CH 23

CHAPTER 23
Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics
Questions
Brief
Exercises
Exercises
Concepts
Problems for Analysis
1. Format, objectives
purpose, and source
of statement.
1, 2, 7,
8, 12
1, 2, 5, 6
2. Classifying investing,
financing, and operating
activities.
3, 4, 6,
16, 17,
19
1, 2, 3,
6, 7,
8, 12
1, 2, 10,
16
1, 3, 4, 5
3. Direct vs. indirect

methods of preparing
operating activities.
5, 9, 19,
20
4, 5, 8, 9,
10, 11
3, 4
1, 2, 5
4. Statement of cash flows

direct method.
11, 13,
14, 19
4, 6, 7,
8, 9
4, 5, 7, 9,
12, 13, 16
3, 4, 6,
7, 8
5. Statement of cash flows

indirect method.
8, 10, 15,
16, 19
5, 8, 9,
10, 11
3, 6, 8,
11, 14,
15, 16,
17, 18
1, 2, 5,
6, 7, 8,
9
6. Noncash investing
and financing activities.
17, 18
12
5, 7, 8,
9
7. Worksheet adjustments.
21
13
19, 20, 21
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e Instructors Manual(For Instructor Use Only)
23-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1.
Describe the purpose of the statement

of cash flows.
2.
Identify the major classifications

of cash flows.
1, 2, 10, 16
3.
Prepare a statement of cash flows.
9, 11, 12, 13,

14, 15, 17, 18
1, 2, 3, 4, 5,
6, 7, 8, 9
4.
Differentiate between net income and net

cash flows from operating activities.
4, 5, 9, 10, 11
2, 3, 4, 5, 6,
7, 8, 11, 16
5.
Determine net cash flows from investing

and financing activities.
1, 2
16
6.
Identify sources of information

for a statement of cash flows.
7.
Contrast the direct and indirect methods

of calculating net cash flow from operating
activities.
4, 5, 6, 7, 9
3, 4, 5,
6, 7, 8
6, 7
8.
Discuss special problems in preparing

a statement of cash flows.
12
10, 18
1, 2, 4, 5,
6, 7, 8, 9
9.
Explain the use of a worksheet in preparing

a statement of cash flows.
13
19, 20, 21
23-2
2, 4, 5, 6,
7, 8, 9
ASSIGNMENT CHARACTERISTICS TABLE
Description
Level of
Difficulty
Time
(minutes)
Simple
1015
Moderate
2030
It
e
m
E23-1
Classification of transactions.
E23-2
Statement presentation of transactionsindirect method.
E23-3
Preparation of operating activities sectionindirect method,

periodic inventory.
Simple
1525
E23-4
Preparation of operating activities sectiondirect method.
Simple
2030
E23-5
Preparation of operating activities sectiondirect method.
Simple
2030
E23-6
Preparation of operating activities sectionindirect method.
Simple
1520
E23-7
Computation of operating activitiesdirect method.
Simple
1520
E23-8
Schedule of net cash flow from operating activities

indirect method.
Moderate
2030
E23-9
SCFdirect method.
Moderate
2030
E23-10
Classification of transactions.
Moderate
2535
E23-11
SCFindirect method.
Moderate
3035
E23-12
SCFdirect method.
Moderate
2030
E23-13
SCFdirect method.
Moderate
3040
E23-14
SCFindirect method.
Moderate
3040
E23-15
SCFindirect method.
Moderate
2535
E23-16
Cash provided by operating, investing, and financing

activities.
Moderate
3040
E23-17
SCFindirect method and balance sheet.
Moderate
3040
E23-18
Partial SCFindirect method.
Moderate
2530
E23-19
Worksheet analysis of selected accounts.
Moderate
2025
E23-20
Worksheet analysis of selected transactions.
Moderate
2025
E23-21
Worksheet preparation.
Moderate
4555
P23-1
SCFindirect method.
Moderate
4045
P23-2
SCFindirect method.
Moderate
5060
P23-3
SCFdirect method.
Complex
5060
P23-4
SCFdirect method.
Moderate
4560
P23-5
SCFindirect method.
Complex
5065
P23-6
SCFindirect method, and net cash flow from operating
Moderate
4050
23-3
activities, direct method.

