Purpose of the Statement of Cash Flows

Summarizes an entity’s cash receipts and cash payments during the period from operating, investing activities, and financing activities

Reports the changes in cash over a period of time and explains those changes

Assess company’s performance on a cash basis

Cash Equivalents

Readily convertible to a determinable amount of cash

Maturity date of three months or less Less degree of risk in terms of price changes Combined with cash on a statement of cash

flows Examples: Commercial paper, Money market

funds, and Treasury bills

LO 2

Operating Activities

Activities concerned with the acquisition and sale of products and services

Examples: Collection of customer accounts Payment to suppliers for inventory Payment of wages Payment of taxes

LO 3

Investing Activities

Activities concerned with the acquisition and disposal of long-term assets

Examples: Capital expenditures Purchase of another company Sale of plant and equipment Sale of another company

Financing Activities Activities concerned with the raising and repaying

of funds in the form of debt and equity Examples:

Issuance of capital stock Issuance of bonds Issuance of bank note Repurchase of stock Retirement of bonds Repayment of notes Payment of dividends

Exhibit 12.2—Format for the Statement of Cash Flows

Exhibit 12.3—Classification of Items on the Statement of Cash Flows

Two Methods of Reporting Cash Flowfrom Operating Activities

Direct method Reports major classes of cash receipts and cash payments

Indirect method Net income is adjusted for the effects of accruals

and deferrals Net cash provided by Operating Activities is the

same under both methods

LO 4

Exhibit 12.7—Statement of Cash Flows Using the Indirect Method

An Approach to Preparing the Statement of Cash Flows: Direct Method

Step1: set up three schedules with the following headings: a. Cash Flows from Operating Activities b. Cash Flows from Investing Activities c. Cash Flows from Financing Activities

Step 2: determine cash flows from operating activities Step 3: determine cash flows from investing activities Step 4: determine cash flows from financing activities

Exhibit 12.8—Julian Corp.’s Income Statement

Exhibit 12.9—Julian Corp.’s Comparative Balance Sheets

Exhibit 12.10—Schedule of Cash Flows from Operating Activities

Exhibit 12.11—Conversion of Income Statement Items to Cash Basis

Direct Method for Reporting Cash Flows from Operating Activities

LO 6

Summary of Adjustments to Net Income under the Indirect Method

Indirect Method for Reporting Cash Flows from Operating Activities

Exhibit 12.12—Schedule of Cash Flows from Investing Activities

Exhibit 12.13—Schedule of Cash Flows from Financing Activities

Completed Statement of Cash Flows (continued)

Comparison of the Indirect and Direct Methods

The Direct method Provides valuable information in evaluating a company’s

operating efficiency Reveals too much to competitors by telling them the

amount of cash receipts and cash and payments from operations

The Indirect method Focuses attention on the differences between income

on an accrual basis and a cash basis Should separately disclose two important cash payments

—income taxes paid and interest paid

Example 12.3—Determining Noncash Investing and Financing Activities

Assume that at the end of the year, Wolk Corp. issues capital stock to an inventor in return for the exclusive rights to a patent. Although the patent has no ready market value, the stock could have been sold on the open market for $25,000

Example 12-3 Determining Noncash Investing and Financing Activities (continued)

Assume Wolk sells stock on the open market for $25,000 and then pays this amount in cash to the inventor for the rights to the patent

Example 12-3 Determining Noncash Investing and Financing Activities (continued)

Next, the acquisition of the patent can be identified and analyzed as follows:

Supplemental schedule of noncash investing and financing activities Acquisition of patent in exchange for capital stock $25,000