Chapter

23-1
 CHAPTER 23

STATEMENT OF CASH FLOWS

Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

Chapter
23-2
 Learning
Learning Objectives
Objectives

Chapter
23-3
 Statement
Statement of
of Cash
Cash Flows
Flows

Special Problems
Preparation of the
in Statement Use of a Worksheet
Statement
Preparation

Usefulness Adjustments similar to Preparation of

Classification of cash depreciation worksheet
flows Accounts receivable (net) Analysis of
Format of statement Other working capital transactions
changes Preparation of final
Steps in preparation
Net losses statement
Examples
Gains
Sources of information
Stock options
Indirect vs. direct Postretirement benefit
method costs
Extraordinary items
Significant noncash
Chapter
23-4 transactions
 Section
Section 11 -- Preparation
Preparation of
of the
the
Statement
Statement ofof Cash
Cash Flows
Flows

Primary purpose:
To provide information about a company’s cash
receipts and cash payments during a period.

Secondary objective:
To provide cash-basis information about the
company’s operating, investing, and financing
activities.

Chapter
23-5 LO 1 Describe the purpose of the statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement
of
of Cash
Cash Flows
Flows

Provides information to help assess:

1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and obligations.
3. Reasons for difference between net income and
net cash flow from operating activities.
4. Cash and noncash investing and financing
transactions.

Chapter
23-6 LO 1 Describe the purpose of the statement of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows

Operating
Activities Investing
Activities Financing
Income
Statement
Activities
Generally
Items Long-Term Generally
Asset Items Long-Term
Liability
The term “Cash” = and
Cash and cash equivalents.
Equity Items
Chapter
23-7 LO 2 Identify the major classifications of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows

Cash and Cash Equivalent Text Footnote 1, page 1245

1 The basis recommended by the FASB for the statement of

cash flows is actually “cash and cash equivalents.” Cash
equivalents are short-term, highly liquid investments that
are both: (a) readily convertible to known amounts of cash,
and (b) so near their maturity that they present insignificant
risk of changes in interest rates. Generally, only investments
with original maturities of three months or less qualify under
this definition. Examples of cash equivalents are Treasury
bills, commercial paper, and money market funds purchased
with cash that is in excess of immediate needs.
Chapter
23-8 LO 2 Identify the major classifications of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows
Classification of Typical Inflows and Outflows
Illustration 23-1

Income
Statement
Items

Chapter
23-9 LO 2 Identify the major classifications of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows
Classification of Typical Inflows and Outflows
Illustration 23-1

Generally
Long-Term
Asset Items
Chapter
23-10 LO 2 Identify the major classifications of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows
Classification of Typical Inflows and Outflows
Illustration 23-1

Generally
Long-Term
Liability and
Equity Items

Chapter
23-11 LO 2 Identify the major classifications of cash flows.
 Classification
Classification of
of Cash
Cash Flows
Flows

Typical
Company
Product Life
Cycle

Chapter
23-12 LO 2 Identify the major classifications of cash flows.
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

Report inflows and outflows

from investing and financing
activities separately.
Chapter
23-13 LO 2 Identify the major classifications of cash flows.
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 23-2

Chapter
23-14 LO 2 Identify the major classifications of cash flows.
 Steps
Steps in
in Preparation
Preparation

Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Selected transaction data

Three Major Steps:

Step 1. Determine change in cash.
Step 2. Determine net cash flow from operating activities.
Step 3. Determine net cash flows from investing and
financing activities.
Chapter
23-15 LO 2 Identify the major classifications of cash flows.
 First
First Example
Example -- 2009
2009

Illustration: Tax Consultants Inc. started on January 1,

2009, when it issued 60,000 shares of $1 par value
common stock for $60,000 cash. The company rented its
office space, furniture, and equipment, and performed tax
consulting services throughout the first year.

The comparative balance sheets at the beginning and end

of the year 2009 appear in Illustration 23-3. Illustration
23-4 shows the income statement and additional
information for Tax Consultants.

