Financial Accounting Fourth Edition

Statement of Cash
Flows

CHAPTER

11 Spiceland • Thomas • Herrmann

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Part A
CLASSIFICATION OF CASH FLOW ACTIVITIES

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Cash Flow Activities
• Operating activities: cash receipts and cash
payments for transactions relating to revenue
and expense activities
• Investing activities: cash transactions
involving the purchase and sale of long-term
assets and current investments
• Financing activities: inflows and outflows of
cash resulting from the external financing of a
business (transactions with lenders and with
stockholders)
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Illustration 11–1 Statement of Cash Flows
E-GAMES, INC.
Statement of Cash Flows
For the year ended December 31, 2021
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000
Cash Flows from Investing Activities
Purchase of investments (35,000)
Sale of land 6,000
Net cash flows from investing activities (29,000)
Cash Flows from Financing Activities
Issuance of common stock 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)
Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period $62,000
Note: Noncash Activities
Purchased equipment by issuing a note payable $20,000

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Learning Objective 1
LO11–1 Classify cash transactions as operating,
investing, or financing activities.

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Illustration 11–2
Operating, Investing, and Financing
Activities
Cash Flows from Operating Activities
Cash Inflows Cash Outflows
Sale of goods or services Purchase of inventory
Collection of interest and dividends Payment for operating expenses
Payment of interest
Payment of income taxes

Cash Flows from Investing Activities

Cash Inflows Cash Outflows
Sale of investments Purchase of investments
Sale of long-term assets Purchase of long-term assets
Collection of notes receivable Lending with notes receivable

Cash Flows from Financing Activities

Cash Inflows Cash Outflows
Issuance of bonds or notes payable Repayment of bonds or notes payable
Issuance of stock Acquisition of treasury stock
Payment of dividends
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Common Mistake
Students sometimes misclassify dividends in
preparing the statement of cash flows.
Dividends received are included in operating
activities. Dividends paid are included in
financing activities.

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Illustration 11–3
Information Sources for Preparing
the Statement of Cash Flows
Information Sources Explanation
1. Income statement Revenues and expenses provide information
in determining cash flows from operating
activities
2. Balance sheet Changes in assets, liabilities, and
stockholders' equity from the end of the last
period to the end of this period help to
identify cash flows from operating,
investing, and financing activities.
3. Detailed accounting records Sometimes additional information from the
accounting records is needed to determine
specific cash inflows or cash outflows for the
period
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Illustration 11–4
Relationship of the Income Statement
and Balance Sheet to the Statement of
Cash Flows
Income Statement
Revenues Statement of Cash Flows
Expenses
Operating Activities:
Balance Sheet

Assets: Investing Activities:

Change in cash
Changes in other current assets
Changes in long-term assets Financing Activities:
Liabilities:
Change in current liabilities
Changes in long-term liabilities Net cash flows = Change in cash
Stockholders’ Equity:
Changes in common stock
Changes in retained earnings
(dividends paid)
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Noncash Activities
• Significant investing and financing activities
that do not affect cash
• Reported after the cash flow statement or in a
note to the financial statements

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Examples of Significant Noncash
Investing and Financing Activities
• Purchase of long-term assets by issuing debt
• Purchase of long-term assets by issuing stock
• Conversion of bonds payable into common
stock
• Exchange of long-term assets

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Concept Check 11–1
Which of the following cash transactions would
affect the amount of investing cash flows reported
in the statement of cash flows?
a. Sale of equipment
b. Payment of dividends
c. Purchase of inventory
d. Issuance of common stock
The sale of equipment would increase investing cash flows.
The payment of dividends would decrease financing cash
flows, the issuance of stock would increase financing cash
flows. The purchase of inventory would decrease operating
cash flows.
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Part B
PREPARING THE STATEMENT OF CASH FLOWS

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Learning Objective 2
LO11–2 Understand the steps and basic format in
preparing the statement of cash flows.

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Illustration 11–5
Steps in Preparing the Statement
of Cash Flows
Step 1. Calculate net cash flows from operating activities, using
information from the income statement and changes in current
assets (other than cash) and current liabilities from the balance
sheet.
Step 2. Determine the net cash flows from investing activities, by
analyzing changes in long-term asset accounts from the balance
sheet.
Step 3. Determine the net cash flows from financing activities, by
analyzing changes in long-term liabilities and stockholders’
equity accounts from the balance sheet.
Step 4. Combine the operating, investing, and financing activities, and
make sure the total from these three activities equals the
amount of cash reported in the balance sheet this year versus
last year (the change in cash).

