Chap 013

Chapter 13
How Well Am I Doing? Statement of Cash Flows

PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA
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Purpose of the Statement of Cash Flows

Are cash flows sufficient to support ongoing operations? Why is there a difference between net income and net cash flow?
Can we meet our obligations to creditors?
Will the company have to borrow money to make needed investments?
Can we pay dividends?
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Learning Objective 1
Classify changes in noncash balance sheet accounts as sources or uses of cash.
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Definition of Cash
The term cash on the statement of cash flows refers broadly to both currency and cash equivalents.
Currency and Bank Accounts
Treasury Bills
Cash
Money Market Funds Commercial Paper
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Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
4. Changes in Capital Stock 3. Changes in Liabilities
5. Dividends Paid to Stockholders
Net Cash Flows for a Period
2. Changes in Noncash Assets
1. Net Income
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Sources Always Decreases Increases Increases Uses Always Increases Decreases
Net Income Net Loss Changes in noncash assets Changes in liabilities* Changes in capital stock accounts Dividends paid to stockholders
Decreases Always Total sources - Total uses = Net cash flow
* Contra asset accounts, such as the Accumulated Depreciation and Amortization account, follow the rules for liabilities.
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Increases in noncash asset accounts imply uses of cash.

Example: Inventory is purchased on credit from a supplier. It is implied that cash was used to acquire the inventory.
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Increases in liability accounts imply sources of cash.

Example: Inventory is purchased on credit from a supplier. It is implied that an increase in a payable has the effect of increasing cash available for other uses.
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Decreases in noncash assets accounts imply sources of cash.

Example: Accounts receivable decreases when a company pays its bill.
The companys cash increases accordingly.
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Decreases in liability accounts imply uses of cash.

Example: If a company makes a payment on a note payable. The companys cash balance decreases accordingly.
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A Simplified Statement of Cash Flows

Ed's Pizza Hut Comparative Balance Sheet Account Balances 3/31/2009 3/31/2008 Change DR (CR) DR (CR) Incr. (Decr.) $ 71,000 $ 90,000 $ (19,000) 23,000 40,000 (17,000) 322,000 300,000 22,000 68,000 100,000 (32,000) 112,000 84,000 28,000 (45,000) (39,000) 6,000 (38,000) (27,000) 11,000 (9,000) (14,000) (5,000) (50,000) (50,000) (500,000) (450,000) 50,000 (4,000) (34,000) (30,000) $ - $ -
Cash Accounts Receivable Inventory Land Equipment Accumulated Depr. Accounts Payable Salaries Payable Note Payable - Joe Doe Common Stock Retained Earnings
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Additional Information:
There was a net loss for the year of $27,000. Depreciation charges for the year were $6,000. During the year, Ed sold land originally costing $32,000 for $32,000. During the year, Ed purchased equipment for $28,000. During the year, Ed paid dividends of $3,000 to the stockholders. Ed issued $50,000 of common stock to settle the note due to Joe Doe.
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Here is a summary of the sources of cash for Eds Pizza Hut.
Ed's Pizza Hut Sources of Cash Decrease in A/R $ Decrease in Land Increase in A/P Depreciation charges Total sources of cash $
17,000 32,000 11,000 6,000 66,000
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Here is a summary of the uses of cash.
Ed's Pizza Hut Uses of Cash Net loss Increase in Inventory Increase in Equipment Increase in Salaries Payable Dividends paid Total uses of cash $ 27,000 22,000 28,000 5,000 3,000 85,000
The net cash flow for Eds Pizza Hut is ($19,000): $66,000 in sources minus $85,000 in uses.
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Ed's Pizza Hut Uses of Cash Net loss Increase in Inventory Increase in Equipment Increase in Salaries Payable Dividends paid Total uses of cash $ 27,000 22,000 28,000 5,000 3,000 85,000
17,000 32,000 11,000 6,000 66,000
This simplified approach does not follow the format required for external reporting purposes. It is for illustrative purposes only.
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Classify transactions as operating, investing, or financing activities.
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The Three Sections of the Statement of Cash Flows
Operating activities are those activities that enter into the determination of net income.
1. Transactions affecting current assets 2. Transactions affecting current liabilities 3. Changes in noncurrent balance sheet accounts that directly affect net income
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Investing activities relate to transactions involving the acquiring or disposing of noncurrent assets.
1. Acquiring or selling property, plant and equipment 3. Lending money to another entity and subsequently collecting on the loan
2. Acquiring or selling securities held for long-term investments
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Financing activities relate to transactions involving borrowing from creditors or repaying creditors and engaging in transactions with the companys owners.
1. Issuing stock and purchasing treasury stock 2. Issuing longterm debt and repayment of debt 3. Payment of dividends (note that interest on debt is classified as an operating activity)
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Format of the Statement of Cash Flows (Indirect Method)

