CH 13

WILEY
IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
13-1 Westmont College
PREVIEW OF CHAPTER 13
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
13-2
CHAPTER
13 Statement of Cash Flows

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate the usefulness of the statement of cash flows.
2. Distinguish among operating, investing, and financing activities.
3. Prepare a statement of cash flows using the indirect method.
4. Analyze the statement of cash flows.
13-3
Statement of Cash Flows: Usefulness and
Format
Learning Objective 1
Indicate the usefulness of
Provides information to help assess: the statement of cash flows.
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet obligations.
3. Reasons for difference between net income and net cash

provided (used) by operating activities.
4. Cash investing and financing transactions during the

period.
13-4 LO 1
Statement of Cash Flows
Question
Which of the following is incorrect about the statement of
cash flows?
a. It is a fourth basic financial statement.
b. It provides information about cash receipts and cash

payments of an entity during a period.
c. It reconciles the ending Cash account balance to the

balance per the bank statement.
d. It provides information about the operating, investing,

and financing activities of the business.
13-5 LO 1
Classification of Cash Flows Distinguish among
operating, investing, and
financing activities.
Operating Investing Financing

Activities Activities Activities
Income Changes in Changes in

Statement Items Investments and Non-current
Non-current Liabilities and
Assets Equity
13-6 LO 2
Classification of Cash Flows
Operating activities—Income statement items

Cash inflows: Illustration 13-1
Typical receipt and payment
classifications
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.
13-7 LO 2
Investing activities—Changes in investments and non-

current assets Illustration 13-1
Cash inflows: classifications
From sale of property, plant, and equipment.

From sale of investments in 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 investments in debt or equity securities of
other entities.
To make loans to other entities.
13-8 LO 2
Financing activities—Changes in non-current liabilities

and equity Illustration 13-1
Cash inflows: classifications
From sale of ordinary shares.

From issuance of long-debt (bonds and notes).
Cash outflows:
To shareholders as dividends.
To redeem long-term debt or reacquire
ordinary shares (treasury shares).
13-9 LO 2
Significant Non-Cash Activities
1. Direct issuance of ordinary shares to purchase assets.

2. Conversion of bonds into ordinary shares.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report non-cash activities in either a

 separate schedule (bottom of the statement) or
 separate note to the financial statements.
13-10 LO 2
Accounting Across the Organization
Net What?
Net income is not the same as net cash provided by operating
activities. Below are some results from recent annual reports
(currencies in millions). Note the wide disparity among these
companies, all of which engage in retail merchandising.
13-11 LO 2
Format of the Statement of Cash Flows
Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.
13-12 LO 2
Illustration 13-3
Format of statement of cash flows
13-13 LO 2
> DO IT!
Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 HK$50 par value ordinary
Financing
shares for HK$8,000,000 cash.
2. Borrowed HK$2,000,000 from Castle Bank,
Financing
signing a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for
Investing
HK$1,700,000 cash.
4. Paid employees HK$120,000 for salaries and Operating
wages.
5. Collected HK$200,000 cash for services Operating
performed.
13-14 LO 2
Preparing the Statement of Cash Flows
Three sources of information:

1. Comparative statements of financial position
2. Current income statement
3. Additional information
13-15 LO 2
Three Major Steps:
Illustration 13-4
Three major steps in preparing
the statement of cash flows
13-16 LO 2
Three Major Steps:
Illustration 13-4
13-17 LO 2
Three Major Steps:
Illustration 13-4
13-18 LO 2
Indirect And Direct Methods
Companies favor the indirect method for two reasons:

