Reporting the Statement of

Cash Flows
Chapter 16

Wild and Shaw

Fundamental Accounting Principles
24th Edition

Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 16 Learning Objectives
CONCEPTUAL
C1 Distinguish between operating, investing, and financing activities, and describe how
noncash investing and financing activities are disclosed.

ANALYTICAL
A1 Analyze the statement of cash flows and apply the cash flow on total assets ratio.

PROCEDURAL
P1 Prepare a statement of cash flows.
P2 Compute cash flows from operating activities using the indirect method.
P3 Determine cash flows from both investing and financing activities.
P4 Appendix 16A—Illustrate use of a spreadsheet to prepare a statement of cash flows.
P5 Appendix 16B—Compute cash flows from operating activities using the direct method.

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Purpose of the Statement
of Cash Flows
How does a
company What explains
receive its the change in
cash? cash balance?

Why do Where does a

income and company
cash flows spend its
differ? cash?

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 Importance of Cash Flows
Cash flows helps:
• users decide if a company has cash to pay its
debts.
• users evaluate company’s ability to pursue
unexpected opportunities.
• managers plan day-to-day operations.
• managers make long-term investment
decisions.

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Measurement of Cash Flows
Cash equivalents are…
 short-term, highly liquid
investments.
 readily convertible into cash.
 sufficiently close to maturity
so that market value is
unaffected by interest rate
changes.

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 Learning Objective C1

Distinguish between operating,

investing, and financing
activities, and describe how
noncash investing and
financing activities are
disclosed.
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 Classification of Cash Flows
The Statement of Cash Flows includes the
following three sections:
– Operating Activities
– Investing Activities
– Financing Activities

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education  7
and describe how noncash investing and financing activities are disclosed.
 Operating Activities Exhibit
16.1

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education  8
and describe how noncash investing and financing activities are disclosed.
 Investing Activities
Exhibit
16.2

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education  9
and describe how noncash investing and financing activities are disclosed.
 Financing Activities
Exhibit
16.3

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 10
and describe how noncash investing and financing activities are disclosed.
 Noncash Investing and Financing
Examples of Noncash Investing and Financing Activities

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 11
and describe how noncash investing and financing activities are disclosed.
 Learning Objective P1

Prepare a statement of cash

flows.

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 Format of the Statement Exhibit
of Cash Flows 16.6

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Learning Objective P1: Prepare a statement of cash flows.
 Preparing the Statement
of Cash Flows Exhibit
16.7

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Learning Objective P1: Prepare a statement of cash flows.
 Analyzing the Cash Account
The Cash account is a natural place to look for
information about cash flows from operating, investing,
and financing activities.

Exhibit
16.8

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Learning Objective P1: Prepare a statement of cash flows.
 Analyzing Noncash Account
A second approach to preparing the statement
of cash flows is analyzing noncash accounts.

Exhibit
16.9

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Learning Objective P1: Prepare a statement of cash flows.
 Information to Prepare the
Statement
Information to prepare the statement of cash
flows comes from three sources:

Comparative Current
Balance Sheets Income Statement

Additional
Information

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Learning Objective P1: Prepare a statement of cash flows.
 Cash Flows from Operating
Indirect and Direct Methods of Reporting
Direct
Method

Indirect
Method

The net cash amount provided by operating activities is

identical under both the direct and indirect methods.
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Learning Objective P1: Prepare a statement of cash flows.
 Learning Objective P2

Compute cash flows from

operating activities using the
indirect method.

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Cash Flows: Indirect Method Illustration
Exhibit
16.10

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Applying the Indirect Method
Exhibit
16.11

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Income Statement
Items Not Affecting Cash
• Expenses and losses with no cash outflows are
added back to net income.
• Revenues and gains with no cash inflows are
subtracted from net income.

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Changes in
Current Assets and Current Liabilities: Table
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Use this table when adjusting Net Income

to Operating Cash Flows.
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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Changes in
Current Assets and Current Liabilities
• Decreases in current assets are added to net income.
• Increases in current assets are subtracted from net
income.
• Increases in current liabilities are added to net income.
• Decreases in current liabilities are subtracted from net
income.

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Summary of Adjustments
for Indirect Method: Part 2
Common adjustments to net income when computing
net cash provided or used by operating activities
under the indirect method:
Exhibit
16.12

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.