P23-7
SCFdirect and indirect methods from comparative

financial statements.
Moderate
3040
P23-8
SCFdirect and indirect methods.
Moderate
3040
P23-9
Indirect SCF.
Moderate
3040
CA23-1
Analysis of improper SCF.
Moderate
3035
CA23-2
SCF theory and analysis of improper SCF.
Moderate
3035
CA23-3
SCF theory and analysis of transactions.
Moderate
3035
CA23-4
Analysis of transactions effect on SCF.
Moderate
2030
CA23-5
Purpose and elements of SCF.
Complex
3040
CA23-6
Cash flow reporting.
Moderate
2030
23-4
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
Describe the purpose of the statement of cash flows.

Identify the major classifications of cash flows.
Prepare a statement of cash flows.
Differentiate between net income and net cash flow from operating activities.
Determine net cash flows from investing and financing activities.
Identify sources of information for a statement of cash flows.
Contrast the direct and indirect methods of calculating net cash flows from
8. Discuss special problems in preparing a statement of cash flows.
9. Explain the use of a worksheet in preparing a statement of cash flows.
*10. Compare the statement of cash flows under GAAP and IFRS.
23-5
CHAPTER REVIEW
1. Corporate investors and potential investors seek information about a companys financial
position, results of operations, and cash flows. Chapter 23 describes the significance of
the statement of cash flows and all aspects of its preparation. Numerous examples are
included which assist in an understanding of how the statement is prepared and
presented.
Purpose and Usefulness of the Statement of Cash Flows
2. (L.O. 1)The information in a statement of cash flows should help investors, creditors, and
others to assess: (1) the entitys ability to generate future cash flows; (2) the entitys ability
to pay dividends and meet obligations; (3) the reasons for the difference between net
income and net cash flow from operating activities; and (4) the cash and noncash
investing and financing transactions during the period. The required presentation of the
statement of cash flows provides financial statement users with information about the
major sources and uses of cash during the fiscal period.
Classification of Cash Flows
3. (L.O. 2)The statement of cash flows classifies cash receipts and cash payments by
operating, investing, and financing activities. Operating activities include all transactions
and events that are not investing and financing activities. Operating activities include the
cash effects of transactions that enter into the determination of net income, such as
cash receipts from sales of goods and services, and cash payments to suppliers and
employees for acquisitions of inventory and expenses. Operating activities involve income
determination items.
4. Investing activities include (a) making and collecting loans, and (b) acquiring and
disposing of investments and productive long-lived assets. Investing activities involve cash
flows generally resulting from changes in long-term asset items.
5. Financing activities involve liability and stockholders equity items and include (a)
obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital
from owners and providing them with a return on, and return of, their investment. Financing
activities involve cash flows generally resulting from changes in long-term liability and
stockholders equity items.
6. The typical cash receipts and cash payments of a business entity classified according to
operating, investing, and financing activities are shown below.
Operating Activities
Cash inflows
From sales of goods or services.
From returns on loans (interest) and on equity securities (dividends).
Cash outflows
23-6
To suppliers for inventory.

