Statement of Cash Flows

1
Statement of Cash Flows
The Statement of Cash Flows provides relevant
information about the cash receipts and cash
payments of an enterprise during a period. It
provides answers to questions 1. Where did
the cash come from during the period? 2. What
was the cash used for during the period? 3.
What was the change in the cash balance during
the period?
2
The Statement of Cash Flows
Content and Format

• Three different activities
• Operating,

• Investing,

• Financing

Illustration 5-24
LO 7 Identify the content of the statement of
cash flows.
3
Statement of Cash Flows
Operating
Investing
Financing
4
Statement of Cash Flows

• Cash Flows from Operating Activities
• Reports the cash effects of transactions that
  enter into the determination of net income.
• The direct method and indirect method are two
  different approaches to report cash flows from
  operations. Each has its advantages and
  disadvantages, but each reconciles to the same
  number for total cash flows from operating
  activities.

5
The Statement of Cash Flows
Preparation Indirect Approach
Noncash charge to expenses.
Noncash credit to revenues.
LO 8 Prepare a statement of cash flows.
6
Statement of Cash Flows

• Cash Flows from Investing Activities
• Reports cash effects of transactions that result
  in a change in long-term assets or investment
  portfolios.
• For example
• Buying or selling property, plant, or equipment
• Buying or selling financial investment
  instruments

7
Statement of Cash Flows

• Cash Flows from Financing Activities
• Reports cash effects of transactions that result
  in a change in long-term liabilities and
  stockholders equity.
• For example
• Acquiring or paying down borrowings
• Issuing capital stock
• Paying dividends to stockholders

8
Basic Format for the Statement of Cash Flows
Cash flows from Operating Activities
Cash flows from Investing Activities
Cash flows from Financing
Activities Net increase
in cash Cash at beginning of
year Cash at end of year

Involve the purchase and sale of products or
services
Involve the acquisition and sale of long-term
assets
Involve the issuance and payment of long-term
liabilities and stock
9
Statement of Cash Flows
Operating
Investing
Financing
10
The Statement of Cash Flows
Review
In preparing a statement of cash flows, which of
the following transactions would be considered an
investing activity? a. Sale of equipment at
book value b. Sale of merchandise on
credit c. Declaration of a cash dividend
d. Issuance of bonds payable at a
discount receivable.
LO 8 Prepare a statement of cash flows.
11
For each of the following transactions, indicate
the direction of the cash flow adjustment inflow
or outflow, add or subtract and the section in
which each transaction should be reported on a
Statement of Cash Flows operating, investing, or
financing. Identify non-cash transactions as
supplementary information to be found in the
Footnotes of the Financial Statements.

• The company purchases its own Common Stock in the
  open market
• answer Cash Outflow Financing
• The company issues Preferred Stock in exchange
  for Land
• answer Supplementary Information in Footnotes
• The company borrowed cash from the bank by
  issuing a 90-day Note
• answer Cash Inflow Financing
• Twenty-Year Bonds are issued
• answer Cash Inflow Financing

12

• Accounts Receivable decreased during the year.
• answer Add back to Operating Section
• Income Tax Payable decreased during the year.
• answer Subtract from Operating Section
• Accounts Payable increased during the year.
• answer Add back to Operating Section
• Cash Dividends are declared and paid to Common
  Stockholders.
• answer Cash Outflow Financing
• Common Stock is issued to a creditor to pay off a
  long term loan.
• answer Supplementary information in Footnotes

13

• A new piece of Machinery is acquired with cash.
• answer Cash Outflow Investing
• Stock of another company is acquired as an
  Investment.
• answer Cash Outflow Investing
• Interest Payable decreased during the year.
• answer Subtract from Operating Section
• Wages Payable decreased during the year.
• answer Subtract from Operating Section
• Gain on Sale of Equipment was recognized in
  Income.
• answer Subtract from Operating Section

14

• Purchased a new Copier by issuing a 90-day Note
• answer Supplementary information in Footnotes
• Unearned Revenue increased during the year.
• answer Add back to Operating Section
• Prepaid Insurance increased during the year.
• answer Subtract from Operating Section
• Sold shares of a long-term investment in Nike
  Company.
• answer Cash Inflow Investing
• Depreciation for Operating Equipment was reported
  on the Income Statement
• answer Add back to Operating Section

15

• Loss on Sale of Land was reported on the Income
  Statement.
• answer Add back to Operating Section
• Net Income on the Income Statement
• answer Operating Section