Chapter
23-16 LO 2 Identify the major classifications of cash flows.
 First
First Example
Example -- 2009
2009
Comparative Illustration 23-3

Balance
Sheets,
Year 1

Income Illustration 23-4

Statement,
Year 1

Chapter
23-17 LO 2 Identify the major classifications of cash flows.
 First
First Example
Example -- 2009
2009

Step 1: Determine the Change in Cash

Illustration 23-3

Chapter
23-18 LO 2 Identify the major classifications of cash flows.
 First
First Example
Example -- 2009
2009

Step 2: Determine the Net Cash Flow from

Operating Activities

A company must determine revenues and expenses on a

cash basis.

Eliminate the effects of income statement transactions

that do not result in an increase or decrease in cash.

Convert net income to net cash flow from operating

activities through either a direct method or an indirect
method.
Chapter
23-19
 First
First Example
Example -- 2009
2009

Step 2: Determine the Net Cash Flow from

Operating Activities
Illustration 23-5

Chapter
23-20
 First
First Example
Example -- 2009
2009
Direct Method
Deducts operating cash disbursements from
operating cash receipts.
Illustration 23-6

“Net cash provided by operating activities” is the

equivalent of cash basis net income.
Chapter LO 4 Contrast the direct and indirect methods of calculating
23-21
net cash flow from operating activities.
 First
First Example
Example -- 2009
2009
Direct Method Illustration 23-6

Accounts Receivable
1/1/09 Balance 0 Receipts from customers 89,000
Revenues 125,000

12/31/09 Balance 36,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-22
net cash flow from operating activities.
 First
First Example
Example -- 2009
2009
Direct Method Illustration 23-6

Accounts Payable
1/1/09 Balance 0
Payments for expenses 80,000 Operating expenses 85,000

12/31/09 Balance 5,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-23
net cash flow from operating activities.
 First
First Example
Example -- 2009
2009
Direct Method Illustration 23-6

Income Tax Payable

1/1/09 Balance 0
Payments for taxes 6,000 Tax expense 6,000

12/31/09 Balance 0

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-24
net cash flow from operating activities.
 First
First Example
Example -- 2009
2009
Indirect Method
Adjusts net income for items not affecting cash.
Illustration 23-8

Common adjustments to Net Income (Loss):

Depreciation and amortization expense.
Gain or loss on disposition of long-term assets.
Change in current assets and current liabilities.
Chapter LO 4 Contrast the direct and indirect methods of calculating
23-25
net cash flow from operating activities.
 First
First Example
Example -- 2009
2009

Step 3: Determine Net Cash Flows from Investing

and Financing Activities
Illustration 23-3

No long-term assets, thus no investing activities.

Chapter
23-26 LO 5 Determine net cash flows from investing and financing activities.
 First
First Example
Example -- 2009
2009

Step 3: Determine Net Cash Flows from Investing

and Financing Activities
Illustration 23-3

 Purchase of common stock for $60,000 (Financing).

Chapter
23-27 LO 5 Determine net cash flows from investing and financing activities.
 First
First Example
Example -- 2009
2009

Step 3: Determine Net Cash Flows from Investing

and Financing Activities
Illustration 23-3

 Net income of $34,000 (Operating).

 Dividends paid of $(14,000) (Financing).
Chapter
23-28 LO 5 Determine net cash flows from investing and financing activities.
 First
First Example
Example -- 2009
2009
Statement of Cash Flows - 2009 Illustration 23-9

Chapter
23-29 LO 6 Prepare a statement of cash flows.
 Operating
Operating Activities
Activities —
— Indirect
Indirect Method
Method
E23-6: KRC Company’s financial statements for the year ended
December 31, 2010, contained the following condensed information.
2010 2009 Change
Revenues from fees $ 840,000
Operating expenses 624,000
Depreciation expense 60,000
Loss on sale of equipment 26,000
Income before income tax 130,000
Income tax 40,000
Net income $ 90,000

Accounts receivable $ 37,000 $ 59,000 $(22,000)

Accounts payable 46,000 31,000 15,000
Income taxes payable 4,000 8,500 (4,500)

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-30
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Indirect
Indirect Method
Method
E23-6: Prepare the operating activities section of the statement of
cash flows using the indirect method (Step 2).

