prepared by debby bloom-hill cma, cfm. slide 13-2 chapter 13 statement of cash flows

Prepared by Debby Bloom-Hill CMA, CFM

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CHAPTER 13CHAPTER 13

Statement of Cash Flows Statement of Cash Flows

Learning objective 1: Explain the need for the statement of cash flows

Slide 13-3

Need for a Statement of Cash Flows


Stakeholders want to know how a company generates and spends cash

Can the company Generate enough cash to pay its

wages and bills, including debt payments

Generate cash in order to earn a reasonable return and pay dividends

Generate enough cash to avoid bankruptcy


Slide 13-4



Cash flow is not the same as net income Under GAAP, income is calculated

using the accrual method The income statement does little to

inform managers and other company stakeholders of the sources and uses of cash


Slide 13-5



For the purposes of the cash flow statement, cash includes both cash and cash equivalents Cash equivalents are short term

investments that can be readily converted into cash

Examples include 90 day US Treasury Bills and money market funds

Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

Slide 13-6

Types of Business ActivitiesTypes of Business Activities

Operating activities Cash flows related to production and

delivery of goods and services Reflect the day to day profit oriented

activities of a business Principal cash inflows are cash sales and collection of accounts receivable

Major sources of cash outflows include payments to suppliers, employees and taxing authorities

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Examples of Operating Activities

Examples of Operating Activities



Slide 13-8


Investing activities Cash flows related to buying and

selling of long-term assets Examples include collections from long term loans, collections from the sale of equipment no longer in use, payments to buy securities of other companies, buying a building and buying a business

Examples of Investing Activities

Examples of Investing Activities


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Financing activities Cash inflows related to issuing

stock and issuing long-term debt Cash outflows related to

repurchasing stock, paying off loans and making dividend payments


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Examples of Financing Activities

Examples of Financing Activities


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Which of the following would be a cash outflow from operating activities?

a. Acquisition of operating equipment

b. Retirement of bondsc. Collection of accounts receivabled. Payments to suppliers for raw

materials

Answer: dPayments to suppliers for raw materialsLearning objective 2: Identify the three types of business activities

presented in a statement of cash flows

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Which of the following would be a cash outflow from investing activities?

a. Payments to suppliersb. Payments to employeesc. Purchase of landd. Payment of dividends

Answer: cPurchase of land


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Which of the following would be a cash outflow from financing activities?

a. Payment of dividendsb. Payments to taxing authoritiesc. Purchase of landd. Cash sales

Answer: aPayment of dividends


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Statement of Cash Flows General Format

Statement of Cash Flows General Format

Learning objective 3: Prepare a statement of cash flows using the direct method

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Preparing the Statement of Cash Flows


Two acceptable methods Direct method

Like an income statement prepared using the cash basis

Indirect method Reconciles net income to cash flow from operations

Preferable under GAAP Most used in financial statements


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Cash flows from operating activities Cash collected on sale of

merchandise Cash received (paid) related to

interest income (expense) Cash received related to dividend

income Cash paid to purchase merchandise Cash paid for general and

administrative expenses Cash paid for income taxes


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Cash flows from investing activities Cash received on the sale of a

machine no longer in use Cash paid to buy a machine Cash paid to buy a building Cash received from selling a

building Cash paid to buy a business


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Cash flows from financing activities Cash received from selling bonds Cash received from using a line of

credit Cash received from issuing common

stock Cash paid to retire long term debt Cash dividends paid


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Direct method Lists specific cash inflows and

outflows from operating activities Similar to cash-basis income

statement within the operating activities section

FASB requires separate schedule to reconcile cash flows from operating activities and net income


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Cash Flows from Operating Activities (Direct Method)


To determine cash flows using the direct method Analyze all balance sheet accounts,

other than cash, to determine how their changes were affected by cash flows

This analysis will involve information from the income statement


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Current asset and current liability accounts The first account is cash received

from customers Solving the following equation

yields cash receipts of $10,004,825


Beginning balance receivables $879,053

Plus sales 10,548,640

Less cash collected ?

Equals ending balance receivables $1,422,868

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Current asset and current liability accounts The next item is cost of

merchandise sold The following formula yields

purchases of $8,286,993


Beginning inventory $988,935

Plus purchases ?

Less cost of goods sold 7,911,480

Equals ending balance inventory $1,364,448

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Current asset and current liability accounts Purchases of $8,286,993 are used in

the next calculation, which solves for cash payments for purchases of inventory of $8,202,703


Beginning balance accounts payable $575,000

Plus purchases 8,286,993

Less cash paid for inventory purchases ?

Equals ending balance accounts payable $659,290

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Analyze other current asset and liability accounts Use prepaid insurance and

insurance expense to solve for cash payments for insurance

Use accrued wages and salaries and wages and salaries expense to solve for cash payments for wages and salaries

Use income taxes payable and income tax expense to solve for cash payments for income taxesLearning objective 3: Prepare a statement of cash

flows using the direct method

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Long term asset accounts Use accumulated depreciation,

depreciation expense, book value of equipment sold, and loss on sale to solve for Cash proceeds related to sale of equipment, and

Cash paid for purchases of equipment


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Long term liabilities and stockholders’ equity Cash paid to reduce debt (or cash

proceeds from borrowing) is the difference between the beginning and ending balance of long term debt

Use beginning and ending retained earnings plus net income to solve for cash payments for dividends


Operating Activities – Direct Method

Operating Activities – Direct Method

29 Learning objective 3: Prepare a statement of cash flows using the direct method

RS Inc. has the following information:

Taxes payable 12/31/2013: $171,000

Income tax expense 2014: $585,000

Taxes payable 12/31/2014: $150,000

Calculate cash paid for taxes in 2014

Answer:$171,000 + ? - $150,000 = $585,000? = 564,000

The indirect method is much more common The two methods differ only in

terms of the presentation of cash flows related to operating activities There are no differences for inventing activities and financing activities

Preparing the Statement of Cash Flows (Indirect Method)Preparing the Statement of

Cash Flows (Indirect Method)

5 step approach to calculate cash flows from operating activities – indirect1. Start with net income2. Add non-cash expenses such as

depreciation and amortization3. Subtract gains and add back losses4. Subtract (add) increases

(decreases) in current assets other than cash

5. Add (subtract) increases (decreases) in current liabilities



The operating activities section is a reconciliation of net income to cash flows from operating activities Current assets

Increases in current assets indicate we must reduce income to convert to cash basis

Decreases indicate we must increase income to convert to cash basis



Current liabilities Increases in current liabilities

indicate we must increase income to convert to cash basis

Decreases in current liabilities indicate we must reduce income to convert to cash basis



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Indirect Method part 1Indirect Method part 1

Learning objective 4: Prepare a statement of cash flows using the indirect method

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Indirect Method part 2Indirect Method part 2


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Using the indirect method, changes in current assets other than cash and current liabilities are used to adjust net income to determine:

a. Income from operationsb. Net cash from investing activitiesc. Net cash provided by operating

activitiesd. None of the above

Answer: cNet cash provided by operating activities


Learning objective 5: Interpret information in the statement of cash flows

Slide 13-37

Interpreting the Statement of Cash Flows

Interpreting the Statement of Cash Flows

In general, the most important part is the cash flows from operating activities Unless a company is able to

generate cash from its core operations, it is unlikely to succeed

If cash flows in this section are low, this implies that a company must offset them by changes in investing and financing decisions

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Statement of Cash FlowsStatement of Cash Flows

Learning objective 5: Interpret information in the statement of cash flows

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prepared by debby bloom-hill cma, cfm. slide 13-2 chapter 13 statement of cash flows

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