Operating Activities: Net income Changes in current assets Changes in noncurrent assets that affect net income (e.g., depreciation) Changes in current liabilities (except for debts to lenders and dividends payable) Changes in noncurrent liabilities that affect net income Investing Activities: Changes in noncurrent assets that are not included in net income Financing Activities: Changes in the current liabilities that are debts to lenders rather than obligations to suppliers, employees, or the government Changes in noncurrent liabilities that are not included in net income Changes in capital stock accounts Dividends
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Format of the Statement of Cash Flows (Indirect Method)

Operating Activities Investing Activities
Reconciliation of the beginning cash balance with the ending cash balance
Financing Activities
Noncash Investing and Financing Activities
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Operating Activities
Net Income or Loss Add: Decrease in current noncash assets Increase in current liabilities Depreciation charges Losses Less: Increase in current noncash assets Decrease in current liabilities $ XXX XXX XXX XXX XXX (XXX) (XXX)
Gains
Cash Flows from Operating Activities
(XXX)
$ XXX
Includes those activities that affect current assets, current liabilities, or net income.
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Sources of cash are added to and uses of cash are subtracted from net cash provided by operating activities.
Impact on Net Cash Provided by Operating Activities Sources of Cash Uses of Cash (Add to Net Income) (Subtract from Net Income) Current Noncash Assets Current Liabilities Decreases Increases Increases Decreases
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Net Income or Loss Add: Decrease in current noncash assets Increase in current liabilities Depreciation charges Losses Less: Increase in current noncash assets Decrease in current liabilities Cash Flows from Operating Activities
Decreases Increases
$ XXX XXX XXX XXX XXX (XXX) (XXX)
Impact on Net Cash Provided by Operating Activities Gains Sources of Cash (XXX) Uses of Cash (Add to Net Income) (Subtract from Net Income)
Current Noncash Assets Current Liabilities
$ XXX
Increases Decreases
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Net Income or Loss Add: Decrease in current noncash assets Increase in current liabilities Depreciation charges Losses Less: Increase in current noncash assets Decrease in current liabilities Cash Flows from Operating Activities (Add to Net Income)
Current Noncash Assets Current Liabilities Decreases Increases Sources of Cash
$ XXX XXX XXX XXX XXX (XXX) (XXX)

Uses of Cash $ XXX (Subtract from Net Income) Increases Decreases
Gains (XXX) Impact on Net Cash Provided by Operating Activities
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Gains
(XXX)
$ XXX
Depreciation and Amortization charges are added back because they are decreases in noncash assets.
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Gains
(XXX)
$ XXX
Gains are subtracted.
Losses are added.
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Investing Activities
Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets Receipt of principal from investments Less: Payments to acquire land, buildings, equipment, or other noncurrent assets Payments to acquire investments Net Cash Flows from Investing Activities $ XXX XXX
(XXX) (XXX) $ XXX
Includes transactions that involve the acquisition or disposal of noncurrent assets.
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Financing Activities
Add: Proceeds from borrowings Proceeds from issuing capital stock Proceeds from sale of bonds Less: Principal payments on borrowed funds Payments related to bond maturities Dividend payments Net Cash Flows from Financing Activities $ XXX XXX XXX (XXX) (XXX) (XXX) $ XXX
Includes transactions involving receipts from or payments to creditors and owners.
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Cash Flows: Gross or Net?