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Illustration 11–6 (1 of 4)
Income Statement, Balance
Sheets, and Additional Information
for E-Games, Inc.
E-GAMES, INC.
Income Statement
For the year ended December 31, 2021

Net Sales $1,012,000

Expenses:
Cost of goods sold $650,000
Operating expenses (salaries, rent, utilities) 286,000
Depreciation expense 9,000
Loss on sale of land 4,000
Interest expense 5,000
Income tax expense 16,000
Total expenses 970,000
Net income $ 42,000

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Illustration 11–6 (2 of 4)
Income Statement, Balance Sheets, and
Additional Information for E-Games, Inc.
E-GAMES, INC.
Balance Sheets
December 31, 2021 and 2020
Increase (I) or
Assets 2021 2020 Decrease (D)
Current assets:
Cash $ 62,000 $ 48,000 $14,000 (I)
Accounts receivable 27,000 20,000 7,000 (I)
Inventory 35,000 45,000 10,000 (D)
Prepaid rent 4,000 2,000 2,000 (I)
Long-term assets:
Investments 35,000 0 35,000 (I)
Land 70,000 80,000 10,000 (D)
Equipment 90,000 70,000 20,000 (I)
Accumulated depreciation (23,000) (14,000) 9,000 (I)
Total assets $300,000 $251,000

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Illustration 11–6 (3 of 4)
Income Statement, Balance
Sheets, and Additional Information
for E-Games, Inc.
Increase (I) or
Liabilities and Stockholders’ Equity 2021 2020 Decrease (D)

Current liabilities:
Accounts payable $ 22,000 $ 27,000 $ 5,000 (D)
Interest payable 2,000 1,000 1,000 (I)
Income tax payable 5,000 7,000 2,000 (D)
Long-term liabilities:
Notes payable 95,000 75,000 20,000 (I)
Stockholders’ equity
Common stock 105,000 100,000 5,000 (I)
Retained earnings 71,000 41,000 30,000 (I)
Total liabilities and stockholders’ equity $300,000 $251,000

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Illustration 11–6 (4 of 4)
Income Statement, Balance
Sheets, and Additional Information
for E-Games, Inc.
Additional Information for 2021:
1. Purchased stock in Intendo Corporation for $35,000.
2. Sold land originally costing $10,000 for only $6,000, resulting in a
$4,000 loss on sale of land.
3. Purchased $20,000 in equipment by issuing a $20,000 note payable
due in three years. No cash was exchanged in the transaction.
4. Issued common stock for $5,000 cash.
5. Declared and paid a cash dividend of $12,000.

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Operating Activities—Indirect and
Direct Methods
• Differ in presentation format for operating activities
• Both methods report investing, financing, and
noncash activities identically
Indirect Method Direct Method
• Begin with net income • Adjust the items in the
• List adjustments to net income statement to directly
income to arrive at show the cash inflows and
operating cash flows outflows from operations
• Most popular method • If used, company must also
report the indirect method
• Easier and less costly
either with the statement of
cash flows or in the notes

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Illustration 11–7
Basic Format for the Statement of
Cash Flows—Indirect Method
E-GAMES, INC.
Statement of Cash Flows, For the year ended December 31, 2021
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
(List individual reconciling items)
Net cash flows from operating activities $ XXX
Cash Flows from Investing Activities
(List individual inflows and outflows)
Net cash flows from investing activities XXX
Cash Flows from Financing Activities
(List individual inflows and outflows)
Net cash flows from financing activities XXX
Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period $62,000

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Key Point
Companies choose between the indirect method and
the direct method in reporting operating activities in
the statement of cash flows. The indirect method
begins with net income and then lists adjustments to
net income, in order to arrive at operating cash flows.
The direct method specifically lists the various cash
inflows and outflows from operations. The investing
and financing sections of the statement of cash flows
are identical under both methods.

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Learning Objective 3
LO11–3
Prepare the operating activities section of the
statement of cash flows using the indirect method.

