CHAPTER 13
13
CHAPTER
STATEMENT OF
OF CASH
CASH FLOWS
FLOWS
STATEMENT
STUDY OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate the usefulness of the statement of cash flows
2. Distinguish between operating, investing, and
financing activities
3. Prepare a statement of cash flows using the indirect
method
STUDYOBJECTIVE
OBJECTIVE11
STUDY
USEFULNESSOF
OFCASH
CASHFLOW
FLOWSTATEMENT
STATEMENT
USEFULNESS
The cash flow statement reports
CASH RECEIPTS and CASH PAYMENTS
from
OPERATING, FINANCING, and INVESTING activities.
The cash flow statement helps users assess:
1.
2.
3.
4.
Ability to generate future cash flows
Ability to pay dividends and meet obligations
Why net income is different from operating cash flows
Cash investing and financing transactions
2
Questions the Statement of
Cash Flow Answers
STUDYOBJECTIVE
OBJECTIVE22
STUDY
OPERATINGCASH
CASHFLOWS
FLOWS
OPERATING
Cash inflows:
From sale of goods or services
From return on loans (interest received) and on
equity securities (dividends received)
Cash outflows:
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
4
Operating Activities - ALERT
Some cash flows relating to investing or
financing activities are classified as
operating activities. For example...
Receipts of investment revenue
(interest and dividends) and
Payments of interest to lenders are
classified as operating activities
because these items are reported in
the income statement.
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STUDYOBJECTIVE
OBJECTIVE22
STUDY
INVESTINGCASH
CASHFLOWS
FLOWS
INVESTING
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
STUDYOBJECTIVE
OBJECTIVE22
STUDY
FINANCINGCASH
CASHFLOWS
FLOWS
FINANCING
Cash inflows:
From sale of equity securities (company's own stock)
From issuance of debt (bonds and notes)
Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital stock
SIGNIFICANTNON-CASH
NON-CASHACTIVITIES
ACTIVITIES
SIGNIFICANT
The following activities are reported in a separate schedule
(bottom of cash flow statement) or a note to the F/S.
1. Issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Format of the Statement of Cash
Flows
Three activities:
operating
investing
financing
Body of
Statement
PLUS
noncash investing and financing activities
Why Report the Causes of Changes
in Cash?
Because investors, creditors, and
other interested parties want to
know what is happening to a
companys most liquid asset:
CASH
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Statement of Cash Flows Helps
Users Evaluate
1. The entity's ability to generate future cash flows.
2. The entity's ability to pay dividends and meet
obligations.
3. The reasons for the difference between net income
and net cash provided (used) by operating activities.
4. The investing and financing transactions during the
period.
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Statement of Cash Flows Helps Answer
the Following Questions
How did cash increase when there was a net
loss for the period?
How were the proceeds of the bond issue used?
How was the expansion in the plant and
equipment financed?
Why were dividends not increased?
How was the retirement of debt accomplished?
How much money was borrowed during the
year?
Is cash flow greater or less than net income?
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CASHFLOW
FLOW
CASH
STATEMENTFORMAT
FORMAT
STATEMENT
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items)
Net cash provided (used) by operating activities
Cash flows from investing activities
(List of individual inflows and outflows)
Net cash provided (used) by investing activities
Cash flows from financing activities
(List of individual inflows and outflows)
Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Noncash investing and financing activities
(List of individual noncash transactions)
XX
XXX
XX
XXX
XX
XXX
XXX
XXX
XXX
XXX
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INFORMATIONREQUIRED
REQUIRED
INFORMATION
TOPREPARE
PREPARECASH
CASHFLOW
FLOWSTATEMENT
STATEMENT
TO
Needed to prepare cash flow statement:
Comparative balance sheet
Current income statement
Additional information.
The SCF deals with cash receipts and
payments, so the accrual concept is
not used in the preparation of the SCF.
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STEPSIN
INPREPARING
PREPARING
STEPS
CASHFLOW
FLOWSTATEMENT
STATEMENT
CASH
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STUDYOBJECTIVE
OBJECTIVE33
STUDY
INDIRECT METHOD
METHOD
INDIRECT
Cash flow from operating activities
Cash flow from investing activities
(X)
Cash flow from financing activities
Net change in cash
Beginning cash & equivalents
Ending cash & equivalents
xx
The operating section
reconciles
NET INCOME
with
CASH FLOW
FROM OPERATIONS
The investing and financing sections are the same
regardless of which method is used.
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INDIRECT METHOD
METHOD
INDIRECT
2006
2005
17
INDIRECT METHOD
METHOD
INDIRECT
For the year ended Dec 31, 2006
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INDIRECT METHOD
METHOD
INDIRECT
Using the information provided, the
cash flow statement will account for
every change on the comparative balance sheet.
The objective:
to determine net cash
flow during the period,
which should match the
change in cash during the period
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INDIRECT METHOD
METHOD
INDIRECT
Net income
145,000
Adjustments to reconcile net income to cash flow from operations
Depreciation exp
9,000
Loss on sale of equipment
3,000
Decrease in A/R
10,000
Increase in inventory
(5,000)
Increase in prepaid expenses
(4,000)
Increase in accounts payable
16,000
Decrease in income taxes payable
(2,000)
Net cash provided by operating activities
Purchase of building
Purchase of equipment
Sale of equipment
172,000
(120,000)
(25,000)
4,000
Net cash used by investing activities
Issuance of common stock
Payment of dividends
Net cash used by financing activities
27,000
(141,000)
20,000
(29,000)
(9,000)
Net increase in cash
22,000
Beginning cash
33,000
Ending cash
55,000
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