For investing and financing activities, items on the statement of cash flows should be presented in gross amounts rather than in net amounts.
Example:
Assume Macys purchases $50 million in property during the year and sells other property for $30 million. Instead of showing the net change of $20 million, the company must report the gross amounts of both transactions.
13-31
Operating Activities: Direct or Indirect Method?

Two Formats for Reporting Operating Activities
Direct Method
Indirect Method Starts with accrual net income and adjusts it to the cash basis
Reports the cash effects of each operating activity
No matter which format is used, the same amount of net cash provided by operating activities is generated.
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Prepare a statement of cash flows using the indirect method to determine the net cash provided by operating activities.
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Statement of Cash Flows: Indirect Method

Lets revisit the comparative balance sheet account balances for Eds Pizza Hut.
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Refresh your memory regarding the following additional information.
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Step 1 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustChange or Use? Effect ments Assets (except cash and cash equivalents) Current assets Accounts receivable Inventory Noncurrent assets Land Equipment Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation Current liabilities Accounts payable Salaries payable Noncurrent liabilities Notes payable Stockholders' equity Common stock Retained earnings Net loss Dividends Total (net cash flow) Adjusted Effect Classification
List each account appearing on the comparative balance sheets except for cash and cash equivalents and retained earnings.
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Step 2 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustChange or Use? Effect ments Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Inventory 22,000 Noncurrent assets Land (32,000) Equipment 28,000 Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Current liabilities Accounts payable 11,000 Salaries payable (5,000) Noncurrent liabilities Notes payable (50,000) Stockholders' equity Common stock 50,000 Retained earnings Net loss (27,000) Dividends 3,000 Total (net cash flow) Adjusted Effect Classification
Compute the change from the beginning balance to the ending balance for each account.
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Step 3 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustAdjusted ClassifiChange or Use? Effect ments Effect cation Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source Inventory 22,000 Use Noncurrent assets Land (32,000) Source Equipment 28,000 Use Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source Current liabilities Accounts payable 11,000 Source Salaries payable (5,000) Use Noncurrent liabilities Notes payable (50,000) Use Recall that the transaction Stockholders' equity involving the Notes Payable and Common stock 50,000 Source Common Stock was noncash. Retained earnings Net loss (27,000) Use Dividends 3,000 Use Total (net cash flow)
Code each entry on the worksheet as a source or use of cash.
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Step 4 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustChange or Use? Effect ments Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 Inventory 22,000 Use (22,000) Noncurrent assets Land (32,000) Source 32,000 Equipment 28,000 Use (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 Current liabilities Accounts payable 11,000 Source 11,000 Salaries payable (5,000) Use (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) Stockholders' equity Common stock 50,000 Source 50,000 Retained earnings Net loss (27,000) Use (27,000) Dividends 3,000 Use (3,000) Total (net cash flow) $ (19,000) Adjusted Effect Classification
Code sources of cash as positive numbers and uses of cash as negative numbers.
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Step 5 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustAdjusted ClassifiChange or Use? Effect ments Effect cation Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 $ 17,000 Inventory 22,000 Use (22,000) (22,000) Noncurrent assets Land (32,000) Source 32,000 32,000 Equipment 28,000 Use (28,000) (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 6,000 Current liabilities Accounts payable 11,000 Source 11,000 11,000 Salaries payable (5,000) Use (5,000) (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) 50,000 We -need to make an adjustment Stockholders' equity for the noncash transaction Common stock 50,000 Source 50,000 (50,000) relating to Notes Payable and Retained earnings Net loss (27,000) Use (27,000) (27,000) Common Stock. Dividends 3,000 Use (3,000) (3,000) Total (net cash flow) $ (19,000) $ $ (19,000)
Make any necessary adjustments, including adjustments for gains and losses. The net effect of these should equal zero.
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Step 6 of 8
Ed's Pizza Hut Statement of Cash Flows Worksheet Source Cash Flow AdjustAdjusted Change or Use? Effect ments Effect Assets (except cash and cash equivalents) Current assets Accounts receivable $ (17,000) Source $ 17,000 $ 17,000 Inventory 22,000 Use (22,000) (22,000) Noncurrent assets Land (32,000) Source 32,000 32,000 Equipment 28,000 Use (28,000) (28,000) Contra Assets, Liabilities, and Stockholders' Equity Contra assets Accumulated depreciation 6,000 Source 6,000 6,000 Current liabilities Accounts payable 11,000 Source 11,000 11,000 Salaries payable (5,000) Use (5,000) (5,000) Noncurrent liabilities Notes payable (50,000) Use (50,000) 50,000 Stockholders' equity Common stock 50,000 Source 50,000 (50,000) Retained earnings Net loss (27,000) Use (27,000) (27,000) Dividends 3,000 Use (3,000) (3,000) Total (net cash flow) $ (19,000) $ $ (19,000) Classification
Operating Operating Investing Investing
Operating Operating Operating
Classify each entry as operating, investing, or financing activity.
Operating Financing
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Step 7 of 8
Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ (27,000) Add: Decrease in A/R 17,000 Increase in A/P 11,000 Increase in Depr. Charges 6,000 Less: Increase in Inventory (22,000) Decrease in Salaries Payable (5,000) Net Cash Provided by Operating Activities (20,000) Investing Activities Proceeds from sale of Land 32,000 Purchase of equipment (28,000) Net Cash Provided by Investing Activities 4,000 Financing Activities Dividends paid (3,000) Net change in cash $ (19,000)
Copy the data from the worksheet into the Statement of Cash Flows section by section.
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Step 8 of 8
Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash Cash, beginning Cash, ending $ (27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) 90,000 71,000
Prepare a cash reconciliation at the bottom of the statement.
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Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss $ Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash Cash, beginning Cash, ending
(27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) 90,000 $71,000
In addition, on the face of the statement or in a supplemental schedule, disclose the issuance of $50,000 of stock to a creditor, a noncash financing activity.
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Interpretation of the Statement of Cash Flows
Examine the operating activities section carefully.