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Operating Activities—Indirect
Method
• Noncash items (convert accrual basis to cash)
 Depreciation expense
• Non-operating items
 Gains and losses on sale of assets
• Changes in current assets and current
liabilities
 Increase in accounts receivable is the amount of
revenue reported in the income statement but not
yet collected in cash

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Illustration 11–8
Summary of Adjustments to Net
Income
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash flows from operating
activities:
+ Depreciation expense
+ Amortization expense
+ Loss on sale of assets
− Gain on sale of assets
− Increase in a current asset
+ Decrease in a current asset
+ Increase in a current liability
− Decrease in a current liability
= Net cash flows from operating activities

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Illustration 11–9
Adjustment for Depreciation
Expense
E-Games, Inc. reports net income of $42,000
and depreciation expense of $9,000 in its
income statement.
E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Operating Activities

Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000

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Illustration 11–10
Adjustment for Loss on Sale of
Land
E-Games, Inc. sold land originally costing $10,000
for only $6,000, resulting in a $4,000 loss on sale
of land.
E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Operating Activities

Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000

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 Common Mistake
Students sometimes are unsure whether to add or
subtract a loss on the sale of assets. Just remember that
a loss is like an expense—both reduce net income. Treat
a loss on the sale of assets like depreciation expense and
add back that amount to net income. A gain on the sale
of long-term assets is the opposite of an expense, so we
subtract that amount from net income to arrive at net
cash flows from operating activities.

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Effects of Changes in Current Assets and
Current Liabilities on Cash From Operating
Activities
Increase in a current asset—decrease in cash
Decrease in a current asset—increase in cash
Increase in a current liability—increase in cash
Decrease in a current liability—decrease in cash
• Example: Accounts Receivable (current asset)
increases; adjustment in Operating Activities is
a decrease to cash.

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Illustration 11–11
Adjustment for Change in Accounts
Receivable
E-Games’ accounts receivable increased
$7,000 during the year (from $20,000 to
$27,000).
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)

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Illustration 11–12
Adjustment for Change in Inventory
E-Games’ inventory balance decreased by
$10,000 during the year.
E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Operating Activities

Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000

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Illustration 11–13
Adjustment for Change in Prepaid
Rent
E-Games’ prepaid rent increased $2,000
during the year.
E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Operating Activities

Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)

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Illustration 11–14
Adjustment for Change in Accounts
Payable
E-Games’ accounts payable decreased
$5,000 during the year.
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
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Illustration 11–15
Adjustment for Change in Interest
Payable
E-Games’ interest payable increased $1,000 during
the year.
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
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Illustration 11–16
Adjustment for Change in Income
Tax Payable
E-Games’ income tax payable decreased $2,000 during the year.
E-GAMES, INC.
Statement of Cash Flows (partial)
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000
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Key Point
Using the indirect method, we start with net income and
adjust this number for (1) revenue and expense items that do
not affect cash, (2) gains and losses that do not affect
operating cash flows, and (3) changes in current assets and
current liabilities.

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Concept Check 11–2
Which of the following would be included as an
adjustment to net income in the operating activities
section of a statement of cash flows using the
indirect method?
a. Depreciation expense
b. Purchase of a truck
c. Issuance of common stock
d. Payment of cash dividends

Adjustments to net income in the operating activities

section include noncash items such as depreciation
expense.
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Concept Check 11–3
Which of the following items would be added back
to net income in the operating activities section of a
statement of cash flows (using the indirect
method)?
a. Gain on sale of piece of equipment
b. Decrease in salaries payable
c. Increase in the balance in accounts payable
d. Increase in the balance in accounts receivable
Increases to current liabilities (such as accounts payable) are
added back to net income in the operating activities section
of a statement of cash flows to arrive at the net cash flow
from operating activities. The other items are subtracted
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Learning Objective 4
LO11–4 Prepare the investing activities section of the
statement of cash flows.

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Investing Activities
• Increase or decrease in investments
• Increase or decrease in long-term assets, such
as:
 Property
 Plant
 Equipment
 Intangible Assets

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Illustration 11–17
Cash Flows from Investing
Activities
E-Games, Inc. (1) purchased investments for $35,000
cash, (2) sold land originally costing $10,000 for only
$6,000 cash, and (3) purchased $20,000 in equipment
by issuing a $20,000 note payable due in three years
(no cash was exchanged).
E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Investing Activities

Purchase of investments $(35,000)
Sale of land 6,000
Net cash flows from investing activities $(29,000)
Note: Noncash Activities
Purchased equipment by issuing a note payable $ 20,000

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Key Point
Cash transactions (inflows and outflows)
involving long-term assets and current
investments are reported in the investing
activities section of the statement of cash flows.
Typical investing activities include buying and
selling property, plant, and equipment, as well
as making and collecting loans.