To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
Investing Activities
Cash inflows
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.
Financing Activities
Cash inflows
From sale of equity securities.
From issuance of debt (bonds and notes).
Cash outflows
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock.
7. Some cash flows relating to investing or financing activities are classified as operating
activities. For example, receipts of investment income (interest and dividends) and payments
of interest to lenders are classified as operating activities. Conversely, some cash flows
relating to operating activities are classified as investing or financing activities. For example,
the cash received from the sale of property, plant, and equipment at a gain, although
reported in the income statement, is classified as an investing activity, and the effect of the
related gain is not included in net cash flow from operating activities. Likewise
a gain or loss on the payment of debt is generally part of the cash outflow related to the
repayment of the principal amount borrowed and, therefore, is a financing activity.
Steps in Preparation
8. (L.O. 3) The information used to prepare the statement of cash flows generally comes
from three major sources: (a) comparative balance sheets, (b) the current income
statement, and (c) selected transaction data. Actual preparation of the statement of
cash flows involves three steps:
a.
Determine the change in cash. The difference between the beginning and ending cash
balance can be easily computed from an examination of the comparative balance
sheets.
23-7
b.
Determine the net cash flow from operating activities. This procedure involves
analyzing not only the current years income statement, but also comparative balance
sheets, as well as selected transaction data.
c.
Determine the net cash flows from investing and financing activities. All other changes
in the balance sheet accounts must be analyzed to determine their effect
on cash.
9. (L.O. 3, 4)To compute net cash flows from operating activities. It is necessary to report
revenues and expenses on a cash basis. This is done by eliminating the effects of income
statement transactions that did not result in a corresponding increase or decrease in cash.
The conversion of accrual-based net income to net cash flow from operating activities may
be done through either the direct method or the indirect method.
Indirect Method
10. (L.O. 4) While the FASB encourages the use of the direct method when preparing the
statement of cash flows, use of the indirect method is also permitted. However, if the
direct method is used the FASB requires that a reconciliation of net income to net cash
flow from operating activities shall be provided in a separate schedule. Therefore, under
either method, the indirect (reconciliation) approach must be presented. The text book
includes comprehensive illustrations which provide a detailed explanation of the
preparation and presentation of the statement of cash flows.
11. When non-cash current asset accounts increase and non-cash current liability accounts
decrease, the change is subtracted from net income.
When non-cash current asset accounts decrease, and non-cash current liability accounts
increase, the change is subtracted from net income.
Non-cash items such as depreciation, amortization, and losses are added to net income,
while gains are subtracted.
12. The schedule shown below presents the common types of adjustments that are made to net
income to arrive at net cash flow provided by operating activities under the indirect method.
Additions to Net Income
Depreciation expense.
Amortization of intangibles and deferred charges.
Amortization of bond discount.
Increase in deferred income tax liability.
Loss on investment in common stock using equity method.
Loss on sale of plant assets.
Loss on impairment of assets.
Decrease in receivables.
Decrease in inventories.
Decrease in prepaid expenses.
23-8
Increase in accounts payable.

Increase in accrued liabilities.
Deductions from Net Income
Amortization of bond premium.
Decrease in deferred income tax liability.
Income on investment in common stock using equity method.
Gain on sale of plant assets.
Increase in receivables.
Increase in inventories.
Increase in prepaid expenses.
Decrease in accounts payable.
Decrease in accrued liabilities.
Investing and Financing Activities
13. (L.O. 5) Investing activities include the analysis of all long-term asset accounts to
determine any cash flow effects. The following are common investing cash flow effects,
though non-cash effects may possibly cause the same effects in the long-term asset
accounts.
a.
A purchase of land will appear as an increase in the land account and will appear as
an investing cash outflow.
b.
A sale of land will appear as a decrease in the land account and will be reported as
an investing cash inflow. However, the change in the land account is rarely the same
amount as the cash flow effect, as a gain or loss may result.
c.
A purchase of a depreciable asset such as equipment or a building will appear as an

increase in the equipment or building account and will appear as an investing cash
outflow.
d.
A sale of a depreciable asset such as equipment or a building will appear as an

decrease in the equipment or building account and a decrease in the accumulated
depreciation account. The net book value change will rarely equal the cash flow
effect, as a gain or loss will usually result.
e.
A sale of an investment in stock or bonds of another company will appear as a