1. Easier and less costly to prepare.
2. Focuses on differences between net income and net cash

flow from operating activities.
13-19 LO 2
Question
The statement of cash flows classifies cash receipts and
cash payments by these activities:
a. operating and non-operating.
b. investing, financing, and operating.
c. financing, operating, and non-operating.
d. investing, financing, and non-operating.
13-20 LO 2
Statement of Cash Flows: Prepare a statement of cash
flows using the indirect
—Indirect Method method.
Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
13-21 LO 3
Illustration 13-5
13-22 LO 3
Change in
2017 2016 Account Balance
Illustration 13-5
Additional information for 2017:
1. Depreciation expense was comprised of €6,000 for building and €3,000 for
equipment.
2. The company sold equipment with a book value of €7,000 (cost €8,000, less
accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment costing €25,000
was also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-23 LO 3
Step 1: Operating Activities
DETERMINE NET CASH PROVIDED/USED BY

OPERATING ACTIVITIES BY CONVERTING NET
INCOME FROM ACCRUAL BASIS TO CASH BASIS.
Common adjustments to Net Income (Loss):

 Add back non-cash expenses (depreciation, amortization,
or depletion expense).
 Deduct gains and add losses.
 Analyze changes to non-cash current asset and current

liability accounts.
13-24 LO 3
Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the issuance of ordinary shares.
c. Payment of cash dividends to the company’s

shareholders.
d. None of the above.
13-25 LO 3
Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 13-7
Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities € 154,000
13-26 LO 3
LOSS ON DISPOSAL OF PLANT ASSETS

Companies should report cash received from the sale
(disposal) of plant assets in the investing activities section.
Because of this,
 any loss on sale is added to net income in the

operating section.
 any gain on sale is deducted from net income in the

operating section.
13-27 LO 3
LOSS ON DISPOSAL OF PLANT ASSETS

Illustration 13-8

Loss on disposal of plant assets 3,000
13-28 LO 3
CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 13-9
Accounts Receivable
1/1/017 Balance 30,000 Receipts from customers 517,000

Sales revenue 507,000
12/31/17 Balance 20,000
Company adds to net income the amount of the decrease in

accounts receivable.
13-29 LO 3

ACCOUNTS
Illustration 13-10

Decrease in accounts receivable 10,000
13-30 LO 3

ACCOUNTS
When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.
Inventory
1/1/17 Balance 10,000 Cost of goods sold 150,000

Purchases 155,000
12/31/17 Balance 15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
13-31 LO 3

ACCOUNTS
Illustration 13-10
Increase in inventory (5,000)
13-32 LO 3

ACCOUNTS
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual basis.
The company deducts the increase from net income to arrive at
net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher

than the expenses paid.
13-33 LO 3

ACCOUNTS
Illustration 13-10

Increase in prepaid expenses (4,000)
13-34 LO 3
CHANGES TO NON-CASH CURRENT LIABILITY

ACCOUNTS
When Accounts Payable increases, the company received more in
goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Taxes Payable decreases, the income tax expense

reported on the income statement was less than the amount of
taxes paid during the period. The decrease is subtracted from net
income to determine net cash provided by operating activities.
13-35 LO 3
CHANGES TO NON-CASH CURRENT LIABILITY

ACCOUNTS Illustration 13-11

Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
13-36
LO 3
Summary of Conversion to Net Cash Provided by

Operating Activities—Indirect Method
Illustration 13-12
Adjustments required to convert net income to net cash provided by operating activities
13-37 LO 3
Ethics Insight
Cash Flow Isn’t Always What It Seems
Some managers have taken actions that artificially increase cash flow
from operating activities. They do this by moving negative amounts out of
the operating section and into the investing or financing section. For
example, WorldCom, Inc. (USA) disclosed that it had improperly
capitalized expenses: It had moved $3.8 billion of cash outflows from the
“Cash from operating activities” section of the statement of cash flows to
the “Investing activities” section, thereby greatly enhancing cash provided
by operating activities. Similarly, Dynegy, Inc. (USA) restated its statement
of cash flows because it had improperly included in operating activities,
instead of in financing activities, $300 million from natural gas trading. The
restatement resulted in a drop of 37% in cash flow from operating
activities.
Source: Henny Sender, “Sadly, These Days Even Cash Flow Isn’t Always What It
Seems to Be,” Wall Street Journal (May 8, 2002).
13-38 LO 3
Step 2: Investing and Financing Activities
Company purchased land of €110,000 by issuing long-term

