chapter 11 financial 3 ed
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Spiceland | Thomas | Herrmann
Financial Accounting
Statementof
Cash Flows
Chapter 11
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Learning Objectives
• Classify cash transactions as operating, investing, or financing activities
• Prepare the operating activities section of the statement of cash flows using the indirect method
• Prepare the investing activities section and the financing activities section of the statement of cash flows
• Perform financial analysis using the statement of cash flows
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Learning Objectives
• Prepare the operating activities section of the statement of cash flows using the direct method
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Formatting the Statement of Cash Flows
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Learning Objective 1
Classify cash transactions as operating, investing, or financing activities
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Cash Flow Activities
• Operating activities: cash receipts and cash payments for transactions relating to revenue and expense activities
• Investing activities: cash transactions involving the purchase and sale of long-term assets and current investments
• Financing activities: inflows and outflows of cash resulting from the external financing of a business
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Illustration 11.2—Operating, Investing, and Financing Activities
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Information Sources for Preparing the Statement of Cash Flows
• Income statement• Balance sheets• Detailed accounting records
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Illustration 11.4—Relationship of theIncome Statement and Balance Sheet to the
Statement of Cash Flows
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Noncash Activities
• Significant investing and financing activities that do not affect cash
• Reported after the cash flow statement or in a note to the financial statements
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Operating Activities—Indirect and Direct Methods
• Differ in presentation format for operating activities• Both methods report investing, financing, and
noncash activities identically
• Begin with net income and then list adjustments to net income in order to arrive at operating cash flows
• Most popular method• Easier and less costly
• Adjust the items on the income statement to directly show the cash inflows and outflows from operations
• Conceptually better method
• More difficult and more costly
Indirect Method Direct Method
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Part B
Preparing the Statement of Cash Flows
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Steps in Preparing the Statement of Cash Flows
Step 1: Calculate net cash flows from operating activities
Step 2: Calculate net cash flows from investing activities
Step 3: Calculate net cash flows from financing activities
Step 4: Combine operating, investing, and financing activities
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Illustration 11.7—Basic Format for the Statement of Cash Flows
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Learning Objective 2
Prepare the operating activities section of the statement of cash flows using the indirect method
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Operating Activities—Indirect Method
• Both net income and cash flows from operating activities represent the same operating activities
• Net income includes both cash and noncash components
• Net cash flows from operating activities removes noncash components
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Illustration 11.16—Summary ofAdjustments to Net Income
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Adjustments for Noncash Effects
• Depreciation expense• Gain or loss on sale of an asset
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Changes in Current Assets and Current Liabilities
• – Increase in a current asset• + Decrease in a current asset• + Increase in a current liability• – Decrease in a current liability
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Learning Objective 3
Prepare the investing activities section and the financing activities section of the statement of cash
flows
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Investing Activities
• Increase or decrease in investments• Increase or decrease in long-term assets
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Financing Activities
• Examine changes in long-term liabilities and stockholders’ equity accounts from the balance sheet
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Illustration 11.19—Complete Statement of Cash Flows
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Learning Objective 4
Perform financial analysis using the statement of cash flows
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Components of Cash Return on Assets
• Cash return on assets measures the operating cash flow generated per dollar of assets
• Cash flow to sales measures the operating cash flows generated for each dollar of sales
• Asset turnover measures the sales revenue generated per dollar of assets
Cash returnon assets
Cash flowto sales
Assetturnover×=
Operating cash flows
Average total assets
Operating cash flows
Net sales
Net sales
Average total assets×=
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Learning Objective 5
Prepare the operating activities section of the statement of cash flows using the direct method
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Operating Activities—Direct Method
• Report the cash inflows and cash outflows directly• Converts each revenue and expense item to its
cash-basis amount• Income statement items that have no cash effect
are not reported
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Illustration 11.27—Operating Activities Using the Direct Method
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End of Chapter 11
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