decrease in the investment account and will be reported as an investing cash inflow.
23-9
However, a gain or loss often results from the sale that causes the cash flow amount
to differ from the change in the long-term asset account.
f.
23-10
A purchase of an investment in stock or bonds of another company will appear as an

increase in the investment account and will be reported as an investing cash outflow.
14. Financing activities include the analysis of all long-term liabilities, all stock accounts,
retained earnings, dividends payable, and some short-term notes payable to determine
any cash flow effects. The following are common financing cash flow effects, though noncash effects may possibly cause the same effects in the respective accounts.
a.
An issuance of long-term debt, including bonds and notes payable, will appear as an
increase in these accounts and will be reported as a financing cash inflow.
b.
A payment or liquidation of long-term bonds or notes payable will appear as an

decrease in the long-term obligation accounts and will be reported as a financing
cash outflow. However, the book value of the obligation must be considered as well
(e.g., discounts and premiums.)
c.
The decrease in retained earnings often represents the declaration of cash dividends
and must be analyzed together with the dividends payable account and the effect of
net income on retained earnings in order to determine if cash dividends were paid,
which are reported as a financing cash outflow.
d.
The issuance of capital stock will appear as an increase in the respective stock
accounts and related additional paid-in capital accounts. Stock issuances are
reported as financing cash inflows.
Sources of Information for the Statement of Cash Flows

15. (L.O. 6) Important sources of information in the preparation of the statement of cash flows
are these:
a.
Comparative balance sheets provide the basic information from which to prepare the
statements. Additional information obtained from analyses of specific accounts is also
included.
b.
An analysis of the Retained Earnings account is necessary. The net increase or

decrease in Retained Earnings without any explanation is a meaningless amount in
the statement. Without explanation, it might represent the effect of net income,
dividends declared, or prior period adjustments.
c.
The statement includes all changes that have passed through cash or have resulted
in an increase or decrease in cash.
23-11
16. Write-downs, amortization charges, and similar book entries, such as depreciation of
plant assets, represent neither inflows nor outflows of cash because they have no effect
on cash. To the extent that they have entered into the determination of net income,
however, the company must add them back to or subtract them from net income, to arrive
at net cash provided (used) by operating activities.
23-12
Direct Method Disclosures

17. (L.O. 7) Minimum disclosure requirements for companies using the direct method include
the following:
Receipts
a. Cash collected from customers.
b. Interest and dividends received.
c. Other operating cash receipts, if any.
Payments
a. Cash paid to employees and suppliers of goods and services.
b. Interest paid.
c. Income taxes paid.
d. Other operating cash payments, if any.
Use of the indirect method requires separate disclosure of changes in inventory,
receivables, and payables relating to operating activities. Such disclosures are required
for the purpose of aiding users in approximating the direct method.
Indirect Method Disclosures
18. Under the direct method (also called the income statement method) cash revenues and
expenses are determined. The difference between these two amounts represents net
cash flows from operating activities. In essence, the direct method results in the presentation of a cash basis income statement. Under the indirect method (also called the
reconciliation method), computation of net cash flows from operating activities begins with
net income. This accrual-based amount is then converted to net cash provided by
operating activities by adding back noncash expenses and charges and deducting
noncash revenues.
a. The principal advantage of the direct method is that it shows operating cash receipts
and payments. Supporters contend that this is useful in estimating future cash flows
and in assessing an entitys ability to (a) generate sufficient cash flow from operations
for the payment of debt, (b) reinvest in its operations, and (c) make distributions to
owners.
b. Proponents of the indirect method cite the fact that it focuses on the difference
between net income and net cash flow from operations as its principal advantage.
Also, supporters of the indirect method contend that users are more familiar with the
method and it is less costly to present the statement of cash flows using this method.
23-13
Special Problems in Statement Preparation

