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Statement of Cash Flows

The document discusses the statement of cash flows, which reports an entity's cash inflows and outflows from operating, investing, and financing activities. It explains that the statement of cash flows helps users assess a company's ability to generate cash flows, pay obligations, and reasons for differences between net income and operating cash flows. The indirect method for preparing the statement of cash flows reconciles net income to net cash provided by operating activities. Adjustments are made to net income for non-cash items and changes in balance sheet accounts to determine cash provided by operations.

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60 views

Statement of Cash Flows

The document discusses the statement of cash flows, which reports an entity's cash inflows and outflows from operating, investing, and financing activities. It explains that the statement of cash flows helps users assess a company's ability to generate cash flows, pay obligations, and reasons for differences between net income and operating cash flows. The indirect method for preparing the statement of cash flows reconciles net income to net cash provided by operating activities. Adjustments are made to net income for non-cash items and changes in balance sheet accounts to determine cash provided by operations.

Uploaded by

sshreyas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 13

13
CHAPTER
STATEMENT OF
OF CASH
CASH FLOWS
FLOWS
STATEMENT
STUDY OBJECTIVES
After studying this chapter, you should be able to:

1. Indicate the usefulness of the statement of cash flows


2. Distinguish between operating, investing, and
financing activities
3. Prepare a statement of cash flows using the indirect
method

STUDYOBJECTIVE
OBJECTIVE11
STUDY

USEFULNESSOF
OFCASH
CASHFLOW
FLOWSTATEMENT
STATEMENT
USEFULNESS
The cash flow statement reports
CASH RECEIPTS and CASH PAYMENTS
from
OPERATING, FINANCING, and INVESTING activities.

The cash flow statement helps users assess:


1.
2.
3.
4.

Ability to generate future cash flows


Ability to pay dividends and meet obligations
Why net income is different from operating cash flows
Cash investing and financing transactions
2

Questions the Statement of


Cash Flow Answers

STUDYOBJECTIVE
OBJECTIVE22
STUDY

OPERATINGCASH
CASHFLOWS
FLOWS
OPERATING
Cash inflows:
From sale of goods or services
From return on loans (interest received) and on
equity securities (dividends received)
Cash outflows:
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
4

Operating Activities - ALERT


Some cash flows relating to investing or
financing activities are classified as
operating activities. For example...
Receipts of investment revenue
(interest and dividends) and
Payments of interest to lenders are
classified as operating activities
because these items are reported in
the income statement.
5

STUDYOBJECTIVE
OBJECTIVE22
STUDY

INVESTINGCASH
CASHFLOWS
FLOWS
INVESTING

Cash inflows:
From sale of property, plant, and equipment
From sale of debt or equity securities of other entities
From collection of principal on loans to other entities

Cash outflows:
To purchase property, plant, and equipment
To purchase debt or equity securities of other entities
To make loans to other entities

STUDYOBJECTIVE
OBJECTIVE22
STUDY

FINANCINGCASH
CASHFLOWS
FLOWS
FINANCING

Cash inflows:
From sale of equity securities (company's own stock)
From issuance of debt (bonds and notes)

Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital stock

SIGNIFICANTNON-CASH
NON-CASHACTIVITIES
ACTIVITIES
SIGNIFICANT

The following activities are reported in a separate schedule


(bottom of cash flow statement) or a note to the F/S.

1. Issuance of common stock to purchase assets.


2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Format of the Statement of Cash


Flows
Three activities:
operating
investing
financing

Body of
Statement

PLUS
noncash investing and financing activities

Why Report the Causes of Changes


in Cash?
Because investors, creditors, and
other interested parties want to
know what is happening to a
companys most liquid asset:

CASH

10

Statement of Cash Flows Helps


Users Evaluate
1. The entity's ability to generate future cash flows.
2. The entity's ability to pay dividends and meet
obligations.
3. The reasons for the difference between net income
and net cash provided (used) by operating activities.
4. The investing and financing transactions during the
period.

11

Statement of Cash Flows Helps Answer


the Following Questions
How did cash increase when there was a net
loss for the period?
How were the proceeds of the bond issue used?
How was the expansion in the plant and
equipment financed?
Why were dividends not increased?
How was the retirement of debt accomplished?
How much money was borrowed during the
year?
Is cash flow greater or less than net income?
12

CASHFLOW
FLOW
CASH
STATEMENTFORMAT
FORMAT
STATEMENT
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items)
Net cash provided (used) by operating activities
Cash flows from investing activities
(List of individual inflows and outflows)
Net cash provided (used) by investing activities
Cash flows from financing activities
(List of individual inflows and outflows)
Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Noncash investing and financing activities
(List of individual noncash transactions)

XX
XXX
XX
XXX
XX
XXX
XXX
XXX
XXX
XXX

13

INFORMATIONREQUIRED
REQUIRED
INFORMATION
TOPREPARE
PREPARECASH
CASHFLOW
FLOWSTATEMENT
STATEMENT
TO

Needed to prepare cash flow statement:


Comparative balance sheet
Current income statement
Additional information.
The SCF deals with cash receipts and
payments, so the accrual concept is
not used in the preparation of the SCF.
14

STEPSIN
INPREPARING
PREPARING
STEPS
CASHFLOW
FLOWSTATEMENT
STATEMENT
CASH

15

STUDYOBJECTIVE
OBJECTIVE33
STUDY

INDIRECT METHOD
METHOD
INDIRECT
Cash flow from operating activities

Cash flow from investing activities

(X)

Cash flow from financing activities

Net change in cash

Beginning cash & equivalents

Ending cash & equivalents

xx

The operating section


reconciles
NET INCOME
with
CASH FLOW
FROM OPERATIONS

The investing and financing sections are the same


regardless of which method is used.
16

INDIRECT METHOD
METHOD
INDIRECT

2006

2005

17

INDIRECT METHOD
METHOD
INDIRECT

For the year ended Dec 31, 2006

18

INDIRECT METHOD
METHOD
INDIRECT
Using the information provided, the
cash flow statement will account for
every change on the comparative balance sheet.

The objective:
to determine net cash
flow during the period,
which should match the
change in cash during the period
19

INDIRECT METHOD
METHOD
INDIRECT
Net income

145,000

Adjustments to reconcile net income to cash flow from operations


Depreciation exp

9,000

Loss on sale of equipment

3,000

Decrease in A/R

10,000

Increase in inventory

(5,000)

Increase in prepaid expenses

(4,000)

Increase in accounts payable

16,000

Decrease in income taxes payable

(2,000)

Net cash provided by operating activities


Purchase of building
Purchase of equipment
Sale of equipment

172,000
(120,000)
(25,000)
4,000

Net cash used by investing activities


Issuance of common stock
Payment of dividends
Net cash used by financing activities

27,000

(141,000)
20,000
(29,000)
(9,000)

Net increase in cash

22,000

Beginning cash

33,000

Ending cash

55,000

20

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