Cash flows from operating activities

Net income $ 90,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation expense 60,000
Loss on sale of equipment 26,000
Decrease in accounts receivable 17,000
Increase in accounts payable 10,000
Decrease in income taxes payable (4,500)
Net cash provided by operating activities 198,500
Solution on
Chapter LO 4 Contrast the direct and indirect methods of calculating
23-31 notes page
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Direct
Direct Method
Method
E23-5: KRC Company’s financial statements for the year ended
December 31, 2010, contained the following condensed information.
2010 2009 Change
Revenues from fees $ 840,000
Operating expenses 624,000
Assume accounts
Depreciation expense 60,000
payable relates
Loss on sale of equipment 26,000 to operating
Income before income tax 130,000 expenses.
Income tax 40,000
Net income $ 90,000

Accounts receivable $ 37,000 $ 59,000 $(22,000)

Accounts payable 46,000 31,000 15,000
Income taxes payable 4,000 8,500 (4,500)

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-32
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Direct
Direct Method
Method

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).
Illustration 23-22

Accounts Receivable
1/1/10 Balance 59,000 Receipts from customers 862,000
Revenues 840,000

12/31/10 Balance 37,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-33
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Direct
Direct Method
Method

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).
Illustration 23-24

Accounts Payable
1/1/10 Balance 31,000
Payments to suppliers 609,000 Operating expenses 624,000

12/31/10 Balance 46,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-34
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Direct
Direct Method
Method

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).
Illustration 23-24

Income Tax Payable

1/1/10 Balance 8,500
Payments for income tax 44,500 Income tax expense 40,000

12/31/10 Balance 4,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

23-35
net cash flow from operating activities.
 Operating
Operating Activities
Activities —
— Direct
Direct Method
Method

E23-5: Prepare the operating activities section of the statement of

cash flows using the Direct method (Step 2).

Cash flows from operating activities

Cash receipts from customers $862,000
Cash paid for operating expenses (609,000)
Cash paid for income taxes (44,500)
Net cash provided by operating activities $208,500

Solution on
Chapter LO 4 Contrast the direct and indirect methods of calculating
23-36 notes page
net cash flow from operating activities.
 Step
Step 3:
3: Determine
Determine Net
Net Cash
Cash Flow
Flow from
from
Investing
Investing and
and Financing
Financing Activities
Activities

E23-2 (a): Plant assets that had cost $25,000 6 years

before and were being depreciated on a straight-line basis
over 10 years with no estimated scrap value were sold for
$5,300.

Plant assets (cost) $ 25,000

Accumulated depreciation ([$25,000 / 10] x 6) 15,000
Book value at date of sale 10,000
Sale proceeds (5,300)
Loss on sale $ 2,700
Chapter
23-37 LO 5 Determine net cash flows from investing and financing activities.
 Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000

Chapter
Net Change in Cash $ 293,000
23-38
 E23-2
E23-2 (b)
(b)

E23-2 (b): During the year, 10,000 shares of

common stock with a stated value of $10 a share
were issued for $33 a share.

Shares sold 10,000

Market value per share $ 33
Value of shares $ 330,000

Chapter
23-39 LO 5 Determine net cash flows from investing and financing activities.
 Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000

Chapter
Net Change in Cash $ 293,000
23-40
 E23-2
E23-2 (d)
(d)

E23-2 (d): The company sustained a net loss for the

year of $50,000. Depreciation amounted to $22,000,
and a gain of $9,000 was realized on the sale of land
for $39,000 cash.

Chapter
23-41 LO 5 Determine net cash flows from investing and financing activities.
 Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000

Chapter
Net Change in Cash $ 293,000
23-42
 E23-2
E23-2 (h)
(h)

E23-2 (h): During the year, treasury stock costing

$47,000 was purchased.

Chapter
23-43 LO 5 Determine net cash flows from investing and financing activities.
 Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000

Chapter
Net Change in Cash $ 293,000
23-44
 Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000

Chapter
Net Change in Cash $ 293,000
23-45
 Sources
Sources of
of Information
Information for
for the
the
Statement
Statement of
of Cash
Cash Flows
Flows

1. Comparative balance sheets.

2. An analysis of the Retained Earnings.

3. Writedowns, amortization charges, and similar

“book” entries, such as depreciation, because they
have no effect on cash.