19. (L.O. 8)Some items that relate to various aspects of the statement of cash flows require
special attention when preparing the statement of cash flows.
a. Depreciation and amortization. Depreciation expense is added back to net income to
arrive at net cash provided by operating activities. Likewise, amortization of limited-life
intangible assets, deferred costs, and bond premium or discount are also adjustments
to net income.
b. Postretirement benefit costs. The difference between the pension expense recorded
during the period and the amount of cash funded for the pension plan is an adjustment
to net income in arriving at net cash provided by operating activities.
c. Deferred income taxes. Changes in deferred income taxes affect net income, but
have no effect on cash. An increase in deferred income taxes decreases net income
but not cash, and therefore is added back to net income.
d. Equity method of accounting. The net increase in the investment account increases
net income but does not affect cash flow. The net increase is deducted from net
income to arrive at net cash flow from operating activities.
e. Gains and losses. Because a gain on the sale of plant assets is reported in the
statement of cash flows as part of the cash proceeds from the sale of the assets under
investing activities, the gain is deducted from net income to avoid double counting.
A loss on sale is added back to net income, and the full cash proceeds is included
under investing activities.
f. Stock options. For share-based compensation plans, companies are required to use the
fair value method to determine compensation cost. Compensation expense is recorded
during the period(s) in which an employee performs the service if a company has a stock
option plan. This expense is recorded by debiting compensation expense and crediting a
stockholders equity account. Thus, net income is increased by the amount of
compensation expense in computing net cash provided by operating activities.
g. Extraordinary items. Cash flows from extraordinary transactions and other events
whose effects are included in net income, but which are not related to operations, are
reported as either investing or financing activities.
h. Accounts receivable (net). An increase in the Allowance for Doubtful Accounts is
added back to net income to arrive at net cash provided by operating activities. This is
due to the fact that the increase in the allowance results in a charge to bad debts
expense (a noncash expense).
i.
23-14
Other working capital changes. Some changes in working capital, although they
affect cash, do not affect net income. Generally, these are investing or financing activities
of a current nature such as the purchase of short-term investments (trading and availablefor-sale securities).
j.
Net losses. If a company reports a net loss instead of net income, the net loss is
adjusted for those items that do not result in a cash inflow or outflow. As a result of such
adjustments, the net loss is often accompanied in a positive cash flow from operating
activities.
k. Significant noncash transactions. Significant noncash investing and financing activities