bonds. This is a significant non-cash investing and financing
activity that merits disclosure in a separate schedule.
Land
1/1/17 Balance 20,000
Issued bonds 110,000
12/31/17 Balance 130,000
Bonds Payable
1/1/17 Balance 20,000
For land 110,000
12/31/17 Balance 130,000
13-39 LO 3
Partial statement Illustration 13-14
Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000
Disclosure: Issuance of bonds to purchase land € 110,000
13-40 LO 3
From the additional information, the company acquired an office

building for €120,000 cash. This is a cash outflow reported in
the investing section.
Building
1/1/17 Balance 40,000

Office building 120,000
12/31/17 Balance 160,000
13-41 LO 3
Partial statement Illustration 13-14

13-42 LO 3
The additional information explains that the equipment increase

resulted from two transactions: (1) a purchase of equipment of
€25,000, and (2) the sale for €4,000 of equipment costing €8,000.
Illustration 13-13
Equipment
1/1/17 Balance 10,000 Cost of equipment sold 8,000

Purchase 25,000
12/31/17 Balance 27,000
Cash 4,000
Journal
Accumulated Depreciation 1,000
Entry
Loss on Disposal of Plant Assets 3,000
Equipment 8,000
13-43 LO 3
Illustration 13-14
Statement of Cash flows from operating activities:
Cash Flows Adjustments to reconcile net income to net cash
Indirect Increase in accounts payable 16,000
Method Decrease in income taxes payable (2,000)
13-44
The increase in ordinary shares resulted from the issuance of
new shares.
Share Capital - Ordinary
1/1/17 Balance 50,000

Shares sold 20,000
12/31/17 Balance 70,000
13-45 LO 3
Illustration 13-14
Partial statement
13-46 LO 3
Retained earnings increased €116,000 during the year. This
increase can be explained by two factors: (1) Net income of
€145,000 increased retained earnings, and (2) Dividends of
€29,000 decreased retained earnings.
Retained Earnings
1/1/17 Balance 48,000

Dividends 29,000 Net income 145,000
12/31/17 Balance 164,000
13-47 LO 3
Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding ordinary
shares.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
13-48 LO 3
Illustration 13-14
Statement of Cash flows from operating activities:
Cash Flows Adjustments to reconcile net income to net cash
Indirect Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
Method
13-49
LO 3
ANATOMY OF A FRAUD
For more than a decade, the top executives at the Italian dairy products company
Parmalat engaged in multiple frauds that overstated cash and other assets by more
than $1 billion while understating liabilities by between $8 and $12 billion. Much of the
fraud involved creating fictitious sources and uses of cash. Some of these activities
incorporated sophisticated financial transactions with subsidiaries created with the
help of large international financial institutions. However, much of the fraud employed
very basic, even sloppy, forgery of documents. For example, when outside auditors
requested confirmation of bank accounts (such as a fake $4.8 billion account in the
Cayman Islands), documents were created on scanners, with signatures that were cut
and pasted from other documents. These were then passed through a fax machine
numerous times to make them look real (if difficult to read). Similarly, fictitious bills
were created in order to divert funds to other businesses owned by the Tanzi family
(who controlled Parmalat).
Total take: Billions of dollars
The Missing Control

Independent internal verification. Internal auditors at the company should have
independently verified bank accounts and major transfers of cash to outside
companies that were controlled by the Tanzi family.
13-50 LO 3
Step 3: Net Change in Cash Illustration 13-5
COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH

FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.
13-51
LO 3
Using Cash Flow to Evaluate a Company
Analyze the statement of
Free cash flow describes the cash cash flows.
remaining from operations after adjustment
for capital expenditures and dividends.
Illustration 13-15
Free cash flow
13-52 LO 4
Free Cash Flow Illustration 13-16
Anheuser-Busch InBev cash
flow information ($ in millions)
Required:
Calculate
free cash
flow.
Cash provided by operating activities $17,451

Less: Expenditures on property and equipment 3,869
Dividends paid 6,253
Free cash flow $7,329
Illustration 13-17
13-53 Calculation of Anheuser-Busch InBev’s free cash flow ($ in millions) LO 4
APPENDIX 13A Consolidated Financial Statements
1. Compute net cash provided by Prepare a statement of cash
flows using the direct method.
operating activities by adjusting
each item in the income statement from the accrual
basis to the cash basis.
2. Companies report only major classes of operating

cash receipts and cash payments.
3. For these major classes, the difference between cash

receipts and cash payments is the net cash provided
by operating activities.
13-54 LO 5
Illustration 13A-2
13-55 Major classes of cash receipts and payments LO 5
Direct Method
Illustration 13A-1
13-56 LO 5
Illustration 13A-1
13-57 LO 5
Change in
2017 2016 Account Balance
Additional information for 2017: Illustration 13A-1

1. Depreciation expense was comprised of €6,000 for building and €3,000 for
equipment.
2. The company sold equipment with a book value of €7,000 (cost €8,000, less
accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment costing €25,000
was also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-58 LO 5
CASH RECEIPTS FROM CUSTOMERS

For Computer Services, accounts receivable decreased
€10,000. Illustration 13A-4
Analysis of accounts receivable
Accounts Receivable
1/1/017 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000
12/31/17 Balance 20,000
Illustration 13A-5
Formula to compute cash receipts from customers—direct method
13-59 LO 5
CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Inventory
1/1/17 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
12/31/17 Balance 15,000
Accounts Payable
Payment to suppliers 139,000 1/1/17 Balance 12,000
Purchases 155,000
12/31/17 Balance 28,000

Illustration 13A-8
13-60 Analysis of accounts payable LO 5
CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Illustration 13A-9
Formula to compute cash payments to suppliers—direct method
13-61 LO 5
CASH PAYMENTS FOR OPERATING EXPENSES

Cash payments for operating expenses were €115,000.
Illustration 13A-10
Computation of cash payments for operating expenses
Illustration 13A-11
Formula to compute cash payments for operating expenses—direct method
13-62 LO 5
CASH PAYMENTS FOR INTEREST

In 2017, Computer Services’ had interest expense of €42,000.
Interest Payable
Cash paid for interest 42,000 1/1/17 Balance 0
Interest expense 42,000
12/31/17 Balance 0
13-63 LO 5
CASH PAYMENTS FOR INCOME TAXES

Cash payments for income taxes were €49,000.
Income Tax Payable

Cash paid for taxes 49,000 1/1/17 Balance 8,000
Income tax expense 47,000
12/31/17 Balance 6,000
Illustration 13A-13
Formula to compute cash payments for income taxes—direct method
13-64 LO 5
Illustration 13A-14
Operating activities section of the statement of cash flows
13-65 LO 5
Increase in Equipment. (1) Equipment purchased for €25,000,

and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.
Illustration 13A-15
Analysis of equipment
Equipment
1/1/17 Balance 10,000 Cost of equipment sold 8,000
Purchases 25,000
12/31/17 Balance 27,000
Accumulated Depreciation
Equipment sold 1,000 1/1/17 Balance 1,000
12/31/17 Balance 3,000
13-66 LO 5
Increase in Equipment. (1) Equipment purchased for €25,000,

and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.
Cash 4,000
Accumulated Depreciation—Equipment 1,000
Loss on Disposal of Plant Assets 3,000
Equipment 8,000
13-67 LO 5
Increase in Land. Land increased Significant non-cash

€110,000. The company purchased investing and financing
land of €110,000 by issuing bonds. transaction.
Increase in Building. Acquired Investing transaction.

building for €120,000 cash.
Increase in Bonds Payable. Bonds

Significant non-cash
Payable increased €110,000. The
investing and financing
company acquired land by exchanging
transaction.
bonds for land.
13-68 LO 5
Increase in Share Capital—Ordinary.