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Concept Check 11–4
Which of the following cash transactions would be
included in the investing activities section of a
statement of cash flows?
a. Purchasing a building
b. Obtaining a loan at a bank
c. Issuing common stock
d. Selling goods to customers

Changes in long-term assets (like buildings) would be

included in the investing activities section of a statement
of cash flows.

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Learning Objective 5
LO11–5 Prepare the financing activities section of the
statement of cash flows.

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Financing Activities
• Examine changes in long-term liabilities and
stockholders’ equity accounts from the
balance sheet
 Cash transactions with a company’s creditors and
shareholders

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Illustration 11–18
Cash Flows from Financing
Activities
E-Games, Inc. (1) issued common stock for $5,000 cash
and (2) paid a cash dividend of $12,000.

E-GAMES, INC.
Statement of Cash Flows (partial)

Cash Flows from Financing Activities

Issuance of common stock $ 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)

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Concept Check 11–5
Which of the following cash transactions would be
included in the financing activities section of a
statement of cash flows?
a. Sale of land
b. Payment of dividends
c. Purchase of equipment
d. Payment of salaries
Changes in long-term liabilities and equity accounts (like
dividends paid) are reported in the financing activities
section of a statement of cash flows.
Common Mistake: Dividends received, however, are an
operating activity.
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Illustration 11–19
Complete Statement of Cash Flows
E-GAMES, INC.
Statement of Cash Flows
For the year ended December 31, 2021
Cash Flows from Operating Activities
Net income $42,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000
Cash Flows from Investing Activities
Purchase of investments (35,000)
Sale of land 6,000
Net cash flows from investing activities (29,000)
Cash Flows from Financing Activities
Issuance of common stock 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)
Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period 62,000
Note: Noncash Activities
Purchased equipment by issuing a note payable $20,000
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Analysis
CASH FLOW ANALYSIS
Apple vs. Alphabet

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Learning Objective 6
LO11–6 Perform financial analysis using the statement
of cash flows.

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Cash Flow Ratios
• Often used to supplement analysis of a
company
• Substitute cash flow from operations in place
of net income
• Positive cash flow from operations is
important to a company’s survival in the long
run

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Illustration 11–20
Selected Financial Data for Apple
and Alphabet

Apple Alphabet
($ in millions)
Net sales $229,234 $ 90,272
Net income 48,351 19,478
Operating cash flows 63,598 36,036
Total assets, beginning 321,686 147,461
Total assets, ending 375,319 167,497

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Illustration 11–21
Return on Assets for Apple and Alphabet
Net Return on
($ in millions) Income ÷ Average Total Assets = Assets
Apple $48,351 ÷ ($321,686 + $375,319)/2 = 13.9%
Alphabet $19,478 ÷ ($147,461 + $167,497)/2 = 12.4%

Illustration 11–22
Cash Return on Assets for Apple and
Alphabet
Operating Cash Return
($ in millions) Cash Flows ÷ Average Total Assets = on Assets
Apple $63,598 ÷ ($321,686 + $375,319)/2 = 18.2%
Alphabet $36,036 ÷ ($147,461 + $167,497)/2 = 22.9%

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Illustration 11–23
Components of Cash Return on
Assets
Cash return Cash flow Asset
on assets = to sales × turnover
Operating cash flows = Operating cash flows × Net sales
Average total assets Net sales Average total assets

• Cash return on assets measures the operating

cash flow generated per dollar of assets
• Cash flow to sales measures the operating cash
flows generated for each dollar of sales
• Asset turnover measures the sales revenue
generated per dollar of assets
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Illustration 11–24
Cash Flow to Sales for Apple and
Alphabet
Operating
($ in millions) Cash Flows ÷ Net Sales = Cash Flow to Sales

Apple $63,598 ÷ $229,234 = 27.7%

Alphabet $36,036 ÷ $90,272 = 39.9%

Illustration 11–25
Asset Turnover for Apple and Alphabet
Asset
($ in millions) Net Sales ÷ Average Total Assets = Turnover
Apple $ 229,234 ÷ ($321,686 + $375,319)/2 = 0.66 times
Alphabet $ 90,272 ÷ ($147,461 + $167,497)/2 = 0.57 times

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Concept Check 11–6
Which of the following ratios is computed by
dividing operating cash flows by net sales?
a. Asset turnover
b. Profit margin
c. Cash flow to sales
d. None of the above

The cash flow to sales ratio is computed by dividing

operating cash flows by net sales.