(such as purchasing an asset by assuming long-term debt), if material in amount, are
disclosed in a separate schedule or narrative disclosure. These items are not to be
incorporated in the statement of cash flows.
Worksheet and T-Account Approach
20. (L.O. 9) Chapter 23 includes a comprehensive illustration of the statement of cash
flows using a worksheet.
23-15
LECTURE OUTLINE
The material in this chapter can be covered in three class sessions. Students often have
difficulty in adjusting transactions recorded on an accrual basis to a cash basis income
statement. Illustration 23-7 provides a comprehensive numerical example of calculating net
cash flow from operating activities under both the indirect and direct methods.
A. (L.O. 1)Purpose and Uses of Statement of Cash Flows.
1. Purpose of the statement.
a. To provide information about the cash receipts and cash payments of a company
during a period which is important information for financial statement users, because
many feel that accrual accounting does not present a true picture.
b. To summarize the operating, investing, and financing activities of the business.
2. Uses of the statement.
a. Assessing the entitys ability to generate future cash flows.
b. Assessing the entitys ability to pay dividends and meet obligations.
c. Reconciling the difference between net income and net cash flow from operating
activities.
d. Assessing the cash and noncash investing and financing transactions during the period.
B. (L.O. 2)Classification of Cash Flows and Format of the Statement of Cash Flows.
Illustration 23-1 identifies the major classifications of cash flows and lists some typical cash
receipts and payments under each classification.
1. Operating activities.Transactions related to the calculation of net income.
2. Investing activities.Transactions related to long-term assets.
3. Financing activities.Transactions related to liabilities and stockholders equity.
4. Format of the statement.
23-16
Illustration 23-2 provides a skeleton format of a statement of cash flows using the indirect
method.
C. Preparation of the Statement of Cash Flows.
1. Sources of information.
a. Comparative balance sheets.
b. Current income statement data.
c. Selected transaction data.
2. Steps.
a. Determine the change in cash.
b. Determine the net cash flow from operating activities.
c. Determine net cash flows from investing and financing activities.
D. (L.O. 3, 4)Determining Net Cash Flow from Operating Activities.
1. Net cash used by operating activities will differ from cash-basis net income or loss.
2. Indirect method or reconciliation method.
a. Adjusts net income for items that affect net income, but do not affect cash.
b. Net cash flow from operating activities is equal to the difference between revenues
and expenses determined on a cash basis
c. Convert accrual basis net income to a cash basis by eliminating those transactions
that do not affect cash.
Use Illustration 23-3 to discuss the typical adjustments to net income to arrive at net cash
flow from operating activities using the indirect method.
3. The net cash flow from operating activities is the same under both the direct and indirect
methods.
23-17
E. (L.O. 5)Determine the Net Cash Flows from Investing and Financing Activities.
Use Illustration 23-4 to discuss the cash flows from investing and financing activities.
1. Cash flows from investing activities include:
a. Purchase of property, plant, and equipment.
b. Purchase/sale of investments in other entities.
c. Issuance/collection of loans to other entities.
2. Cash flows from financing activities include:
a. Issuance/repayment of long-term debt.
b. Issuance/repurchase of own stock.
c. Payment of cash dividend.
Use Illustration 23-5 to demonstrate how a statement of cash flows is prepared using the
indirect method.
F. (L.O. 6)Sources of Information for a Statement of Cash Flows.
1. Current years income statement.
2. Comparative balance sheets.
3. Additional information from accounting records.
G. Preparation of a Statement of Cash FlowsDirect Method.
Use Illustrations 23-6 and 23-7 to demonstrate how to convert accrual based net income to
net cash from operating activities and present the results under the direct method.
1. Net cash provided by operating activities is equivalent to cash-basis net income.
a. Exists when cash receipts exceed cash disbursements from operating activities.
23-18
Use Illustration 23-8 to demonstrate how a statement of cash flows is prepared using the
direct method.
2. Direct method or income statement method.
a. Net cash flow from operating activities = cash receipts cash disbursements.
3. Compute net cash from operating activities by adjusting each item on the income statement
from the accrual basis to the cash basis.
a. Compute cash receipts from customers, interest, and dividends.
b. Compute cash payments to suppliers, employees, operating expenses, interest,
and taxes.
4. Compute cash flows from investing and financing activities.
H. (L.O. 7) Direct versus Indirect Controversy.
Use Illustration 23-9 to compare the different formats of the operating activities section for
the statement of cash flows.
1. Direct method has the advantage of showing operating cash receipts and payments.
a. Many companies do not collect information in a manner that allows them to determine
cash received from customers or paid to suppliers.
2. Indirect method has the advantage of reconciling net income with net cash flow from
3. Although the FASB prefers the direct method, it permits the use of the indirect method.
I. Special Rules Applying Direct and Indirect Methods.
1. Direct method.Companies are required to report, at a minimum, the following:
a. Receipts.
(1) Cash collected from customers.
(2) Interest and dividends received.
(3) Other operating cash receipts, if any.
23-19
b. Payments.
(1) Cash paid to employees and suppliers of goods or services.
(2) Interest paid.
(3) Income taxes paid.
(4) Other operating cash payments, if any.
2. Indirect method:
a. Companies must disclose separately changes in:
(1) Inventories.
(2) Receivables.
(3) Payables.
b. Companies must also disclose in the financial statements or accompanying notes:
(1) Interest paid.
(2) Income taxes paid.
J. (L.O. 8)Special Problems in Preparing a Statement of Cash Flows.
1. Adjustments to net income. Depreciation expense, amortization of intangible assets,
deferred costs, and bond discount or premium.
2. Postretirement benefit costs.Adjust net income for the difference between cash paid
and expense reported.
3. Change in deferred income taxes. Changes in deferred income taxes affect net income
but have no effect on cash.
4. Equity Method: Changes. Related to an investment accounted for under the equity
method.
5. Losses.Added to net income. Gains: deducted from net income.
6. Stock options.Added to net income in the amount of compensation expense from stock
options.
7. Extraordinary items.Added/deducted to/from net income at gross amount.
a. Classify as either an investing or financing activity.
b. Shown at gross amount, not net of tax.
23-20
c. FASB requires that all income taxes be classified as operating cash outflows.
8. Accounts receivable (net).
a. Indirect method.Increase/decrease in the Allowance for Doubtful Accounts should be
added/deducted from net income or, compare the change in accounts receivable on a
net basis.
b. Direct method.Do not net the accounts receivable. If accounts have been written off,
an additional adjustment is necessary.
9. Other working capital changes.
a. Items that affect cash, but not net income:
(1)
Purchase of short-term available-for-sale securities.
(2)
Short-term nontrade note payable.
(3)
Cash dividends payable.
10. Net losses. After adjustments, may result in either a positive or a negative net cash flow
from operating activities.
11. Significant noncash transactions are excluded from body of the statement of cash flows.
a. If material in amount, may be disclosed in a narrative or schedule at the bottom of the
statement, or
b. As a separate note or schedule to the financial statements.
K. (L.O. 9)Use of a Worksheet.
1. Basic format.
a. In the balance sheet accounts section, debit balance accounts are listed separately
from credit balance accounts.
b. In the statement of cash flows effects sections, cash inflows are entered as debits
and outflows as credits.
c. Reconciling items are not entered in any journal or account.
Illustration 23-10 provides the format of a worksheet for the preparation of the statement of
cash flows using the indirect method.
23-21
2. Analyzing and entering transactions.