Eds Pizza Hut generated a negative net cash provided by operating activities of $20,000. This is usually a sign of fundamental difficulties. Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-today activities.
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Compute free cash flow.
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Free Cash Flow

Free cash flow measures a companys ability to fund its capital expenditures and dividends from its net cash provided by operating activities.
Free Cash Flow = Net Cash Provided by Operating Activities
Capital Expenditures
Dividends
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Free Cash Flow

Using the equation shown on the prior slide, the free cash flow for Eds Pizza Hut of ($51,000) is computed like this . . .
Net Cash Provided by Capital Free Cash Flow = - Expenditures - Dividends Operating Activities $ (51,000) = $ (20,000) - $ 28,000 - $ 3,000
Appendix 13A
The Direct Method of Determining the Net Cash Provided by Operating Activities.
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Use the direct method to determine the net cash provided by operating activities.
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Computing Net Cash Provided by Operating Activities

The direct method computes net cash provided by operating activities by reconstructing the income statement on the cash basis from top to bottom.
However
The amount of net cash provided by operating activities under the direct method will always agree with the amount computed using the indirect method.
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Revenue or Expense Item Sales revenue (as reported) Adjustments to a cash basis: 1 Increases in accounts receivable 2 Decreases in accounts receivable
Add (+) or Deduct (-) to Adjust to a Cash Basis
Similarities and Differences in Handling Data

Adjustments for accounts that affect revenue are the same in the direct method and indirect methods.
Cost of goods sold (as reported) Adjustments to a cash basis: 3 Increase in merchandise inventory 4 Decrease in merchandise inventory 5 Increase in accounts payable 6 Decrease in accounts payable Operating expenses (as reported) Adjustments to a cash basis: 7 Increase in prepaid expenses 8 Decrease in prepaid expenses 9 Increase in accrued liabilities 10 Decrease in accrued liabilities 11 Period's depreciation, depletion and amortization charges Income tax expense (as reported) Adjustments to a cash basis: 12 Increase in accrued taxes payable 13 Decrease in accrued taxes payable 14 Increase in deferred income taxes 15 Decrease in deferred income taxes
+ +
+ + -
Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect methods.
+ +
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Direct Method: Gains and Losses