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Appendix – Operating Activities – Direct Method

LO11-7 Prepare the operating activities section of the

statement of cash flows using the direct
method.

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11-57
Operating Activities—Direct Method
• Report the cash inflows and cash outflows
directly
• Converts each revenue and expense item to
its cash-basis amount
• Income statement items that have no cash
effect are not reported

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Illustration 11–27 (Illustration 11–26 not shown)
Relationship between the Income
Statement and Cash Flows from
Operating Activities—Direct Method
Income Statement Cash Flows from Operating Activities

Revenues: Cash inflows:

Sales and service revenue Cash received from customers
Investment revenue Cash received from interest and dividends
Noncash revenues and gains (gain on (Not reported)
sale of assets)
Less: Expenses Less: Cash Outflows

Cost of goods sold Cash paid to suppliers for inventory

Operating expense Cash paid for salaries, rent, utilities, etc.
Noncash expenses and losses (loss (Not reported)
on sale of assets, depreciation)
Interest expense Cash paid to creditors for interest
Income tax expense Cash paid to the government for taxes
= Net income = Net cash flows from operating activities
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Illustration 11–27A
Convert Income Statement Items to
Operating Cash Flows

Revenue Expense
− Increase in related current asset + Increase in related current asset

+ Decrease in related current asset − Decrease in related current asset

+ Increase in related current liability − Increase in related current liability

− Decrease in related current liability + Decrease in related current liability

= Cash received = Cash paid

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Illustration 11–28
Cash Received from Customers

Net sales $ 1,012,000

− Increase in accounts receivable (7,000)
= Cash received from customers $ 1,005,000

• E-Games reports net sales of $1,012,000 as the first

item in its income statement.
• Accounts receivable increased $7,000.
• Cash received from customers = $1,012,000 minus
$7,000.

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 Calculate Cash Paid to Suppliers
This calculation requires us to examine both the Inventory
account and the Accounts Payable account, the balance sheet
accounts related to cost of goods sold.
Cost of goods purchased = ?
Answer: $640,000. Accounts Payable
This is not the cash paid for purchases. 27,000 Beginning
Some of these purchases may have been balance
made on credit. Cash paid to ? 640,000 Cost of goods
suppliers purchased
(decreases A/P) (increases A/P)
Inventory 22,000
Beginning balance 45,000
Cost of goods ? 650,000 Cost of goods sold
purchased (decreases inventory) Cash paid to suppliers = ?
(increases inventory) Answer: $645,000.
35,000

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11-62
Illustration 11–29
Cash Paid to Suppliers

Cost of goods sold $ 650,000

− Decrease in inventory (10,000)
= Purchases 640,000
+ Decrease in accounts payable 5,000
= Cash paid to suppliers $ 645,000

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11-63
Illustration 11–30
Cash Paid for Operating Expenses
Operating expenses $286,000
+ Increase in prepaid rent 2,000
= Cash paid for operating expenses $288,000

Rent expense is the only operating expense with a

related balance sheet account (prepaid rent). Other
operating expenses must have been paid in cash.

Depreciation expense does not involve cash, so it is

excluded from the direct method statement of cash
flows.

The sale of land ($6,000 cash inflow) is an investing

activity, not an operating activity.
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Illustration 11–31
Cash Paid for Interest Expense

Interest expense $ 5,000

− Increase in interest payable (1,000)
= Cash paid for interest $ 4,000

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Illustration 11–32
Cash Paid for Income Taxes

Income Tax Expense $ 16,000

+ Decrease in income tax payable 2,000
= Cash paid for income taxes $ 18,000

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Illustration 11–33
Operating Activities Using the Direct Method
E-GAMES, INC.
Statement of Cash Flows (partial) – Direct Method
Cash Flows from Operating Activities

Cash received from customers $1,005,000

Cash paid to suppliers (645,000)
Cash paid for operating expenses (288,000)
Cash paid for interest (4,000)
Cash paid for income taxes (18,000)
Net cash flows from operating activities $50,000

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Concept Check 11–7

Which of the following sections of a statement of

cash flows will be different depending on which
method (direct or indirect) is chosen to prepare it?
a. Operating activities
b. Investing activities
c. Financing activities
d. All sections vary depending on the method used.
The operating activities section is the only section that
will vary depending on which method of preparation is
selected (i.e., either the indirect or direct method). The
other two sections are identical under both methods.
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End of Chapter 11

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