3. The bottom portion of the worksheet provides the information necessary to prepare the
statement of cash flows.
*L. (L.O. 10) IFRS Insights
1. As in GAAP, the statement of cash flows is a required statement for IFRS. In addition,
the content and presentation of a U.S. statement of cash flows is similar to one used for
IFRS. However, the disclosure requirements related to the statement of cash flows are
more extensive under GAAP. IAS 7 (Cash Flow Statements) provides the overall IFRS
requirements for cash flow information.
2. Similarities
a.
Both GAAP and IFRS require that companies prepare a statement of cash flows.
b.
Both IFRS and GAAP require that the statement of cash flows should have three
major sectionsoperating, investing, and financingalong with changes in cash
and cash equivalents.
c.
Similar to GAAP, the cash flow statement can be prepared using either the indirect
or direct method under IFRS. For both IFRS and GAAP, most companies use the
indirect method for reporting net cash flow from operating activities.
d.
The definition of cash equivalents used in IFRS is similar to that used in GAAP.
3. Differences
23-22
a.
A major difference in the definition of cash and cash equivalents is that in certain
situations, bank overdrafts are considered part of cash and cash equivalents under
IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts are classified
as financing activities.
b.
IFRS requires that non-cash investing and financing activities be excluded from the
statement of cash flows. Instead, these non-cash activities should be reported
elsewhere. This requirement is interpreted to mean that non-cash investing and
financing activities should be disclosed in the notes to the financial statements
instead of in the financial statements. Under GAAP, companies may present this
information in the cash flow statement.
c.
One area where there can be substantive differences between IFRS and GAAP
relates to the classification of interest, dividends, and taxes. IFRS provides more
alternatives for disclosing these items, while GAAP requires that except for
dividends paid (which are classified as a financing activity), these items are all
reported as operating activities.
23-23
ILLUSTRATION 23-1
CLASSIFICATIONS OF THE STATEMENT OF CASH FLOWS
23-24
ILLUSTRATION 23-2
FORMAT OF STATEMENT OF CASH FLOWS (Indirect Method)
23-25
ILLUSTRATION 23-3
INDIRECT METHOD: ADDITIONS AND DEDUCTIONS
TO AND FROM NET INCOME
23-26
23-27
ILLUSTRATION 23-4
CASH FLOWS FROM INVESTING
AND FINANCING ACTIVITIES
23-28
ILLUSTRATION 23-5
CALCULATION OF CASH FLOWS
FROM OPERATING ACTIVITIES INDIRECT METHOD
23-29
23-30
ILLUSTRATION 23-5 (continued)
23-31
23-32
ILLUSTRATION 23-6
SCHEDULE OF CHANGES FROM THE ACCRUAL
TO THE CASH BASIS INCOME STATEMENT
23-33
23-34
ILLUSTRATION 23-7
CASH FLOWS FROM OPERATING ACTIVITIES
DIRECT APPROACH
23-35
23-36
ILLUSTRATION 23-8
STATEMENT OF CASH FLOWS DIRECT METHOD
23-37
23-38
23-39
23-40
ILLUSTRATION 23-9
DIRECT VS INDIRECT CONTROVERSY
23-41
ILLUSTRATION 23-10
FORMAT OF WORKSHEET FOR PREPARATION OF
STATEMENT OF CASH FLOWS
23-42

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CHAPTER 23

Statement of Cash Flows

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

3. Direct vs. indirect

4. Statement of cash flows

5. Statement of cash flows

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Describe the purpose of the statement

Identify the major classifications

Prepare a statement of cash flows.

9, 11, 12, 13,

Differentiate between net income and net

Determine net cash flows from investing

Identify sources of information

Contrast the direct and indirect methods

Discuss special problems in preparing

Explain the use of a worksheet in preparing

ASSIGNMENT CHARACTERISTICS TABLE

Statement presentation of transactionsindirect method.

Preparation of operating activities sectionindirect method,

Preparation of operating activities sectiondirect method.

Preparation of operating activities sectiondirect method.

Preparation of operating activities sectionindirect method.

Computation of operating activitiesdirect method.

Schedule of net cash flow from operating activities

Cash provided by operating, investing, and financing

SCFindirect method and balance sheet.

Partial SCFindirect method.

Worksheet analysis of selected accounts.

Worksheet analysis of selected transactions.

SCFindirect method, and net cash flow from operating

activities, direct method.

SCFdirect and indirect methods from comparative

SCFdirect and indirect methods.

Analysis of improper SCF.

SCF theory and analysis of improper SCF.

SCF theory and analysis of transactions.

Analysis of transactions effect on SCF.

Purpose and elements of SCF.

Cash flow reporting.

Describe the purpose of the statement of cash flows.

To suppliers for inventory.

Increase in accounts payable.

A purchase of a depreciable asset such as equipment or a building will appear as an

A sale of a depreciable asset such as equipment or a building will appear as an

A sale of an investment in stock or bonds of another company will appear as a

A purchase of an investment in stock or bonds of another company will appear as an

A payment or liquidation of long-term bonds or notes payable will appear as an

Sources of Information for the Statement of Cash Flows

An analysis of the Retained Earnings account is necessary. The net increase or

Direct Method Disclosures

Special Problems in Statement Preparation

k. Significant noncash transactions. Significant noncash investing and financing activities

Purchase of short-term available-for-sale securities.

Short-term nontrade note payable.

Cash dividends payable.

2. Analyzing and entering transactions.

ILLUSTRATION 23-5 (continued)

ILLUSTRATION 23-5 (continued)

ILLUSTRATION 23-8 (continued)

ILLUSTRATION 23-8 (continued)

ILLUSTRATION 23-8 (continued)

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