13-1

Course: Financial Accounting

Session: 27-30

Instructor: M Faisal
Course: Financial Accounting
Program: BBA
Semester: 2
Topic: Ch 13: Statement of Cash Flows

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Ch 13: Statement of Cash Flows

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Session Contents Activities

#
Class activity1: Discussion / Question
Ø STATEMENT OF CASH FLOWS Answer on learning outcomes of the pre-
Ø Purposes of the statement reading assignment.
Ø Example of a statement of cash flows
Class activity2: Concepts will be built
Ø Classification of cash flows
through lecture & discussion.
Ø Operating activities
Ø Investing activities Class activity3: Handout’s End of the
Ø Financing activities Chapter practice questions -
Ø The approach to preparing a statement of
Pr 13.6 pg 591
27-30 cash flows
Ø Preparing a statement of cash flows: an Home assignment:
illustration
Revise the lecture & problem solved in the
Ø Operating activities –
class. Read the topic due for discussion in
Direct[Discuss only] & Indirect
the next class.
Ø Investing activities
Ø Financing activities Will be updated shortly
Ø Cash and cash equivalents
Ø GAAP vs. IFRS approaches for
Statement of Cash Flow
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Purpose
Purpose of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Provides
Provides information
information about
about the
the cash
cash receipts
receipts
and
and cash
cash payments
payments of
of aa business
business entity
entity
during
during the
the accounting
accounting period.
period.
Helps
Helps investors
investors with
with questions
questions about
about the
the company’s:
company’s:

 Ability
Ability to
to generate
generate positive
positive cash
cash flows.
flows.

 Ability
Ability to
to meet
meet its
its obligations
obligations and
and to
to pay
pay dividends.
dividends.

 Need
Need for
for external
external financing.
financing.

 Investing
Investing and
and financing
financing transactions
transactions for
for the
the period.
period.

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Classification
Classification of
of Cash
Cash Flows
Flows

The
The Statement
Statement ofof Cash
Cash Flows
Flows must
must
include
include the
the following
following three
three sections:
sections:
•• Cash
Cash Flows
Flows from
from Operating
Operating Activities
Activities
•• Cash
Cash Flows
Flows from
from Investing
Investing Activities
Activities
•• Cash
Cash Flows
Flows from
from Financing
Financing Activities
Activities

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Operating
Operating Activities
Activities

Inflows
Inflows from:
from:
•• Sales
Sales to
to customers.
customers.
•• Interest
Interest and
and dividends
dividends + Cash
received.
received.
Flows
Outflows
Outflows to:
to: from
•• Suppliers
Suppliers of
of merchandise
merchandise Operating
and
and services.
services.
•• Employees.
Employees.
_ Activities
•• Lenders
Lenders for
for interest.
interest.
•• Governments
Governments for for taxes.
taxes.

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Investing
Investing Activities
Activities
Inflows
Inflows from:
from:
 Selling
 Selling investments
investments and
and plant
plant
assets.
assets.
 Collecting
 Collecting of
of principal
principal on
on loans.
loans. + Cash
Cash
Flows
Flows
from
from
Outflows
Outflows to:
to:
 Purchase
Investing
Investing
 Purchase of
of investments
investments and
and
plant
plant assets.
assets. _ Activities
Activities
 Purchase
 Purchase debt
debt or
or equity
equity
investments.
investments.
 Make
 Make loans.
loans.
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Financing
Financing Activities
Activities
Inflows from:

 Short-term
Short-term and
and long-term
long-term
borrowing.
borrowing.

 Owners
Owners (for
(for example,
example, from
from + Cash
issuing
issuing stock).
stock).
Flows
from
Outflows
Outflows to:
to: Financing
 Make
Make payments
payments onon borrowed
borrowed

funds.
funds.
_ Activities

 Owners
Owners for
for dividends.
dividends.

 Purchase
Purchase treasury
treasury stock.
stock.

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Cash
Cash and
and Cash
Cash Equivalents
Equivalents

Cash Cash
Equivalents Currency


 Short-term,
Short-term, highly
highly liquid
liquid investments.
investments.

 Readily
Readily convertible
convertible into
into cash.
cash.

 So
So near
near maturity
maturity that
that market
market value
value is
is unaffected
unaffected by
by
interest
interest rate
rate changes.
changes.
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The
The operating
operating Let’s look at
cash
cash flows
flows section
section the Direct
can
can be
be prepared
prepared Method for
using
using either
either the
the preparing the
direct
direct method
method oror Statement of
the
the indirect
indirect
method. Cash Flows.
method.
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 Direct
Direct Method
Method
13-12

Cash
Cash Received
Received from
from Customers
Customers
o Accrual basis revenue includes sales that did
not result in cash inflows.
o Can be computed as:

Decrease
Decrease in
in
+ receivables
receivables =

Cash
Cash Received
Received from
from
Net
Net Sales
Sales Customers
Customers
Increase
Increase in
in
– receivables
receivables =

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 Direct
Direct Method
Method
13-13

Cash
Cash Received
Received from
from Customers
Customers
The accounts receivable balance was $80,000 on
12/31/04 and $110,000 on 12/31/05. If accrual
sales revenue for 2005 was $900,000, what
was cash basis revenue?

Decrease
Decrease in
in
+ receivables
receivables =
Net
Net Sales
Sales Cash
Cash Received
Received from
from
$900,000
$900,000 Customers
Customers
Increase
Increase in
in
– receivables
receivables =
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 Direct
Direct Method
Method
13-14

Cash
Cash Received
Received from
from Customers
Customers
The accounts receivable balance was $80,000 on
12/31/04 and $110,000 on 12/31/05. If accrual
sales revenue for 2005 was $900,000, what
was cash basis revenue?

Net
Net Sales
Sales Cash
Cash Received
Received from
from
$900,000
$900,000 Customers
Customers == $870,000
$870,000
$30,000
$30,000
Increase
Increase in
in
– receivables
receivables =
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Let’s look at some

simplified
formulas for
computing direct
method cash
flows.

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 Direct
Direct Method
Method
13-16

Interest
Interest and
and Dividends
Dividends Received
Received

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 Direct
Direct Method
Method
13-17

Cash
Cash Paid
Paid for
for Merchandise
Merchandise
Step 1

Step 2

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 Direct
Direct Method
Method
13-18

Cash
Cash Paid
Paid for
for Merchandise
Merchandise
How much did Martin Co. pay for inventory
in 2005?
Inventory, 1/1/05 $ 130,000 A/P, 1/1/05 $ 23,000
Inventory, 12/31/05 $ 165,000 A/P, 12/31/05 $ 35,000
COGS, 12/31/05 $ 900,000

Purchases
Purchases for
for 2005
2005 were
were $935,000.
$935,000.
a. $900,000
Purchases
Purchases == $900,000
$900,000 ++ $35,000
$35,000
b. $923,000
c. $947,000 Cash
Cash Paid
Paid for
for Merchandise
Merchandise in
in 2005
2005
d. $877,000 was
was $923,000.
$923,000.
Cash
Cash Paid
Paid == $935,000
$935,000 -- $12,000
$12,000
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 Direct
Direct Method
Method
13-19

Cash
Cash Payments
Payments for
for Expenses
Expenses
After
After deducting
deducting depreciation
depreciation and
and other
other
noncash
noncash expenses,
expenses, the
the cash
cash paid
paid for
for expenses
expenses
is
is affected
affected by
by
(1)
(1) whether
whether the
the expense
expense was
was prepaid,
prepaid, and
and
(2)
(2) whether
whether the
the expense
expense was
was accrued.
accrued.

+ Increase in + Decrease in
Cash Paid for prepaid expenses accrued liabilities
= Expenses
Expenses - Decrease in - Increase in
prepaid expenses accrued liabilities

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Direct
Direct Method
Method
Cash Flows From Operating Activities

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Let’s look at the

Indirect Method
that is used by
over 97% of all
companies.

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Indirect
Indirect Method
Method

Changes
Changes in in current
current assets
assets and
and current
current
liabilities
liabilities as
as shown
shown on
on the
the following
following table.
table.

Cash
Cash Flows
Flows
Net
Net from
from Operating
Operating
Income
Income Activities
Activities

++ Losses
Losses and
and ++ Noncash
Noncash
-- Gains
Gains expenses
expenses such
such as
as
depreciation
depreciation and
and
amortization.
amortization.

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Indirect
Indirect Method
Method

Use this table when adjusting Net

Income to Operating Cash Flows.