Regarding gains and losses on sale of assets, no adjustments are needed at all under the direct method.
13-53
The Direct Method

Lets revisit the comparative balance sheet account balances for Eds Pizza Hut.
13-54
The Direct Method

Ed's Pizza Hut Income Statement For the Year Ended 3/31/2009 Sales $ 1,000,000 Cost of goods sold 750,000 Gross margin 250,000 Operating expenses 277,000 Net loss $ (27,000)
Lets assume that Eds Pizza Hut prepared this income statement.
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The Direct Method

Step 1: Translate sales revenue into cash collected from customers.
Sales (as reported) Add: Decrease in accounts receivable Cash collected from customers
$ $
1,000,000 17,000 1,017,000
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The Direct Method

Step 2: Translate cost of goods sold into cash disbursements for purchases.
Cost of goods sold (as reported) $ Add: Increase in inventory Less: Increase in accounts payable Cash paid for purchases $ 750,000 22,000 (11,000) 761,000
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The Direct Method

Step 3: Translate operating expenses into cash paid for operating expenses.
Operating expenses (as reported) Add: Decrease in salaries payable Less: Increase in depreciation Cash paid for operating expenses $ 277,000 5,000 (6,000) 276,000
There is not an adjustment needed for income taxes because Eds Pizza Hut has a net loss of $27,000.
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The Direct Method

Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Cash received from customers $ 1,017,000 Cash paid for purchases (761,000) Cash paid for operating expenses (276,000) Net cash flow from operations (20,000) Investing Activities Proceeds from sale of land 32,000 Purchase of equipment (28,000) Net cash flow from investing activities 4,000 Financing Activities Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending $ 71,000
Notice that the net cash provided by operating activities agrees with that computed using the indirect method.
Appendix 13B
The T-Account Approach to Preparing the Statement of Cash Flows
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T-Account Approach: Statement of Cash Flows

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T-Account Approach: Statement of Cash Flows

Additional Information:
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T-Account Approach
Here is a summary of the sources of cash for Eds Pizza Hut.
17,000 32,000 11,000 6,000 66,000
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T-Account Approach
Here is a summary of the uses of cash for Eds Pizza Hut.
Ed's Pizza Hut Uses of Cash Net loss $ Increase in Inventory Decrease in Salaries Payable Increase in Equipment Dividends paid Total uses of cash $ 27,000 22,000 5,000 28,000 3,000 85,000
The net cash flow for Eds Pizza Hut is ($19,000): $66,000 in sources minus $85,000 in uses.
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T- Account Approach
Cash Provided 27,000 Net loss Used
3,000 Cash dividends paid
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T-Account Approach
Cash Provided Decrease in accounts receivable Used 17,000 27,000 Net loss 22,000 Increase in inventory
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T-Account Approach
Cash Provided Decrease in accounts receivable Used 17,000 27,000 Net loss 22,000 Increase in inventory
Sale of land
32,000
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T-Account Approach
Cash Provided Decrease in accounts receivable Depreciation charges Used 17,000 6,000 27,000 Net loss 22,000 Increase in inventory
Proceeds from sale of land
32,000
28,000 Purchase of equipment 3,000 Cash dividends paid
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T-Account Approach
Cash Provided Decrease in accounts receivable Depreciation charges Increase in accounts payable Used 17,000 6,000 11,000 27,000 Net loss 22,000 Increase in inventory 5,000 Decrease in salaries payable 28,000 Purchase of equipment 3,000 Cash dividends paid
32,000
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T-Account Approach
What about the $50,000 issuance of common stock to settle the note payable to Joe Doe?
No Effect in the Cash Account.
However, this transactions would be disclosed in a supplemental schedule that accompanies the statement of cash flows.
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T-Account Approach
Cash Provided Decrease in accounts receivable Depreciation charges Increase in accounts payable Used 17,000 6,000 11,000 27,000 22,000 5,000 20,000 28,000 3,000 19,000 Net loss Increase in inventory Decrease in salaries payable Net cash used in operations Purchase of equipment Cash dividends paid Net decrease in cash
32,000
The net effect of these transactions on the cash account is as shown. Notice, the net decrease in cash is $19,000.
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The Statement of Cash Flows

