (482000)
Less: Cash used for dividends (—)
Free cash flow $3,713,000
Free cash flow as a percent of cash
flow from operations 89%
Dell Corporation
Use: To measure the financial strength of a business. A company that has positive free cash flow is able to fund internal growth, retire debt, and enjoy financial flexibility.

57. Chapter 16
The End

58. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

59. After studying this chapter, you should be able to:
Objectives
1. Summarize the types of cash flow activities reported in the statement of cash flows.
2. Prepare a statement of cash flows, using the indirect method.
3. Prepare a statement of cash flows, using the direct method.
4. Calculate and interpret the free cash flow.
After studying this chapter, you should be able to: