Statement of Cash Flows

A. Purpose
1. Cash Control
2. Explain Changes in Cash
a. Cash Inflow (Debit)
b. Cash Outflow (Credit)
B. Activity Sections
1. Operating Activities
a. Day to Day Activities
1. Depreciation Expense
2. Accounts Receivable
3. Inventory
4. Prepaid Expenses (Rent)
5. Accounts Payable
6. Accrued Expense Payable / Liabilities (Wages)
7. Gain or Loss on Sale of Fixed / Assets or Investments
2. Investing Activities (Sale= Cash Inflow, Add) (Purchase= Cash Outflow, Subtract)
a. Purchase and Sale of Fixed / Plant Assets
b. Purchase and Sale of Long Term Investments (HTM)
3. Financing Activities
a. Payment of Dividends (Cash Outflow, Subtract)
b. Issuance of Stock Investments (Cash Inflow, Add)
c. Retirement of Bonds (Decrease in Bonds Payable= Cash Outflow, Subtract)
C. The Indirect Method
1. Operating Activities Section Only
2. Starting Point Net Income
3. Series of Adjustments for Cash Flows
4. Ending Point Net Cash Inflow or Outflow
a. Income Items that do not produce a cash inflow
(-)
b. Expense Items that do not produce a cash outflow
(+)
c. Non-Income Items that produce a cash inflow
(+)
d. Non-Income Items that produce a cash outflow
(-)
D. Operating Activities and Explanations (Indirect Method)
1. Depreciation Expense
a. Look at: Accumulated Depreciation
b. Does not produce cash outflow (+)
1. Other Explanation: Depreciation and Amortization are not cash expenses, only decreases NI
2. Accounts Receivable
a. Look at: Accounts Receivable
b. Increase: Did not produce cash inflow (-)
1. Other Explanation: Someone still has to pay you cash, someone owes you, thats a bad thing,
so subtract
c. Decrease: Produces cash inflow (+)
1. Other Explanation: You finally got paid what you were owed, thats a good thing, so add
3 Accounts Payable
a. Look at: Accounts Payable
b. Increase: Did not produce a cash outflow (+)
1. Other Explanation: Credit Purchase, you bought something on credit, and dont have to pay
yet, thats a good thing, so add

c. Decrease: Produces a cash outflow (-)

1. Other Explanation: You finally had to pay on the credit purchase and lose the cash that you
owed, thats a bad thing, so subtract
4 Inventory
a. Look at: Beginning Inventory and Ending Inventory (Change)
b. Increase: Produce a cash outflow (-)
1. Other Explanation: You purchased inventory with cash outflow, so you lost cash, thats a bad
thing, so subtract
c. Decrease: Did not produce a cash outflow (+)
1. Other Explanation: You sold inventory, which will eventually lead to cash inflow, thats a
good thing, so add
5 Prepaid Expenses
a. Look at: Prepaid Rent, Prepaid Insurance, etc.
b. Increase: Produce a cash outflow (-)
1. Other Explanation: You bought prepaid rent, insurance, etc. and you paid with cash, so you
lost cash, thats a bad thing, so subtract
c. Decrease: Did not produce a cash outflow (+)
1. Other Explanation: You expense rent or insurance that you paid for earlier, so no current
outflow of cash, thats a good thing, so add
6 Accrued Expense Payable / Liability
a. Look at: Wages Payable or Accrued Liabilities, etc.
b. Increase: Did not produce a cash outflow (+)
1. Other Explanation: You incurred a liability, but you dont have to pay it back just yet, thats a
good thing, so add
c. Decrease: Produce a cash outflow (-)
1. Other Explanation: You finally pay back the liability you incurred earlier with cash, so you
lost cash, thats a bad thing, so subtract
7 Gain or Loss on Sale of Fixed / Plant Assets or Investments
a. Look at: Other Revenues and Gains (Income Statement)
b. Gain on Sale: Subtract
c. Loss on Sale: Add
d. These will be offset in the Investing Activities Section