chapter 5 reporting cash flows. the statement of cash flows identifies the primary activities that...

Chapter 5Chapter 5

Reporting Cash Flows

The Statement of Cash FlowsThe Statement of Cash Flows

• Identifies the primary activities that resulted in cash ________ and ________

• Reports cash flow resulting– __________ Activities– __________ Activities– __________ Activities

• Presented in two formats– ________– ________


• Operating Section– Reports

• Cash Collected from _______________• Cash Paid for ____________, Wages, Utilities, etc.• GAAP requires Cash Paid for __________ be reported with Operating Activities• Depreciation and Amortization are _______________ expense and never appear

on a cash flow statement under the direct format

– Operating cash flows are the cash accounting representation of accrual accounting __________________.

– The Operating Section of the Statement of Cash Flows and the Income Statement are two representation of the same transactions.

– GAAP requires a schedule to reconcile cash flows from operating activities with net income when the direct format is used.

The Direct Format

The Statement of Cash Flows

Mom’s Cookie CompanyStatement of Cash Flows

For the Year Ended December 31, 2004

Operating ActivitiesReceipts: Collections from customers$662,080Payments:

For inventory(471,590)

To employees(70,800)

For rent(24,000)

For utilities(4,500)

For supplies(15,990)

For insurance(3,700)

For advertising(6,500)

For interest(4,150)

For income tax (22,710)

Net cash flow from operating activities 58,140

Exhibit 1Exhibit 1Exhibit 1Exhibit 1

Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Cash Received from Operating Activities

Cash Paid for Operating Activities––Net Cash from (for) Operating Activities==

The Direct Format


• Investing Section– Reports

• Cash Paid to acquire _______________________• Cash Received from the disposal of

_____________________.

– Some transactions affect investing and financing activities without affecting ________ directly.

– Investing and financing activities that do not affect cash have to be reported in the ________.

The Direct Format


Cash Flow from Investing ActivitiesCash Flow from Investing Activities

Cash Received from Investing Activities

Cash Paid for Investing Activities––Net Cash from (for) Investing Activities==

The Direct FormatMom’s Cookie CompanyStatement of Cash Flows



Net cash flow from operating activities $ 58,120

Investing ActivitiesPayments for purchase of equipment (216,000)

Receipts from sale of equipment 340

Net cash flow for investing activities (215,660)


• Financing Section

– Reports• Cash Received from ____________ _________

• Cash Repaid for ________

• Cash Received from investment by owners

• Cash Distributed to owners

– Some transactions affect investing and financing activities without affecting _________ directly.

– Investing and financing activities that do not affect cash have to be reported in the _______________.

The Direct Format




Net cash flow for operating activities $ 58,120Net cash flow for investing activities (215,660)Financing ActivitiesReceipts from sale of common stock 100,000Payment of dividends (10,000)Receipts from borrowing

80,000Repayment of debt

(1,800)Net cash flow from financing activities 168,200Net increase in cash

10,680Cash balance, December 31, 2003 0Cash balance, December 31, 2004 $ 10,680


Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Cash Received from Financing Activities

Cash Paid for Financing Activities––Net Cash from (for) Financing Activities==

The Direct Format

Exhibit 3Exhibit 3Exhibit 3Exhibit 3 Calculation of Operating Cash Flows


• The difference between the direct and indirect formats are in the operating section only.

• Most major corporations use the indirect format

• Operating Section– Is reconciliation of ________________ and cash

– Starts with _________________ and adjust for • Non-cash income statement items

• Increases in ____________________.

• Decreases in ____________________.

• Increases in ________________________.

• Decreases in ________________________.

• Net cash flows from all sections are the same under the direct method and the indirect method.

The Indirect Format



Operating ActivitiesNet income$ 52,990Depreciation expense25,500Increase in accounts receivable(8,570)Increase in merchandise inventory(23,600)Increase in supplies(690)Increase in prepaid rent(2,000)Increase in accounts payable9,610Increase in unearned revenue4,250Increase in interest payable 650

Net cash flow from operating activities 58,140

ContinuedContinuedContinuedContinued

From the income

statement



• The Operation Section

– Starts with net income and then

• Depreciation Expense is added because it is an expense that does not require a cash payment.

• _______________ Increases in current assets

• ADD Decreases in current assets

• _______________ Increases in current liabilities

• SUBTRACT Decreases in current liabilities

The Indirect Format

Net income+ Depreciation and Amortization Expense– Increases in Current Asset Accounts+ Decreases in Current Asset Accounts+ Increases in Current Liability Accounts– Decreases in Current Liability Accounts= Cash Flow from Operating Activities

Summary of Adjustments for Summary of Adjustments for the Indirect Formatthe Indirect Format

Summary of Adjustments for Summary of Adjustments for the Indirect Formatthe Indirect Format

Summary of Adjustments for the Summary of Adjustments for the Indirect FormatIndirect Format

Summary of Adjustments for the Summary of Adjustments for the Indirect FormatIndirect Format

Current Assets Current Liabilities

Add To Net Income

Add To Net Income

Increases in

Decreases in

Subtract from Net Income

Subtract from Net Income

Cash Flow Patterns and the Cash Flow Patterns and the Financial Health of a CompanyFinancial Health of a Company


Operating cash flows are positive

Investing cash flows are negative

Financing cash flows are positive

These normally are a sign of a ___________ and__________ company.



Operating cash flows are negative

Investing cash flows are positive

Financing cash flows are positive

The company is facing __________ financial ____________. It is selling assets and using financing activities to meet current cash needs.



Operating cash flows are positive

Investing cash flows are positive or negative

Financing cash flows are negative

The company is ___________ but may not have a lot of good ________ opportunities. It is using operating cash to pay off debt and pay stockholders.

chapter 5 reporting cash flows. the statement of cash flows identifies the primary activities that...

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