Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 23: Statement of Cash Flows

Prepared by Jep Robertson and Renae Clark New Mexico State University

Chapter 23: Statement of Cash Flows

After studying this chapter, you should be able to:
1. Describe the purpose of the statement of cash flows. 2. Identify the major classifications of cash flows. 3. Differentiate between net income and net cash flows from operating activities. 4. Contrast the direct and the indirect methods of calculating net cash flow from operating activities.

Chapter 23: Statement of Cash Flows

5. Determine net cash flows from investing and financing activities. 6. Prepare a statement of cash flows. 7. Identify sources of information for a statement of cash flows. 8. Identify special problems in preparing a statement of cash flows. 9. Explain the use of a work sheet in preparing a statement of cash flows.

Usefulness of the Statement of Cash Flows

The information may help users assess the following aspects:
The entitys ability to generate future cash flows The entitys ability to pay dividends and meet obligations The reasons as to why net income and net cash flow from operating activities differ Cash and non-cash investing and financing activities during the year

The Cash Flow Statement

The cash flow statement provides information about:
the cash receipts (cash inflows), and uses of cash (cash outflows) during the period

Inflows and outflows are reported for:

operating activities, investing activities, and financing activities during the period

Statement of Cash Flows: Concept

Operating activities
Investing activities Financing activities

inflows

Cash Pool
outflows

Operating activities Investing activities Financing activities

Preparing a Statement of Cash Flows

There are two methods of preparing the statement of cash flows:
1. the indirect method and 2. the direct method

The indirect method derives cash flows from accrual basis statements. The direct method determines cash flows directly for each source or use of cash.

Statement of Cash Flows: Indirect Method: Concept

Earned Revenues
+
Eliminate Non-cash revenues
Operating cash flow

Net Income Expenses Incurred -

Eliminate Non-cash charges

The Statement of Cash Flows: Indirect Method

Accrual Basis Statements
Income Statement items & Changes in Current Assets and Current Liabilities Balance Sheet: Changes In Non-Current Assets Balance Sheet: Changes in Non-Current Liabilities and Equity

Cash Flow Statement

Operating activities: Adjust net income for accruals and non-cash charges to get cash flows Investing activities: Inflows from sale of assets and Outflows from purchases of assets Financing activities: Inflows and outflows from loan and equity transactions

Direct Method: Operating Activities

Inflows From sales of goods or services From returns on loans (interest) and returns on equity securities (dividends) Outflows
To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses

Investing and Financing Activities

For the direct and indirect methods the sections reporting investing and financing activities are the same. The net inflows or outflows for each section (under the two methods) are identical. The operating activities are reported differently.

Format of the Statement of Cash Flows: Indirect Method

Cash flows from operating activities: Net Income Adjustments (to arrive at cash flow from operations) (List of individual inflows and outflows) Net cash flow from operating activities

$ XXX $ XX
$ XXX $ XX $ XXX $ XX $ XXX

Cash flows from investing activities: (List of individual inflows and outflows) Net cash flow from investing activities
Cash flows from financing activities: (List of individual inflows and outflows) Net cash flow from financing activities

Major Classes of Cash Receipts and Payments

Formula to Compute Cash Receipts from Customers

Formula to Compute Cash Payments for Operating Expenses

Indirect Method: Special Items

Note the following adjustments to net income in deriving operating cash flow:
Loss on sale of assets is added to net income Gain on sale of assets is deducted from net income Discount on bonds payable (as amortized) is added to net income Premium on bonds payable (as amortized) is deducted from net income

Format of the Statement of Cash Flows: Direct Method

Cash flows from operating activities: Cash receipts (individually): Inflows Cash payments to suppliers (separately): outflows Net cash flow from operating activities Cash flows from investing activities: (List of individual inflows and outflows) Net cash flow from investing activities Cash flows from financing activities: (List of individual inflows and outflows) Net cash flow from financing activities $ XXX ($ XXX) $ XXX

$ XX $ XXX

$ XX $ XXX

Direct Method: Concept

Cash Receipts From sale of goods and services to customers From receipts of interest and dividends Cash Payments To suppliers To employees
less

For operating exp equals For interest

Cash flow from operations

For taxes

Cash Flow Statement: Direct Method

Cash receipts from customers:
= Revenue from credit sales + Decrease in A/Rec balances - Increase in A/Rec balances

Cash Flow Statement: Direct Method

Cash payments to suppliers: = Cost of goods sold + Increase in inventory - Decrease in inventory
+ Decrease in accounts payable - Increase in accounts payable

Cash Flow Statement: Direct Method

Cash payments for operating and other expenses:
= Operating expenses + Increase in prepaid expenses - Decrease in prepaid expenses + Decrease in accrued expenses payable - Increase in accrued expenses payable

Reporting Significant Non-Cash Transactions

Transactions not involving cash inflows or cash outflows are non-cash transactions. They are not reported in the body of the cash flow statement. If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements. Example: Issue of bonds (payable) for purchase of land.

Worksheet
A work sheet may be useful when a number of adjustments are needed. Involves three steps:
1. Enter beginning and ending balance sheet data. 2. Enter the data that explains the changes in balance sheet accounts (other than cash). 3. Enter the increase or decrease in cash on cash line and at the bottom of the work sheet. This entry results in the totals of the reconciling items to agree.

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