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Classifying Cash Flows

Here

 Operating Activities – can be reported

in one of two ways:
1. Indirect Method
 Reports necessary adjustments to
reconcile net income to cash from
operating activities.
 Used by most companies. Covered here.
2. Direct Method
 Separately lists each major item of operating
cash receipts and disbursements.
 Recommended by the FASB.
 Investing Activities
 Financing Activities
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Indirect Method
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• Net income (or loss)

• Reconciling items:
 Adjustments for changes in current
assets and current liabilities
 Adjustments for operating items
not providing or using cash
(depreciation, amortization, depletion,
and bad debts)
•Net cash flow from operating activities
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Example of Use of Indirect

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Method for Operating Activities

The Joe's Place
The $8,000 gain was the
$8,000 gain was the
result Income Statement
result of selling land
of selling land
For the
costing Year Ending
$32,000 for March 31, 20B
$40,000
costing $32,000 for $40,000
Revenues
during
during the
the period;
period; $ 727,000
Operating
the
the gain
gain is expenses
is considered
considered aa (748,000)
Depreciation
nonoperating
nonoperating expense
gain.*
gain.* (6,000)
Gain on sale of land 8,000
Net loss $ (19,000)
*Note: Adjustments for gains and losses are covered in Supplement A to
this chapter. Check with your instructor to determine if you will be held
responsible for these types of adjustments.
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Joe's Place Page
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Balance Sheets Here

3/31/20B 3/31/20A
Assets
Cash $ 62,000 $ 90,000
Accounts receivable 23,000 40,000
Inventory 350,000 300,000
Land Joe's Place 80,000 112,000
Equipment,
Statementnet of Retained Earnings 39,000 45,000
TotalFor
assets
the Year Ending March 31, 20B $ 554,000 $ 587,000
Liabilities
Retained and Stockholders'
earnings, 3/31/20A Equity
$ 46,000
Less: Net loss Liabilities (19,000)
Accounts payable
Less: Dividends $ 38,000
(20,000) $ 27,000
Salaries
Retainedpayable
earnings, 3/31/20B $ 7,000 9,000 14,000
Long-term note payable - 50,000
Total liabilities $ 47,000 $ 91,000
Stockholders' Equity
Common stock $ 500,000 $ 450,000
Retained earnings 7,000 46,000
Total stockholders' equity $ 507,000 $ 496,000
Total liabilities and stockholders' equity $ 554,000 $ 587,000
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Starting Point
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Joe's Place
Statement of Cash Flows
For the Year Ending March 31, 20B
Operating activities:
Net loss $ (19,000)
When
When using
using the
the
indirect
indirect method,
method,
always
always start
start with
with
the
the net
net income
income
or
or net
net loss
loss
for
for the
the period.
period.
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Reconciling Items – Rules for

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Changes in Account Balances

Change in Account Balance during Period
Increase Decrease
Current Subtract from Add to
Noncash Assets net income net income
Current Add to Subtract from
Liabilities net income net income
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Reconciling Items –
Page
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Changes in Account Balances

Joe's Place
Statement of Cash Flows
For the Year Ending March 31, 20B
Operating activities:
Net loss $ (19,000)
Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000

Change in Account Balance during Period

Increase Decrease
Current Subtract from Add to
Noncash Assets net income net income
Current Add to Subtract from
Liabilities net income net income
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Reconciling Items –
Page
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Joe's Place
Here

ChangesStatement
in Account Balances
of Cash Flows
For the Year Ending March 31, 20B
Operating activities:
Net loss $ (19,000)
Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000
Less: Increase in inventory (50,000)
Decrease in salaries payable (5,000)
Change in Account Balance during Period
Increase Decrease
Current Subtract from Add to
Noncash Assets net income net income
Current Add to Subtract from
Liabilities net income net income
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Reconciling Items –
Joe's Place
Page
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Here

Statement of Cash Flows

Changes
For thein Account
Year Balances
Ending March 31, 20B
Operating activities:
Net loss $ (19,000)
Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000
Less: Increase in inventory (50,000)
Decrease in salaries payable (5,000)
Add: Depreciation expense 6,000
Less: Gain on sale of land (8,000)
Net cash flow from operating activities $ (48,000)
Add
Addnoncash
noncashexpenses.
expenses.
Subtract
Subtractnonoperating
nonoperatinggains*
gains*and
and
add
addnonoperating
nonoperatinglosses
losses*.*.
*Note: Adjustments for gains and losses are covered in Supplement A to this chapter. Check with
your instructor to determine if you will be held responsible for these types of adjustments.