Slide 2

 Definition of cash, cash equivalents & cash

flows.
 Roles of the cash flow statement (CFS)
 Components in CFS
 Preparing CFS

21-2
 Slide 3

 Short-term, highly liquid investments.

Resources  Readily convertible into known, fixed
immediately amounts of cash.
available to pay  So near maturity that there is
obligations. insignificant risk of market value
Examples: cash fluctuation from interest rate
changes.
on hand and  Examples: short-term fixed deposits
cash in bank and investments in short-term
treasury bills.

21-3
 Slide 4

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

Business

Cash paid for Purchase of operational Payment of dividends

expenses assets
Repurchase of stock
Purchase of investments
Repayment of debt
Loans to others

CASH OUTFLOWS
21-4
 Slide 5

The Statement helps users assess . . .

 a firm’s ability to generate cash.
 a firm’s ability to meet its obligations.
 the reasons for differences between income and
associated cash flows.
 the effect of cash and noncash investing and
financing activities on a firm’s financial position.

21-5
 Slide 6

Lists inflows and outflows

of cash and cash
equivalents by category

Explains the change in cash

during the period

FRS 107 requires a CFS to be

presented as an integral part of
the FS for each period.
21-6
 Slide 7

Operating Activities

Reconciliation of the Net

Investing Activities Increase or Decrease in
Cash with the Change in the
Balance of the Cash
Financing Activities Account

Noncash Investing
and Financing
Activities 21-7
 Slide 8

Operating Reports the cash effects of the

Activities elements of net income.

Reports the cash effects of the

Investing acquisition and disposition of assets
(other than inventory and cash
Activities equivalents).

Reports the cash effects of the sale

Financing or repurchase of shares, the
issuance or repayment of debt
Activities securities, and the payment of cash
dividends.

21-8
 Slide 9

Inflows from:
 Sales to customers.
 Interest and dividends
received. + Cash
Flows
Outflows to: from
 Purchase of inventory. Operating
 Salaries, wages, and other Activities
operating expenses.
_
 Interest on debt.
 Income taxes.

21-9
 Slide 10

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the cash Starts with

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

Note that no matter which format is used, the same

amount of net cash flows operating activities is generated. 21-10
 Slide 11

Cash Flows from Operating Activities--Direct Method

Cash Inflows:
The cash effect of each
From customers $ 98 operating activity is
From investment revenue 3
Cash Outflows: reported directly on
To suppliers of goods (50) the statement of cash
To employees (11)
To bondholders (3) flows.
For insurance expense (4) Cash Flows from Operating Activities--Indirect Method
For income taxes (11) Net Income $ 12
Net cash flows from operating activities $ 22 Adjustments for noncash effects:

The net cash increase or Gain on sale of land (8)

Depreciation expense 3
decrease from operating Loss on sale of equipment 2
activities is derived indirectly Changes in operating assets and liabilities:
by starting with reported net Increase in accounts receivable (2)
Decrease in inventory 4
income on an accrual basis Increase in accounts payable 6
and working backwards to Increase in salaries payable 2
convert that amount to a cash Discount on bonds payable 2
Decrease in prepaid insurance 3
basis. Decrease in income tax payable (2)
Net cash flows from operating activities $ 22
21-11
 Slide 12

So, which method?

FRS 107 encourages the use of the direct method

because the direct ,method provides information which
may be useful in estimating future cash flows and which
is not available under the indirect method.

21-12
 Slide 13

Inflows from:
 Sale of long-term assets used in
the business.
 Sale of investment securities
(stocks and bonds). + Cash
 Collection of nontrade
receivables. Flows
from
Outflows to: Investing
 Purchase of long-term assets
used in the business. _ Activities
 Purchase of investment
securities (stocks and bonds).
 Loans to other entities.
21-13
 Slide 14

Inflows from:
 Sale of shares to owners.
 Borrowing from creditors
+ Cash
through notes, loans,
mortgages, and bonds. Flows
from
Outflows to: Financing
 Owners in the form of dividends
or other distributions.
_ Activities
 Owners for the reacquisition of
shares previously sold.
 Creditors as repayment of the
principal amounts of debt.
21-14
 Slide 15

The net amount of cash inflows and

outflows reconciles the change in the
company’s beginning and ending cash
balances.

For example, assume the net increase in cash is $9

million and the Cash beginning balance is $20
million. The cash reconciliation would be as
follows:
Net increase in Cash $ 9,000,000
Cash balance, January 1 20,000,000
Cash balance, December 31 $ 29,000,000

21-15
 Slide 16

1. Acquiring an asset by incurring a debt payable

to the seller.
2. Acquiring an asset by entering into a capital
lease.
3. Converting debt into common stock or other
equity securities.
4. Exchanging noncash assets or liabilities for
other noncash assets or liabilities.

FRS 107 provides that significant investing and financing

transactions not involving cash should be excluded from
CFS.
21-16
 Slide 17

 FRS 107 requires that:

 Interest and dividends – disclose separately
 Interest paid – may be classified as an operating
CF or a financing CF
 Dividend paid - may be classified as an operating
CF or a financing CF
 Interest received - may be classified as an
operating CF or a investing CF
 Dividend received - may be classified as an
operating CF or a investing CF
 Taxes paid – disclose separately and shd be
classified as CF from operating activities.

21-17
 Slide 18

Reconstructing the events and transactions that

occurred during the period helps identify the
operating, investing and financing activities to be
reported.

A spreadsheet can be used to ensure that

no reportable activities are inadvertently
overlooked.

Let’s see how to use a spreadsheet to prepare a

Cash Flow Statement on the next few slides.
21-18
 UNITED BRANDS CORPORATION Slide 19
Spreadsheet for the Cash Flow Statement
Changes We begin by
Dec. 31, Dec. 31,
2008 Debits Credits 2009 entering the
Balance Sheet
Assets: beginning and
Cash
Accounts receivable
20
30
29
32
ending balances
Short-term investments
Inventory
-
50
12
46
for each account
Prepaid insurance 6 3 on the
Land 60 80
Buildings and equipment 75 81 comparative
Less: Accumulated depreciation (20) (16)
221 267 balance sheet and
Liabilities:
Accounts payable 20 26
income statement.
Salaries payable 1 3
Income tax payable 8 6
Notes payable - 20
Bonds payable 50 35 The changes
Less: Discount on bonds payable (3) (1)
columns will be
Shareholders' Equity:
Common stock 100 used later to
Paid-in capital 20
130
explain the
Retained earnings 25
29 increase or
19 decrease in each
221 267
account balance.
21-19
 Slide 20
Changes
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Income Statement
Revenues:
Sales revenue 100
Investment revenue 3
Gain on sale of land 8

Expenses:
Cost of good sold (60)
Salaries expense (13)
Depreciation expense (3)
Bond interest expense (5)
Insurance expense (7)
Loss on sale of equipment (2)
Income tax expense (9)
Net income 12

The beginning balances for income

statement accounts are always zero.

21-20
 Changes Slide 21
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Cash Flow Statement
Operating Activities: Next we
allocate space
on the
spreadsheet
for the
statement of
cash flows.
Investing Activities:

Financing Activities:

Spreadsheet entries duplicate the actual journal entries used

to record the transactions as they occurred during the year.
They are only entered on the spreadsheet and are not
recorded in the accounting records. 21-21
 UNITED BRANDS CORPORATION Slide 22
Spreadsheet for the Cash Flow Statement
Changes
Dec. 31, Dec. 31, Let’s start by
Balance Sheet
2008 Debits Credits 2009
analyzing Sales
Assets: Revenue and its
Cash 20 29
Accounts receivable 30 32 related account
Short-term investments
Inventory
-
50
12
46
Accounts
Prepaid insurance
Land 60
6 3
80
Receivable by
Buildings and equipment 75
Changes
81 looking at the
Less: Accumulated depreciation (20) (16)
Dec. 31,
221 267 relationship in a T-
Dec. 31,
2008 Debits Credits 2009
Liabilities:
Income Statement
Accounts payable 20 26
account format.
Revenues:
Salaries payable 1 3
Sales revenue 100
Income tax payable 8 6
Investment revenue 3
Notes payable Accounts- Receivable 20
Gain on sale of land 8
Bonds payable Beg. bal. 30 50 35
Less: Discount
Expenses: on bonds
Credit payable
sales 100 (3) ? Cash received (1)
Cost of good sold
End. bal. 32 (60)
Shareholders'
Salaries expenseEquity: (13)
Common stock
Depreciation expense 100 (3)
Bond interest expense 130
(5)
Paid-in capital
Insurance expense 20 (7)
Loss on sale of equipment (2)29
Retained
Income earnings
tax expense 25 (9)
Net income 1219
221 267 21-22
 UNITED BRANDS CORPORATION Slide 23
Spreadsheet for the Cash Flow Statement
Changes
Dec. 31, Dec. 31, We can see from
Balance Sheet
2008 Debits Credits 2009
this analysis that
Assets: cash received from
Cash 20 29
Accounts receivable 30 32 customers must
Short-term investments
Inventory
-
50
12
46
have been $98
Prepaid insurance
Land 60
6 3
80
million.
Buildings and equipment 75 81
Less: Accumulated depreciation (20) Changes (16)
Dec. 31,
221 Dec. 31,
267
2008 Debits Credits 2009
Liabilities:
Income Statement
Accounts payable
Revenues:
Salaries payable
20
1
26
3
Let’s see how to
Sales revenue
Income tax payable
Investment revenue
8
100
3
6 post this entry to
Notes payable Accounts- Receivable 20
Gain on sale of land
Bonds payable Beg. bal. 30 50
8
35 the spreadsheet.
Less: Discount
Expenses: on bonds
Credit payable
sales 100 (3) 98 Cash received (1)
Cost of good sold
End. bal. 32 (60)
Shareholders'
Salaries expenseEquity: (13)
Common stock
Depreciation expense 100 (3)
Bond interest expense 130
(5)
Paid-in capital
Insurance expense 20 (7)
Loss on sale of equipment (2)29
Retained
Income earnings
tax expense 25 (9)
Net income 1219
221 267 21-23
Balance Sheet Slide 24
Assets:
Cash 20 29 First, $2 million is
Accounts receivable 30 (1) 2 32
Short-term investments - 12 debited to
Inventory
Prepaid insurance
50
6
46
3
Accounts
Land 60 80 Receivable to
Buildings and equipment 75 81
Less: Accumulated depreciation (20) (16) account for the
Liabilities:
221 267
total change in the
Accounts payable 20 26 account.
Salaries payable 1 Changes 3
Income tax payable Dec. 31, 8 Dec. 31, 6
Notes payable 2008 - Debits Credits 2009 20
Bonds payable
Income Statement 50 35
Less: Discount on bonds payable
Revenues: (3) (1)
Sales revenue
Investment revenue
(1) 100 100
3
Then, $100 million
Shareholders' Equity: Accounts Receivable
Gain on sale
Common stock of land
Beg. bal. 30
100 8 is credited to Sales
Paid-in capital Credit sales
Expenses: 100 20 98 Cash received
130
Revenue to
Cost of good sold (60)
Salaries expense
End. bal. 32 29
(13) account for the
Retained earnings 25
Depreciation expense
Bond interest expense
(3)
(5)19
total change in the
Insurance expense
Loss on sale of equipment
221 267
(7)
(2)
account.
Income tax expense (9)
Net income Changes 12
Dec. 31, Dec. 31, 21-24
 Changes Slide 25
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Statement of Cash Flows
Operating Activities: The final part
Cash Inflows:
From customers (1) 98
of this entry is
a $98 million
entry on the
Statement of
Cash Flows
under Cash
Investing Activities: Inflows from
Customers.
Accounts Receivable
Beg. bal. 30
Credit sales
Financing Activities: 100 98 Cash received Let’s skip
End. bal. 32
ahead and
look at the
analysis of
Short-term
Investments. 21-25
 UNITED BRANDS CORPORATION Slide 26
Spreadsheet for the Cash Flow Statement
Changes
Dec. 31,
2008 Debits Credits
Dec. 31,
2009
The $12 million
Balance Sheet increase in the
Assets:
Cash 20 29 Short-term
Accounts receivable
Short-term investments -
30 (1)
(12)
2
12
32
12
Investments
Inventory 50 46 account is due to
Prepaid insurance 6 3
Land 60 80 the purchase of
Buildings and equipment 75 81
Less: Accumulated depreciation (20) (16) short-term
Liabilities:
221 267
investments
Accounts payable 20 26 during the year.
Salaries payable 1 3
Income tax payable 8 6
Notes payable - 20
Bonds payable 50 35
Less: Discount on bonds payable (3) (1)
Short-term Investments
Beg.
Shareholders' bal.
Equity: 0
Common stock
Purchases 12 100
End. bal. 12
130 In the textbook, entry
Paid-in capital 20
number 12 illustrates the
29
Retained earnings 25 analysis of the Short-
term Investment account.
19
221 267 21-26
 Changes Slide 27
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Statement of Cash Flows
Operating Activities: The final part
Cash Inflows:
From customers (1) 98
of this entry is
a $12 million
entry on the
Statement of
Cash Flows
under
Investing Activities: Investing
Activities.
Purchase of S-T investment (12) 12

Financing Activities:
Short-term Investments
Beg. bal. 0
Purchases 12
End. bal. 12
Now, let’s look
at a noncash
transaction. 21-27
 UNITED BRANDS CORPORATION Slide 28
Spreadsheet for the Cash Flow Statement
Changes
Dec. 31, Dec. 31,
2008 Debits Credits 2009 In entry number 14,
Balance Sheet we find that a note
Assets:
Cash 20 29 payable was issued
Accounts receivable 30 (1) 2 32 as payment for a
Short-term investments - (12) 12 12
Inventory 50 46 building.
Prepaid insurance 6 3
Land 60 80 Investing in a new
Buildings and equipment 75 (14) 20x 81 building is a
Less: Accumulated depreciation (20) (16)
221 267 significant investing
Liabilities: activity and
Accounts payable 20 26
Salaries payable 1 3
financing the
Income tax payable 8 6 acquisition with
Notes payable - (14) 20x 20
Bonds payable 50 35
long-term debt is a
Less: Discount on bonds payable (3) (1) significant financing
activity.
Shareholders' Equity:
Common stock 100
130
Paid-in capital 20
29
Retained earnings 25
19
x denotes a noncash transaction 221 267 21-28
 UNITED BRANDS CORPORATION Slide 29
Spreadsheet for the Cash Flow Statement
Changes
Dec. 31, Dec. 31, After entering all
Balance Sheet
2008 Debits Credits 2009
the transactions,
Assets: this is what the
Cash 20 (19) 9 29
Accounts receivable 30 (1) 2 32 balance sheet
Short-term investments - (12) 12 12
Inventory 50 (4) 4 46 portion of the
Prepaid insurance
Land
6
60 (13)
(8)
30 (3)
3
10
3
80
spreadsheet looks
Buildings and equipment 75 (14) 20x (9) 14 81 like.
Less: Accumulated depreciation (20) (9) 7 (6) 3 (16)
221 267
Liabilities:
Accounts payable 20 (4) 6 26
Salaries payable 1 (5) 2 3
Income tax payable 8 (10) 2 6
Notes payable - (14) 20x 20
Bonds payable 50 (15) 15 35
Less: Discount on bonds payable (3) (7) 2 (1)

Shareholders' Equity:
Common stock 100 (16) 10
(17) 20 130
Paid-in capital 20 (16) 3
(17) 6 29
Retained earnings 25 (16) 13
(18) 5 (11) 12 19
221 267 21-29
 Slide 30

Changes
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Income Statement
Revenues:
Sales revenue (1) 100 100
Investment revenue (2) 3 3
Gain on sale of land (3) 8 8

Expenses:
Cost of good sold (4) 60 (60)
Salaries expense (5) 13 (13)
Depreciation expense (6) 3 (3)
Bond interest expense (7) 5 (5)
Insurance expense (8) 7 (7)
Loss on sale of equipment (9) 2 (2)
Income tax expense (10) 9 (9)
Net income (11) 12 12

After entering all the transactions, this is

what the income statement portion of the
spreadsheet looks like.
21-30
 Changes Slide 31
Dec. 31, Dec. 31,
2008 Debits Credits 2009
Statement of Cash Flows After entering
Operating Activities:
Cash Inflows: all the
From customers (1) 98
From investment revenue (2) 3
transactions,
Cash Outflows: this is what
To suppliers of goods (4) 50
To employees (5) 11 the statement
To bondholders
For insurance expense
(7)
(8)
3
4
of cash flows
For income taxes (10) 11 portion of the
Net cash flows 22
Investing Activities:
spreadsheet
Sale of land (3) 18 looks like.
Sale of equipment (9) 5
Purchase of S-T investment (12) 12
Purchase of land (13) 30
Net cash flows (19)
Financing Activities:
Retirement of bonds payable (15) 15
Sale of common stock (17) 26
Payment of cash dividends (18) 5
Net cash flows 6
Net increase in cash (19) 9 9
Totals 376 376

21-31
 UNITED BRANDS CORPORATION Slide 32
Cash Flow Statement
For the Year Ended December 31, 2009
($ in millions)

Here is the Cash Flows from Operating Activities:

Cash Inflows:

Statement of From customers

From investment revenue
$ 98
3

Cash Flows Cash Outflows:

To suppliers of goods (50)
To employees (11)
prepared using To bondholders (3)
For insurance expense (4)
the direct For income taxes (11)
Net cash flows from operating activities $ 22
method. Cash Flows from Investing Activities:
Sale of land (30)
Sale of equipment (12)
Purchase of S-T investment 18
Purchase of land 5
Net cash flows from investing activities (19)
Cash Flows from Financing Activities:
Retirement of bonds payable 26
Sale of common stock (15)
Payment of cash dividends (5)
Net cash flows from financing activities 6
Net increase in cash 9
Cash balance, January 1 20
Cash balance, December 31 $ 29
21-32
 Slide 33

Cash Flows from Operating Activities--Indirect Method

and
Reconciliation of Net Income to The indirect method
Net Cash Flows from Operating Activities derives the net cash
Net Income $ 12
Adjustments for noncash effects: increases or decreases
Increase in accounts receivable (2) from operating activities
Gain on sale of land (8)
Decrease in inventory 4
indirectly by starting with
Increase in accounts payable 6 reported net income and
Increase in salaries payable 2 “working backwards” to
Depreciation expense 3
Discount on bonds payable 2 convert that amount to a
Decrease in prepaid insurance 3 cash basis.
Loss on sale of equipment 2
Decrease in income tax payable (2)
Net cash flows from operating activities $ 22

21-33
 Slide 34

Depreciation Adding these items back to net

Expense
income restores net income to
what it would have been had
depreciation and the loss not been
Loss on Sale subtracted at all.
of Equipment

Subtracting the gain reverses the

Gain on Sale
effect of the gain having been
of Land
added to net income.

21-34
 Slide 35

For components of net income that increase or decrease cash, but by an

amount different from that reported on the income statement, net income
is adjusted for changes in the balances of related balance sheet accounts
to convert the effects of those items to a cash basis.

Note: Cash and cash equivalents, short-term investments in securities

available for sale, dividends payable, and short-term payables to financial
institutions are excluded from this category. 21-35
 Slide 36

Cash Flows fromOperating Activities

Income Statement Indirect Method Direct Method
Net income $ 12
Adjustments
Sales $ 100 Increase in accounts receivable (2) Cash received fromcustomers $ 98
Investment revenue 3 (No adjustment--no investment Cash received from 3
revenue receivable or long-term investments
investments)
Gain on sale of land 8 Gain on sale of land (8) (Not reported--no cash effect)
Cost of goods sold (60) Decrease in inventory 4
Increase in accounts payable 6 Cash paid to suppliers (50)
Salaries expense (13) Increase in salaries payable 2 Cash paid to employees (11)
Depreciation expense (3) Depreciation expense 3 (Not reported--no cash effect)
Interest expense (5) Decrease n bond discount 2 Cash paid for interest (3)
Insurance expense (7) Decrease in prepaid insurance 3 Cash paid for insurance (4)
Loss on sale of equipment (2) Loss on sale of equipment 2 (Not reported--no cash effect)
Income tax expense (9) Decrease in income tax payable (2) Cash paid for income taxes (11)
Net cashflowfromoperating Net cashflowfromoperating
Net income $ 12 activities $ 22 activities $ 22

21-36
 Slide 37

A spreadsheet is
equally useful in
preparing a
statement of cash
flows whether we use
the direct or the
indirect method of
determining cash
flows from operating
activities.

21-37
 Slide 38

The T-Account
method serves the
same purpose as a
spreadsheet in
assisting in the
preparation of a
statement of Cash
Flows.

21-38
 Slide 39

1. Draw a T-account for each income statement and balance

sheet account.
2. The T-account for cash should be drawn considerably
larger.
3. Enter each account’s net change on the appropriate side
(debit or credit) of the uppermost portion of each T-
account.
4. Reconstruct the transactions that caused changes in
each account balance during the year and record the
entries for those transactions directly in the T-accounts.
5. After all account balances have been explained by T-
account entries, prepare the statement of cash flows from
the cash T-account, being careful also to report noncash
investing and financing activities.
21-39
 Slide 40

 E21-24
 E21-25
 E21-28
 E21-29

21-40