Chapter
23-46 LO 7 Identify sources of information for a statement of cash flows.
 Net
Net Cash
Cash Flow
Flow from
from Operating
Operating Activities—
Activities—
Indirect
Indirect Versus
Versus Direct
Direct Method
Method
Adjustments Needed to Determine Net Cash Flow from Operating
Activities — Indirect Method
Illustration 23-18

Chapter
23-47 LO 7 Identify sources of information for a statement of cash flows.
 Net
Net Cash
Cash Flow
Flow from
from Operating
Operating Activities—
Activities—
Indirect
Indirect Versus
Versus Direct
Direct Method
Method
Direct Method - Companies adjust each item in the income
statement from the accrual basis to the cash basis.
Illustration 23-21

Chapter
23-48 LO 7 Identify sources of information for a statement of cash flows.
 Direct
Direct Versus
Versus Indirect
Indirect Controversy
Controversy

In Favor of the Direct Method

Shows operating cash receipts and payments.

Information about cash receipts and payments is

more revealing of a company’s ability
1. to generate sufficient cash from operating
activities to pay its debts,

2. to reinvest in its operations, and

3. to make distributions to its owners.

Chapter
23-49 LO 7 Identify sources of information for a statement of cash flows.
 Direct
Direct Versus
Versus Indirect
Indirect Controversy
Controversy

In Favor of the Indirect Method

Focuses on the differences between net income

and net cash flow from operating activities.

Provides link between the statement of cash flows

and the income statement and balance sheet.

Special Rules Applying to Indirect Methods

Disclose Interest paid.
Disclose Income taxes paid.
Chapter
23-50 LO 7 Identify sources of information for a statement of cash flows.
 Special
Special Problems
Problems in
in Statement
Statement Preparation
Preparation

1. Adjustments similar to depreciation

Amortization of limited-life intangible assets.

Amortization of deferred costs.

Amortization of bond discount or premium.

Changes in deferred income taxes.

Change related to an investment when recording

income or loss under the equity method.

Chapter
23-51 LO 8 Discuss special problems in preparing a statement of cash flows.
 Special
Special Problems
Problems in
in Statement
Statement Preparation
Preparation

2. Accounts receivable, net

3. Other working capital changes

4. Net losses

5. Gains

6. Stock options

7. Postretirement benefits

8. Extraordinary items

9. Significant noncash transactions

Chapter
23-52 LO 8 Discuss special problems in preparing a statement of cash flows.
 Use
Use of
of aa Worksheet
Worksheet
A worksheet involves the following steps.
Step 1. Enter the balance sheet accounts and their
beginning and ending balances in the balance sheet accounts
section.

Step 2. Enter the data that explain the changes in the

balance sheet accounts and their effects on the statement
of cash flows in the reconciling columns of the worksheet.

Step 3. Enter the increase or decrease in cash on the cash

line and at the bottom of the worksheet. This entry should
enable the totals of the reconciling columns to be in
agreement.
Chapter
23-53 LO 9 Explain the use of a worksheet in preparing a statement of cash flows.
  Companies preparing financial statements under iGAAP must
prepare a statement of cash flows.

 Both iGAAP and U.S. GAAP require that the statement of cash
flows should have three major sections—operating, investing, and
financing—along with changes in cash and cash equivalents.

 Similar to U.S. GAAP, the cash flow statement can be prepared

using either the indirect or direct method under iGAAP.

Chapter
23-54
  iGAAP encourages companies to disclose the aggregate amount of
cash flows that are attributable to the increase in operating
capacity separately from those cash flows that are required to
maintain operating capacity.

 The definition of cash equivalents used in iGAAP is similar to that

used in U.S. GAAP.

 iGAAP requires that noncash investing and financing activities be

excluded from the statement of cash flows. Instead, these noncash
activities should be reported elsewhere.
Chapter
23-55
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Chapter
23-56