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CHAPTER 13STATEMENT OF CASH FLOWS

CHAPTER 13STATEMENT OF CASH FLOWS

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

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STUDY OBJECTIVE 1USEFULNESS OF CASH FLOW STATEMENT

STUDY OBJECTIVE 1USEFULNESS OF CASH FLOW STATEMENT

The cash flow statement reports CASH RECEIPTS and CASH PAYMENTS

from OPERATING, FINANCING, and INVESTING activities.

The cash flow statement helps users assess:

1. Ability to generate future cash flows2. Ability to pay dividends and meet obligations3. Why net income is different from operating cash flows4. Cash investing and financing transactions

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Questions the Statement of Cash Flow Answers

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• 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

STUDY OBJECTIVE 2OPERATING CASH FLOWS

STUDY OBJECTIVE 2OPERATING CASH FLOWS

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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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• 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

STUDY OBJECTIVE 2INVESTING CASH FLOWS

STUDY OBJECTIVE 2INVESTING CASH FLOWS

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• 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

STUDY OBJECTIVE 2FINANCING CASH FLOWS

STUDY OBJECTIVE 2FINANCING CASH FLOWS

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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.

SIGNIFICANT NON-CASH ACTIVITIESSIGNIFICANT NON-CASH ACTIVITIES

The following activities are reported in a separate schedule (bottom of cash flow statement) or a note to the F/S.

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Format of the Statement of Cash Flows

Three activities:

– operating

– investing

– financing

PLUS

– noncash investing and financing activities

Body of Statement

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Why Report the Causes of Changes in Cash?

Because investors, creditors, and other interested parties want to know what is happening to a company’s 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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COMPANY NAMEStatement of Cash Flows

Period Covered

Cash flows from operating activities (List of individual items) XX Net cash provided (used) by operating activities XXXCash flows from investing activities (List of individual inflows and outflows) XX Net cash provided (used) by investing activities XXXCash flows from financing activities (List of individual inflows and outflows) XX Net cash provided (used) by financing activities XXXNet increase (decrease) in cash XXXCash at beginning of period XXXCash at end of period XXX

Noncash investing and financing activities (List of individual noncash transactions) XXX

CASH FLOW STATEMENT FORMAT

CASH FLOW STATEMENT FORMAT

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Needed to prepare cash flow statement: Comparative balance sheet

Current income statement

Additional information.

INFORMATION REQUIREDTO PREPARE CASH FLOW STATEMENT

INFORMATION REQUIREDTO PREPARE CASH FLOW STATEMENT

The SCF deals with cash receipts andpayments, so the accrual concept is

not used in the preparation of the SCF.

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STEPS IN PREPARING CASH FLOW STATEMENT

STEPS IN PREPARING CASH FLOW STATEMENT

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STUDY OBJECTIVE 3

INDIRECT METHODSTUDY OBJECTIVE 3

INDIRECT METHOD

Cash flow from operating activities X

Cash flow from investing activities (X)

Cash flow from financing activities X

Net change in cash X

Beginning cash & equivalents X

Ending cash & equivalents xx

The operating sectionreconciles

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 METHODINDIRECT METHOD

2006 2005

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INDIRECT METHODINDIRECT METHOD

For the year ended Dec 31, 2006

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INDIRECT METHODINDIRECT METHOD

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 METHODINDIRECT METHODNet 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) 27,000

Net cash provided by operating activities 172,000

Purchase of building (120,000)

Purchase of equipment (25,000)

Sale of equipment 4,000

Net cash used by investing activities (141,000)

Issuance of common stock 20,000

Payment of dividends (29,000)

Net cash used by financing activities (9,000)

Net increase in cash 22,000

Beginning cash 33,000

Ending cash 55,000