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Indirect
Indirect Method
Method
Joyce,
Joyce, Inc.
Inc. has
has prepared
prepared the
the Balance
Balance Sheet
Sheet as
as
of
of March
March 31,
31, 2004,
2004, and
and March
March 31,
31, 2005.
2005.
The
The Income
Income Statement
Statement for
for the
the year
year ended
ended
3/31/05
3/31/05 has
has also
also been
been prepared.
prepared. Joyce
Joyce needs
needs
help
help preparing
preparing the
the Statement
Statement ofof Cash
Cash Flows
Flows
using
using the
the indirect
indirect method.
method.

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Indirect
Indirect Method
Method

The
The $8,000
$8,000 gain was
was the
gainJoyce, the
Joyce, Inc.
Inc.
result of selling
result of selling land
land
Income
Income Statement
Statement
costing $32,000
costing $32,000
For
for
for $40,000
$40,000
Forthe
the Year
YearEnding
Ending 3/31/05
3/31/05
during
during the
the period.
period.
Revenues
Revenues $ 727,000
$ 727,000
Operating
Operating Expenses
Expenses (748,000)
(748,000)
Depreciation
Depreciation Expense
Expense (6,000)
(6,000)
Gain
Gain on
on Sale
Sale of
ofLand
Land 8,000
8,000
Net
NetLoss
Loss $$ (19,000)
(19,000)

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Indirect
Indirect Method
Method

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Indirect
Indirect Method
Method
Joyce
Joyce issued
issued $50,000
$50,000 of
of no
no
par
par common
common stock
stock to
to
settle
settle the
the $50,000
$50,000 note
note
payable.
payable.

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Indirect
Indirect Method
Method

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Indirect
Indirect Method
Method

With
With the
the indirect
indirect method,
method, always
always
start
start with
with the
the net
net income
income oror net
net
loss
loss for
for the
the period.
period.

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Indirect
Indirect Method
Method

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Indirect
Indirect Method
Method

Accounts
Accounts receivable
receivable decreased.
decreased.
3/31/05
3/31/05 3/31/04
3/31/04
$23,000
$23,000 -- $40,000
$40,000 == $(17,000)
$(17,000)

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 13-43

Indirect
Indirect Method
Method

Accounts
Accounts payable
payable increased.
increased.
3/31/05
3/31/05 3/31/04
3/31/04
$38,000
$38,000 -- $27,000
$27,000 == $11,000
$11,000

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 13-44

Indirect
Indirect Method
Method

Inventory
Inventory increased.
increased.
3/31/05
3/31/05 3/31/04
3/31/04
$350,000
$350,000 -- $300,000
$300,000 == $50,000
$50,000

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 13-45

Indirect
Indirect Method
Method

Salaries
Salaries payable
payable decreased.
decreased.
3/31/05
3/31/05 3/31/04
3/31/04
$$ 9,000
9,000 -- $14,000
$14,000 == $(5,000)
$(5,000)
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 13-46

Indirect
Indirect Method
Method

Add
Add back
back non-cash
non-cash expenses.
expenses.

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 13-47

Indirect
Indirect Method
Method

Subtract
Subtract gains.
gains.

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Indirect
Indirect Method
Method

The
The operating
operating cash
cash
flows
flows amount
amount comes
comes
from
from the
the schedule
schedule
just
just prepared.
prepared.

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 13-49

Indirect
Indirect Method
Method

Land originally costing $32,000

was sold for $40,000.

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 13-50

Indirect
Indirect Method
Method

Dividends of $20,000 were paid to

owners during the year.

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 13-51

Indirect
Indirect Method
Method

Compute the net change in cash

for the period.

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Indirect
Indirect Method
Method

Complete
Complete the
the Statement
Statement of
of Cash
Cash
Flows
Flows by
by reconciling
reconciling beginning
beginning
cash
cash to
to ending
ending cash.
cash.

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 13-53

Indirect
Indirect Method
Method

Note that the ending

cash amount ties
back to Joyce’s
Balance Sheet at
3/31/05.

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 13-54

Indirect
Indirect Method
Method

In addition, on the face of the statement or in

a supplemental schedule, disclose the
$50,000 noncash financing activity.

Cash interest payments and cash tax

payments must be disclosed.

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 13-55

Class Activity3

End of the Chapter practice question(s)

Pr 13.6 pg 591

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Questions
Questions &
& Answers
Answers

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