Chapter 17

Statement of
Cash Flows

Chapter
17-1 Accounting Principles, Ninth Edition
 Study
Study Objectives
Objectives

1. Indicate the usefulness of the statement of cash

flows.
2. Distinguish among operating, investing, and financing
activities.
3. Prepare a statement of cash flows using the indirect
method.
4. Analyze the statement of cash flows.

Chapter
17-2
 Statement
Statement of
of Cash
Cash Flows
Flows

The Statement of Preparing the

Using Cash Flows
Cash Flows: Statement of
to Evaluate a
Usefulness and Cash Flows—
Company
Format Indirect Method

Usefulness Step 1: Operating Free cash flow

Classifications activities
Significant Step 2: Investing
noncash activities and financing
activities
Format
Step 3: Net
Preparation
change in cash
Indirect and direct
methods

Chapter
17-3
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and

net cash provided (used) by operating activities.
4. Cash investing and financing transactions during
the period.

Chapter
17-4 SO 1 Indicate the usefulness of the statement of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows

Operating
Activities Investing
Activities Financing
Income
Statement
Activities
Generally
Items Long-Term Generally
Asset Items Long-Term
Liability
and
Equity Items
Chapter
17-5 SO 2 Distinguish among operating, investing, and financing activities.
 Classification
Classification of
of Cash
Cash Flows
Flows

Classification of Typical Inflows and Outflows

Illustration 17-1

Operating activities - Income statement items

Cash inflows:
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
Chapter
17-6 SO 2 Distinguish among operating, investing, and financing activities.
 Classification
Classification of
of Cash
Cash Flows
Flows

Classification of Typical Inflows and Outflows

Illustration 17-1

Investing activities - Changes in investments and long-

term assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities.

To make loans to other entities.

Chapter
17-7 SO 2 Distinguish among operating, investing, and financing activities.
 Classification
Classification of
of Cash
Cash Flows
Flows

Classification of Typical Inflows and Outflows

Illustration 17-1

Financing activities - Changes in long-term liabilities

and stockholders’ equity
Cash inflows:
From sale of common stock.
From issuance of long-term debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock
(treasury stock).

Chapter
17-8 SO 2 Distinguish among operating, investing, and financing activities.
 Classification
Classification of
of Cash
Cash Flows
Flows

Significant Noncash Activities

1. Issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Companies report these activities in either a separate

schedule at the bottom of the statement of cash flows
or in a separate note or supplementary schedule to the
financial statements.
Chapter
17-9 SO 2 Distinguish among operating, investing, and financing activities.
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

The cash flows from operating activities section

always appears first, followed by the investing
and financing sections.
Chapter
17-10 SO 2 Distinguish among operating, investing, and financing activities.
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 17-2

Chapter
17-11 SO 2 Distinguish among operating, investing, and financing activities.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows

Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Additional information

Three Major Steps: Illustration 17-3

Chapter
17-12 SO 2 Identify the major classifications of cash flows.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows

Three Major Steps: Illustration 17-3

Chapter
17-13 SO 2 Identify the major classifications of cash flows.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows

Indirect and Direct Methods

Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.

Chapter
17-14 SO 2 Identify the major classifications of cash flows.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Indirect Demonstration
Method Problem

Illustration 17-4

Chapter
17-15 SO 3 Prepare a statement of cash flows using the indirect method.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Indirect Demonstration
Method Problem
Illustration 17-4

Chapter
17-16 SO 3 Prepare a statement of cash flows using the indirect method.
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Demonstration
Problem

Illustration 17-4
Additional information for 2010:
1. The company declared and paid a $29,000 cash dividend.
2. Issued $110,000 of long-term bonds in direct exchange for land.
3. A building costing $120,000 and equipment costing $25,000 were purchased for cash.
4. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
5. Issued common stock for $20,000 cash.
6. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
Chapter
17-17 SO 3 Prepare a statement of cash flows using the indirect method.
 Operating
Operating Activities
Activities

Summary of Conversion to Net Illustration 17-11

Cash Provided by Operating

Activities—Indirect Method

Chapter
17-18 SO 3 Prepare a statement of cash flows using the indirect method.
 Illustration 17-13
Cash flows from operating activities:
Statement
Statement Net income $ 145,000

of
of Cash
Adjustments to reconcile net income to net cash
Cash provided by operating activities:

Flows
Flows
Depreciation expense
Loss on sale of equipment
9,000
3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Indirect Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Method Decrease in income taxes payable (2,000)
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
Chapter
17-19 SO 3 Prepare a statement of cash flows using the indirect method.
 Investing
Investing and
and Financing
Financing Activities
Activities

Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds
payable.
b. Payment of cash to repurchase outstanding
capital stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.

Chapter
17-20 SO 3 Prepare a statement of cash flows using the indirect method.
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Chapter
17-21