Financing
Increase in Share Capital—Ordinary of
transaction.
€20,000. Increase resulted from the
issuance of new shares.
Increase in Retained Earnings. The

€116,000 net increase in Retained Financing
transaction
Earnings resulted from net income of
(cash dividend)
€145,000 and the declaration and
payment of a cash dividend of €29,000.
13-69 LO 5
Illustration 13A-16
Statement of cash flows,
2017—direct method
13-70 LO 5
Step 3: Net Change in Cash Illustration 13A-1
COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH

FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.
13-71
LO 5
Using a Worksheet to Prepare the
APPENDIX 13B
Statement of Cash Flows—Indirect Method
Explain how to use a
worksheet to prepare the
statement of cash flows
using the indirect method.
Illustration 13B-1
13-72 Format of worksheet LO 6
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the

statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that

explain the changes in the statement of financial position
accounts other than cash and their effects on the statement of
cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
13-73 LO 6
Preparing a
Worksheet
Illustration 13B-3
Completed worksheet—
indirect method
13-74 LO 6
Statement of Cash Flows—
APPENDIX 13C
T-Account Approach
The change in cash is equal to the change Use the T-account approach
to prepare a statement of
in all of the other statement of financial cash flows.
position accounts.
If we analyze the changes in all of the non-cash statement of
financial position accounts, we will explain the change in the
Cash account.
13-75 LO 7
Illustration 13C-1
T-account approach
13-76
A Look at U.S. GAAP Learning Objective 8
Compare the accounting for
statement of cash flows under
IFRS and U.S. GAAP.
Key Points
Similarities
 Companies preparing financial statements under both GAAP and IFRS must
prepare a statement of cash flows as an integral part of the financial
statements.
 Both IFRS and GAAP require that the statement of cash flows should have
three major sections— operating, investing, and financing—along with
changes in cash and cash equivalents.
 Similar to IFRS, the statement of cash flows can be prepared using either the
indirect or direct method under GAAP. Companies choose for the most part
to use the indirect method for reporting net cash flows from operating
activities.
13-77 LO 8
A Look at U.S. GAAP
Key Points
Differences
 The definition of cash equivalents used in GAAP is similar to that used in
IFRS. A major difference 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 in the statement of cash flows and are reported as liabilities on the
statement of financial position.
 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 on the face of the statement of cash
flows.
13-78 LO 8
A Look at U.S. GAAP
Key Points
Differences
 One area where there can be substantial differences between IFRS and
GAAP relates to the classification of interest, dividends, and taxes. The
following table indicates the differences between the two approaches.
13-79 LO 8
A Look at U.S. GAAP
Key Points
Differences
 Under IFRS, some companies present the operating section in a single line
item, with a full reconciliation provided in the notes to the financial
statements. This presentation is not seen under GAAP.
 Similar to IFRS, under GAAP companies must disclose the amount of taxes
and interest paid. Under GAAP, companies disclose this in the notes to the
financial statements. Under IFRS, some companies disclose this information
in the notes, but others provide individual line items on the face of the
statement. In order to provide this information on the face of the statement,
companies first add back the amount of interest expense and tax expense
(similar to adding back depreciation expense) and then further down the
statement they subtract the cash amount paid for interest and taxes. This
treatment can be seen in the statement of cash flows provided for Petra
Foods in Appendix C.
13-80 LO 8
A Look at U.S. GAAP
Looking to the Future
Presently, the FASB and the IASB are involved in a joint project on the
presentation and organization of information in the financial statements. One
interesting approach, revealed in a published proposal from that project, is
that in the future the income statement and statement of financial position
(balance sheet) would adopt headings similar to those of the statement of
cash flows. That is, the income statement and statement of financial position
would be broken into operating, investing, and financing sections. With
respect to the cash flow statement specifically, the notion of cash equivalents
will probably not be retained. That is, cash equivalents will not be combined
with cash but instead will be reported as a form of highly liquid, low-risk
investment. The definition of cash in the existing literature would be retained,
and the statement of cash flows would present information on changes in
cash only. In addition, the FASB favors presentation of operating cash flows
using the direct method only. However, the majority of IASB members express
a preference for not requiring use of the direct method of reporting operating
cash flows.
13-81 LO 8
A Look atAU.S.
LookGAAP
at IFRS
GAAP Self-Test Questions
Under GAAP interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
13-82 LO 8
A Look atAU.S.
LookGAAP
at IFRS
IFRS requires that non-cash items:
a) be reported in the section to which they relate, that is, a

