Chapter 13

Statement of Cash Flows

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CASH INFLOWS
Operating Activities Investing Activities Financing Activities
Sale of operational assets Issuance of stock
Cash received Sale of investments Issuance of bonds
from revenues and notes

Business

Cash paid for Purchase of operational Payment of

expenses assets dividends
Purchase of investments Repurchase of
stock
Repayment of debt
CASH OUTFLOWS
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Cash Flow Statement

• Periodic
• Provides information regarding the liquidity of a
firm
• Explains the reasons for increase or decrease in
cash balance from one balance sheet date to the
next
• Amount of net income in a period is usually
different than the amount of increase in cash in
the same period
• Reconciles net income with cash flow from
operations.
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Relationships to the Balance Sheet

and the Income Statement
Information needed to prepare a statement of
cash flows:
 Comparative Balance Sheets.
 Income Statement.
 Additional details concerning selected accounts.

 Cash = Liabilities Stockholders’ Equity

Noncash Assets

derives from . .
.
Assets = Liabilities Stockholders’ Equity

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Classifications on the Statement of

Cash Flows
The SCF must include the following three sections, as defined
in FASB Statement 95:
 Operating Activities
-- cash flows related to selling/purchase goods and services;
that is, to earning income.
 Investing Activities
-- cash flows related to the acquisition or sale of non current
assets.
 Financing Activities
--long term and short term cash flows related to liabilities
and owners’ equity; dividends are a financing cash
outflow.

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This ending cash

balance should
agree with the
balance sheet.

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Cash Flows from Operating
Activities
Inflows
Cash received from:
 Customers
 Dividends and interest on
investments
+ Cash
Flows
Outflows from
Cash paid for: Operating
 Purchase of goods for resale
and services (electricity,
_ Activities
etc.)
 Salaries and wages
 Income taxes
 Interest on liabilities
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International Perspective—IFRS
Classification of Interest on the Cash Flow Statement

U.S. GAAP and IFRS differ in the cash flow statement

treatment of interest received and interest paid.

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Cash Flows from Investing Activities

Inflows
Cash received from:
 Sale or disposal of property,
plant and equipment
 Sale or maturity of investments + Cash
in securities
Flows
from
Outflows
Investing
Cash paid for:
 Purchase of property, plant and
_ Activities
equipment
 Purchase of investments in
securities
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Cash Flows from Financing
Activities
Inflows
Cash received from:
 Borrowings on notes, mortgages,
bonds, etc. from creditors
 Issuing stock to owners
+ Cash
Flows
Outflows
Cash paid for:
from
 Repayment of principal to _ Financing
creditors (excluding interest, Activities
which is an operating activity)
 Repurchasing stock from owners
 Dividends to owners
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Non-cash Investing and Financing

Activities

• A set of important investing and

financing activities occur without
generating or consuming any cash:
 exchange common stock for land
 conversion of bonds to stock
 acquire a building in exchange for a note
payable.
• Separate section in the SCF reporting
these non-cash items.
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Direct Method vs. Indirect Method

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the cash Starts with

effects of each accrual net
operating income and
activity converts to cash
basis

Note that no matter which format is used, the same

amount of net cash flows from operating activities is
generated.
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Reporting and interpreting cash Flows
from Operating Activities

The indirect method adjusts net income by eliminating

noncash items.

+/- Changes in current

assets and current
liabilities. Cash Flows
Net from Operating
Income Activities:
Indirect
Method
+ Losses and - + Noncash
Gains expenses such as
depreciation and
amortization.
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Relationships to the Balance Sheet

and the Income Statement

Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Use this table when adjusting Net Income to

Operating Cash Flows for changes in current
assets and current liabilities.

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The Statement of Cash Flows will begin with

net income from the Income Statement.
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Step 1
Adjust net income for depreciation and
amortization expense.

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Step 2
Adjust net income for changes in
current assets and current liabilities.
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

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Direct Method

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Converting revenues to cash inflows

Cash received from Customers=3,000,000$

Total sales revenues=3,250,000$

Account receivable (increase)=250,000$
• This means that of the total sales of $3,250,000, a net
$250,000 went uncollected during the year. Thus, cash
received from customers only came to $3,000,000.

TOTAL SALES-INCREASE IN ACCOUNT

RECEIVABLES= Cash Received From Customers

TOTAL SALES + DECREASE IN ACCOUNT

RECEIVABLES= Cash Received From Customers

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Converting cost of goods sold to cash

outflows
Cash paid for inventory=1,050,000$

• Total cost of goods sold is the amount of inventory

sold during the year.
• Purchases of goods increase the balance in the
inventory, while recording cost of goods sold
decreases the balance in the inventory.
• If inventory increases, the amount of purchases is
higher than the amount of goods sold. The
increase must be added!
• If inventory decreases, the amount of purchases is
lower than the amount of goods sold. This would
mean that some of the cost of goods sold came
from existing stock on hand! The decrease must be
subtracted!
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Converting cost of goods sold to cash

outflows
Cash paid for inventory (cash payments to
suppliers)=1,050,000$

• Total cost of goods sold= $1,160,000

• Inventory (decrease)=40,000$
• Inventory Purchased=Cost of Goods Sold-
Decrease in Inventory=$1,160,000 -40,000$=
$1,120,000

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Converting cost of goods sold to cash

outflows
• The inventory purchased is only the starting
point for determining cash paid for inventory.
• Inventory purchased must be adjusted for the
portion that was purchased on credit.
• Emerson’s accounts payable increased by
$70,000. This means that cash paid for
inventory purchases was 1,120,000$-
70,000$=1,050,000$
• Cash Paid for Inventory=Inventory Purchases
-the Increase in Accounts Payable

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Converting cost of goods sold to cash

outflows

COST OF GOODS SOLD+INCREASE IN

INVENTORY=Inventory Purchased

COST OF GOODS SOLD-DECREASE IN INVENTORY

=Inventory Purchased

Inventory Purchased –(INCREASE IN ACCOUNT

PAYABLE) or + (DECREASE IN ACCOUNT
PAYABLE)=Cash paid for inventory

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Converting operating expenses to cash

outflows
Cash paid for wages=480,000$

• Wage expense= $450,000

• Wages Payable (decrease)=30,000$
• Cash paid for wages=Wage Expense+ Decrease in Wages
Payable=$480,000+30,000$= $480,000

• Cash paid for interest, other operating expenses,

income taxes
 Cash payments for these items equaled the amount of
expense in the income statement
 If there had been related balance sheet accounts
(interest payable, taxes payable..) the expense
amounts would need to be adjusted in a similar
manner.

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Converting operating expenses to cash

outflows-accrued expenses

ACCRUED EXPENSES= paid after they are

recognized as expenses
ACCRUED EXPENSES LIABILITY ACCOUNT is
created

Cash paid for accrued expenses=EXPENSES +

DECREASE IN ACCRUED EXPENSE

Cash paid for accrued expenses=EXPENSES -

INCREASE IN ACCRUED EXPENSE

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Converting operating expenses to cash

outflows-pre-paid expenses

PRE-PAID EXPENSES= paid before they are

recognized as expenses
PRE-PAID EXPENSES ASSET ACCOUNT is created

Cash paid for pre-paid expenses=EXPENSES -

DECREASE IN PRE-PAID EXPENSE

Cash paid for pre-paid expenses=EXPENSES +

INCREASE IN PRE-PAID EXPENSE

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Depreciation Expense/ Gain on sale of

land

• Depreciation expense is in the income

statement, but it is not an operating cash flow
item. The reason is that it is a noncash expense.
• Depreciation is recorded via a debit to
Depreciation Expense and a credit to
Accumulated Depreciation. No cash is impacted
by this expense entry.
• The gain on sale of land in the income
statement does not appear in the operating cash
flows section. The entire proceeds will be listed
in the investing activities section.

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Property, Plant, & Equipment

April 30, 2010 $ 75,736
Purchases 11,389
Depreciation (10,771)
Disposals (77)
April 30, 2011 $ 76,277

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Although short-
term
investments is a
current asset, it
is reported in
the investing
section on the
statement of
cash flows.

Short-Term Investments
April 30, 2010 $ 3,367
Purchases 6,532
Sales (8,406)
April 30, 2011 $ 1,493

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Reporting Cash Flows from
Financing Activities

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Retained
earnings
decreased by
$65,560 due to
the combined
effect of
$40,754 of
income and
$106,314 in
dividends.
Retained Earnings Analysis

April 30, 2010 $ 130,767

Add net income 40,754
Less dividends (106,314)
April 30, 2011 $ 65,207

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