Ed's Pizza Hut Statement of Cash Flows For the Period Ending 3/31/2009 Operating Activities Net Loss Add: Decrease in A/R Increase in A/P Increase in Depr. Charges Less: Increase in Inventory Decrease in Salaries Payable Net Cash Provided by Operating Activities Investing Activities Proceeds from sale of Land Purchase of equipment Net Cash Provided by Investing Activities Financing Activities Dividends paid Net change in cash Cash, beginning Cash, ending $ (27,000) 17,000 11,000 6,000 (22,000) (5,000) (20,000) 32,000 (28,000) 4,000 (3,000) (19,000) 90,000 $ 71,000
In addition, on the face of the statement or in a supplemental schedule, disclose the issuance of $50,000 of stock to a creditor, a noncash financing activity.
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End of Chapter 13

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Chapter 13

How Well Am I Doing? Statement of Cash Flows

Purpose of the Statement of Cash Flows

Can we meet our obligations to creditors?

Will the company have to borrow money to make needed investments?

Can we pay dividends?

Classify changes in noncash balance sheet accounts as sources or uses of cash.

5. Dividends Paid to Stockholders

Net Cash Flows for a Period

2. Changes in Noncash Assets

Decreases Always Total sources - Total uses = Net cash flow

Increases in noncash asset accounts imply uses of cash.

Increases in liability accounts imply sources of cash.

Decreases in noncash assets accounts imply sources of cash.

Decreases in liability accounts imply uses of cash.

A Simplified Statement of Cash Flows

A Simplified Statement of Cash Flows

A Simplified Statement of Cash Flows

17,000 32,000 11,000 6,000 66,000

A Simplified Statement of Cash Flows

A Simplified Statement of Cash Flows

17,000 32,000 11,000 6,000 66,000

Classify transactions as operating, investing, or financing activities.

The Three Sections of the Statement of Cash Flows

The Three Sections of the Statement of Cash Flows

2. Acquiring or selling securities held for long-term investments

The Three Sections of the Statement of Cash Flows

Format of the Statement of Cash Flows (Indirect Method)

Format of the Statement of Cash Flows (Indirect Method)

Noncash Investing and Financing Activities

$ XXX XXX XXX XXX XXX (XXX) (XXX)

Current Noncash Assets Current Liabilities

$ XXX XXX XXX XXX XXX (XXX) (XXX)

Gains (XXX) Impact on Net Cash Provided by Operating Activities

Gains are subtracted.

Losses are added.

(XXX) (XXX) $ XXX

Includes transactions that involve the acquisition or disposal of noncurrent assets.

Includes transactions involving receipts from or payments to creditors and owners.

Cash Flows: Gross or Net?

Operating Activities: Direct or Indirect Method?

Reports the cash effects of each operating activity

Statement of Cash Flows: Indirect Method

Statement of Cash Flows: Indirect Method

Code each entry on the worksheet as a source or use of cash.

Operating Operating Investing Investing

Operating Operating Operating

Classify each entry as operating, investing, or financing activity.

Prepare a cash reconciliation at the bottom of the statement.

Statement of Cash Flows: Indirect Method

Interpretation of the Statement of Cash Flows

Examine the operating activities section carefully.

Compute free cash flow.

Free Cash Flow

Free Cash Flow

Computing Net Cash Provided by Operating Activities

Add (+) or Deduct (-) to Adjust to a Cash Basis

Similarities and Differences in Handling Data

Direct Method: Gains and Losses

The Direct Method

The Direct Method

The Direct Method

1,000,000 17,000 1,017,000

The Direct Method