non-cash investing activity would be reported in the
investing section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
13-83 LO 8
A Look atAU.S.
LookGAAP
at IFRS
In the future, it appears likely that:
a) the income statement and statement of financial position
(balance sheet) will have headings of operating,
investing, and financing, much like the statement of cash
flows.
b) cash and cash equivalents will be combined in a single
line item.
c) the IASB will not allow companies to use the direct
approach to the statement of cash flows.
d) None of the above.
13-84 LO 8
Copyright
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13-85

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WILEY

13 Statement of Cash Flows

1. Indicate the usefulness of the statement of cash flows.

2. Distinguish among operating, investing, and financing activities.

3. Prepare a statement of cash flows using the indirect method.

4. Analyze the statement of cash flows.

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and meet obligations.

3. Reasons for difference between net income and net cash

4. Cash investing and financing transactions during the

a. It is a fourth basic financial statement.

b. It provides information about cash receipts and cash

c. It reconciles the ending Cash account balance to the

d. It provides information about the operating, investing,

Operating Investing Financing

Income Changes in Changes in

Operating activities—Income statement items

Investing activities—Changes in investments and non-

From sale of property, plant, and equipment.

Financing activities—Changes in non-current liabilities

From sale of ordinary shares.

1. Direct issuance of ordinary shares to purchase assets.

Companies report non-cash activities in either a

 separate note to the financial statements.

Three sources of information:

2. Current income statement

Three Major Steps:

Three Major Steps:

Three Major Steps:

Companies favor the indirect method for two reasons:

2. Focuses on differences between net income and net cash

a. operating and non-operating.

b. investing, financing, and operating.

c. financing, operating, and non-operating.

d. investing, financing, and non-operating.

DETERMINE NET CASH PROVIDED/USED BY

Common adjustments to Net Income (Loss):

 Deduct gains and add losses.

 Analyze changes to non-cash current asset and current

a. Payment of cash to lenders for interest.

b. Receipt of cash from the issuance of ordinary shares.

c. Payment of cash dividends to the company’s

d. None of the above.

Cash flows from operating activities:

LOSS ON DISPOSAL OF PLANT ASSETS

 any loss on sale is added to net income in the

 any gain on sale is deducted from net income in the

LOSS ON DISPOSAL OF PLANT ASSETS

Cash flows from operating activities:

CHANGES TO NON-CASH CURRENT ASSET

1/1/017 Balance 30,000 Receipts from customers 517,000

12/31/17 Balance 20,000

Company adds to net income the amount of the decrease in

CHANGES TO NON-CASH CURRENT ASSET

Cash flows from operating activities:

CHANGES TO NON-CASH CURRENT ASSET

1/1/17 Balance 10,000 Cost of goods sold 150,000

12/31/17 Balance 15,000

CHANGES TO NON-CASH CURRENT ASSET

CHANGES TO NON-CASH CURRENT ASSET

If prepaid expenses decrease, reported expenses are higher

CHANGES TO NON-CASH CURRENT ASSET

Cash flows from operating activities: