HOSP 2110 (Management Acct)

Learning Centre

Statement of Cash Flows

The Statement of Cash Flows (or cash flow statement) is one of the main financial statements used
by investors. It shows the cash generated and used during a specific time period. Ideally a company
should generate positive cash flows; this will make it more likely to find investors for the future. The
positive or negative net cash flow identified at the end of the statement of cash flows is equal to the
total change in the cash account balance.
The cash flow statement reports the cash inflows and outflow in three categories:
1. Operating
activities

reports the accrual net income and adjusts it for changes in

current asset and current liability accounts

2. Investing
activities

Reports the purchase and sale of fixed assets, marketable

securities, and any other investment accounts

3. Financing
activities

reports the changes to ownership equity and payment or

borrowing of long-term liabilities

The cash flow statement can be prepared using the indirect method where differences in the balance
sheet accounts for two time periods are compared. The first step is to determine if the changes in
each account represent an increase or decrease of cash. An increase of cash (also called an inflow
or source of cash) is added when converting accrual net income to cash net income. A decrease of
cash (also called an outflow or use of cash) is subtracted when converting accrual net income to
cash net income.
For instance, if accounts receivable increased from one period to the next, then revenue would also
have increased. The revenue would overstate the amount of cash received and the net income would
be higher than it would be in cash basis accounting. To adjust the income, the increase in A/R
represents a decrease to net income. It is an outflow of cash. This is true for any other asset account
an increase in an asset account corresponds to an outflow of cash; a decrease corresponds to an
inflow of cash.
If a liability increased, (for example, A/P), that means we are borrowing cash to finance a purchase or
pay expenses. The actual expenses or purchases paid in cash are less than the total reported accrual
operating expenses; this means the accrual net income is lower than it would be in cash basis
accounting. The increase in a current liability is a source of cash (inflow), and added to net income
when converting to the cash basis.
There are some items that are only ever an inflow or outflow of cash: depreciation expense, capital
gain/loss, dividends, and net income/loss. Dividends are paid out, so they represent an outflow of
cash. Net income is an inflow of cash into the business. Capital gains and losses occur from the sale
of long-term assets. If there is a capital gain it would increase the net income, but not the cash, so to
adjust to the cash basis, we would treat it as an outflow of cash (and inflow for a capital loss).
The table on the next page summarizes changes in accounts and whether they are inflows or outflows
of cash.
2013 Vancouver Community College Learning Centre.
Student review only. May not be reproduced for classes.

Authored by Emily Simpson

Description
Asset
Asset
Liability/Common Stock
Liability/Common Stock
Depreciation
Capital Gain
Capital Loss
Net Income
Net Loss
Dividends

Change in
Account
Increase
Decrease
Increase
Decrease

Inflow or Outflow
of Cash
Outflow
Inflow
Inflow
Outflow
Inflow
Outflow
Inflow
Inflow
Outflow
Outflow

Once each account change in the two balance sheets has been recognized as an inflow or outflow of
cash (Note: CASH and RETAINED EARNINGS in the balance sheet are NOT recognized as inflows
or outflows and can be ignored), the next step is to categorize the type of cash flow each change
belongs to.
Cash Flow from Operating Activities
Net income/net loss
Current assets (NOT marketable securities!)
Current liabilities (NOT loans! NOT notes payable!)
Depreciation
Capital gain/capital loss
Cash Flow from Investing Activities
Long-term assets (fixed assets)
Marketable securities
All investments
Cash Flow from Financing Activities
Long-term liabilities
Loan/Notes payable
Current mortgage payable
Common stock
Dividends
In order to prepare the statement of cash flows, you would list each section as above with the amount
of inflow (+ amount) or outflow (- amount) of cash for each item. You would calculate the net cash flow
for each section at the end. Then take the sum of all three sections to get the net cash flow increase
or decrease. This number should match the change in the cash account balance. You then list the
beginning and ending cash balance for the year to prove that the sum of the net cash flow
increase/decrease and the beginning cash balance gives the ending cash balance.

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

Practice Problems
1. Indicate whether each given change in account balance represents an inflow or outflow of
cash and its categorization in the cash flow statement (operating, financing, or investing).
Activity
Accounts receivable increase
Interest payable increase
Payment of cash dividend
Purchased equipment
Common stock increase
Prepaid expenses decrease
Unearned revenue decrease
Sale of marketable securities
Capital loss
Current mortgage payable decrease
Sale of long-term investment
Borrowing on note payable
Common stock decrease
Inventory increase
Wages payable decrease
Mortgage payable increase
Accumulated depreciation
Sale of land

Cash Inflow or Outflow?

Section

2. Net income is $353,000; depreciation expense is $42,000; accounts receivable increased

$1,080; credit card receivables decreased $2,100; prepaid insurance increased $3,440;
inventory decreased $4,500; accounts payable increased $5,200; wages payable decreased
$2,900. Prepare a statement for net cash flow from operating activities.
3. A Nanaimo resort showed the following changes in current accounts during the annual
operating period ending December 31, 2009. Net income for 2009 was $141,100. Cash
dividends of $154,00 were paid out. Prepare a statement of cash flows (SCF).
Assets
31-Dec-08
31-Dec-09
Current Assets
Cash
$25,200
$29,600
Accounts receivable
12,550
12,900
Credit card receivables
9,700
8,000
Inventories
2,850
1,100
Marketable securities
2,000
3,000
Prepaid expenses
6,100
4,200
$58,400
$58,800
Total Current Assets
Property, plant, and equipment
Land
194,000
194,000
Building
9,800,000
9,800,000
Furniture
184,000
134,000
Equipment
736,400
803,400
Accumulated Depreciation
(2,400,000)
(2,544,200)
8,514,400
8,387,200
Net Property, plant and equipment
Other Assets
509,000
609,000
Total Assets
$9,081,800
$9,055,000
2013 Vancouver Community College Learning Centre.
Student review only. May not be reproduced for classes.

Liabilities and Stockholders Equity

Current Liabilities
Accounts payable
Wages payable
Notes Payable
Current mortgage payable
Total Current Liabilities
Long-term Liabilities
Mortgage payable
Total Liabilities
Stockholders Equity
Common stock
Retained earnings
Total Stockholders Equity
Total Liabilities and SE

13,700
4,200
4,900
15,300
38,100

15,700
5,000
3,700
15,900
40,300

7,710,200
$7,748,300

7,704,300
$7,744,600

960,000
373,500
1,333,500
$9,081,800

950,000
360,400
1,310,400
$9,055,000

4. Prepare an SCF for the year 2010 based on the following information. The net income for
2010 is $8,000 and dividends of $7,000 were paid.
Assets
2009
2010
Current Assets
Cash
$15,800
$16,600
Credit card receivables
$813
$747
Accounts receivable
7,387
6,853
Inventories
4,925
6,275
Marketable securities
2,975
3,425
$31,900
$33,900
Total Current Assets
Property, plant, and equipment
Furniture/Equipment
$15,700
$19,700
Accumulated depreciation
(4,600)
(5,600)
$11,100
$14,100
Net Property, plant and equipment
Total Assets
$43,000
$48,000
Liabilities and Stockholders Equity
Current Liabilities
Accounts payable
Accrued expenses payable
Taxes payable
Total Current Liabilities
Long-term Liabilities
Mortgage payable
Total Liabilities
Stockholders Equity
Common stock
Retained earnings
Total Stockholders Equity
Total Liabilities and SE

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

$3,800
800
2,400
$7,000

$6,100
700
1,200
$8,000

$24,800
$31,800

$26,800
$34,800

$5,200
6,000
$11,200
$43,000

$6,200
7,000
$13,200
$48,000

Solutions
1.
Activity
Accounts receivable increase
Interest payable increase
Payment of cash dividend
Purchased equipment
Common stock increase
Prepaid expenses decrease
Unearned revenue decrease
Sale of marketable securities
Capital loss
Current mortgage payable decrease
Sale of long-term investment
Borrowing on a note payable
Common stock decrease
Inventory increase
Wages payable decrease
Mortgage payable increase
Accumulated depreciation
Sale of land

Cash Inflow or Outflow?

Outflow
Inflow
Outflow
Outflow
Inflow
Inflow
Outflow
Inflow
Inflow
Outflow
Inflow
Inflow
Outflow
Outflow
Outflow
Inflow
Inflow
Inflow

Section
Operating
Operating
Financing
Investing
Financing
Operating
Operating
Investing
Operating
Financing
Investing
Financing
Financing
Operating
Operating
Financing
Operating
Investing

2.
Net Cash Flow from Operating Activities
Operating Activities
Net Income
Accounts receivable (increased)
Credit card receivables (decreased)
Prepaid insurance (increased)
Inventory (decreased)
Accounts payable (increased)
Wages payable (decreased)
Depreciation
Net Cash Flow, Operating Activities

$353,000
(1,080)
2,100
(3,440)
4,500
5,200
(2,900)
42,000
$394,180

3.
Statement of Cash Flows for the year ended Dec 31, 2009
Operating Activities
Net income
$141,100
Accounts receivable (increased)
(350)
Credit card receivables (decreased)
1,700
Inventories (decreased)
1,750
Prepaid expenses (decreased)
1,900
Accounts payable (increased)
2,000
Wages payable (increased)
800
Depreciation
144,200
$293,100
Net Cash Flow, Operating Activities
2013 Vancouver Community College Learning Centre.
Student review only. May not be reproduced for classes.

Investing Activities
Sale of furniture
Purchased equipment
Invested in marketable securities
Invested in other assets
Net Cash Flow, Investing Activities
Financing Activities
Payment on notes payable
Borrowing on current mortgage payable
Payment on mortgage payable
Redeem capital stock
Dividends paid
Net Cash Flow, Financing Activities
Net Cash Flow increase
Cash balance Dec 31, 2008
Cash balance Dec 31,2009

$50,000
(67,000)
(1,000)
(100,000)
($118,000)
(1,200)
600
(5,900)
(10,000)
(154,200)
($170,700)
$4,400
$25,200
$29,600

4.
Statement of Cash Flows for the Year Ended December 31, 2010
Operating Activities
Net Income
$8,000
Credit card receivables ( 66)
66
Accounts receivable ( 534)
534
Inventories ( 1,350)
(1,350)
Accounts payable ( 2,300)
2,300
Accrued expenses payable ( 100)
(100)
Taxes payable ( 1,200)
(1,200)
Depreciation
1,000
Net Cash Flow, Operating Activities
Investing Activities
Marketable securities ( 450)
Furniture/Equipment ( 4,000)
Net Cash Flow, Investing Activities
Cash Flow Adjustments, Financing Activities
Common stock issued ( 1,000)
Borrowing on long-term mortgage ( 2,000)
Dividends paid
Net Cash Flow, Financing Activities
Net Cash Flow
Cash balance, December 31, 2008
Cash balance, December 31, 2009

2013 Vancouver Community College Learning Centre.

Student review only. May not be reproduced for classes.

$8,250

(450)
(4,000)
($4,450)
1000
2,000
(6,000)
($3,000)
$800
15,800
$16,600