• Statement of Cash Flows

• Purpose of the Statement of Cash Flows

• Reports cash flows
– Cash flows from operating activities –
transactions that affect net income.
– Cash flows from investing activities – transactions
that affect noncurrent assets.
– Cash flows from financing activities – transactions
that affect equity and debt of the entity.
1
• Noncash Investing and Financing Activities
• Operating Activities, Investing Activities &
Financing Activities
• Cash and Cash Equivalents
• Direct Method
– Cash Received from Customers
– Interest and Dividends Received
– Cash Paid for Merchandise
– Cash Payments for Expenses
2
Chapter STATEMENT OF CASH
FLOWS –Indirect Method
13

3
 Indirect Method
Changes
Changesin incurrent
currentassets
assetsand
andcurrent
current
liabilities
liabilitiesas
asshown
shownononthe
thefollowing
followingtable.
table.

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

++Losses
Lossesandand ++Noncash
Noncash
--Gains
Gains expenses
expensessuch
suchas as
depreciation
depreciationand
and
amortization.
amortization.

4
 Indirect Method

Use this table when adjusting Net Income

to Operating Cash Flows.
5
6
 The
The Indirect
Indirect Method
Method
Balance Sheet
Cash
Liabilities
Noncash
Assets Stockholders’
Equity

Assets = Liabilities + Stockholders’ Equity

Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets

7
 The
The Indirect
Indirect Method
Method
Balance Sheet
Cash
Liabilities
Noncash
Assets Stockholders’
Equity

Assets = Liabilities + Stockholders’ Equity

Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
1 2 3
The cash flows are determined by analyzing liabilities,
stockholders’ equity, and noncash assets. 8
 The
The Indirect
Indirect Method
Method

Start
Start with
with the
the accrual
accrual basis
basis net
net income
income
(shown
(shown inin the
the income
income statement,
statement, thethe
Retained
Retained Earnings
Earnings account,
account, oror the
the
statement
statement ofof stockholders’
stockholders’ equity).
equity).

9
 The
The Indirect
Indirect Method
Method
Find
Find the
the net
net income.
income.
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance
Date Item Debit Credit Debit Credit
2006
To
To statement
statement
Jan. 1 Balance 202,300
Dec. 31 Net income 108,000 310,300
31 Cash dividends 28,000 282,300

10
 Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000

Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Inc. in accounts receivable $ 9,000
Deduct:
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating activity. $100,500

11
 The
The Indirect
Indirect Method
Method

Next,
Next, wewe need
need toto determine
determine depreciation
depreciation expense
expense
for
for the
the year.
year. IfIf itit isn’t
isn’t given
given on
on the
the income
income
statement,
statement, sometimes
sometimes itit can can be
be found
found by
by analyzing
analyzing
the
the Accumulated
Accumulated Depreciation
Depreciation account.
account.

12
 The
The Indirect
Indirect Method
Method
Determine
Determine depreciation
depreciation expense.
expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 58,300
Dec. 31 Depreciation for year 7,000 65,300

to
to statement
statement

13
 Operating Activities – Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
Deduct: $125,200
Inc.Because Depreciation
in accounts receivable Expense
$ 9,000
Dec.reduced
in accounts
net payable
income but did 3,200
not
Dec.require
in income
an taxes payable
outflow of cash, 500
it is
Gain on sale of land 12,000 24,700
added back to
Net cash flow from operating
net income.
activities $100,500
14
 The
The Indirect
Indirect Method
Method

Select
Select current
current assets
assets and
and current
current
liabilities
liabilities that
that impact
impact cash
cash flow
flow and
and
determine
determine thethe increases
increases and
and decreases.
decreases.

15
 Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
Determine the debit or
credit change of each
item above.

16
 Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
These debit changes are subtracted from net
income in the operating activities section of
the statement of cash flows. Think of these
debits as deductions from net income in
arriving at net cash flow from operations. 17
 Changes in Current Accounts
Change
Accounts 2006 2005 Debit
Credit 9,000
Accounts receivable (net) $74,000 $65,000 8,000
Inventories 172,000 180,000 3,200
Accounts payable (mdse.) 43,500 46,700 2,200
Accrued expenses payable 26,500 24,300 500
Income taxes payable 7,900 8,400
These credit changes are added to net income in the
operating activities section of the statement of cash
flows. Think of these credits as additions to net
income in arriving at net cash flow from operations.
18
 Operating Activities—Indirect Method
Cash flows from operating activities:
Net income per income statement $108,000
Add:
Depreciation $ 7,000
Decrease in inventories 8,000
Increase in accrued expenses 2,200 17,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating
activities $100,500
19
 The
The Indirect
Indirect Method
Method

Analyze
Analyze the the income
income statement
statement toto determine
determine
ifif there
there are
are any
any gains
gains or
or losses
losses from
from selling
selling
investments,
investments, equipment,
equipment, etc.etc.

20
 Rundell Inc.
Income Statement
For the Year Ended December 31, 2006
Sales $1,180,000
Cost of merchandise sold 790,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses 203,000
Income from operations $ 187,000
Other income:
Gain on sale of land $12,000
$12,000
Other expense:
Interest expense 8,000 4,0000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000

21
 Operating Activities—Indirect Method
Cash flows from operating activities:
Net income, per income statement $108,000
Add:
Depreciation $ 7,000
This gain was
Decrease included in net income,
in inventories 8,000 but
didIncrease in accrued
not represent anexpenses 2,200flow.
operating cash 17,200
$125,200
Inc. in accounts receivable $ 9,000
Dec. in accounts payable 3,200
Dec. in income taxes payable 500
Gain on sale of land 12,000 24,700
Net cash flow from operating
activities $100,500
22
The
The Indirect
Indirect Method
Method
IfIf there
there had
had been
been aa loss
loss on
on this
this
sale,
sale, the
the loss
loss would
would have
have been
been
added
added to to net
net income.
income.

23
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Dividends
Dividends
ACCOUNT Dividends Payable ACCOUNT NO. 23
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 10,000
10 Cash paid 10,000 -- --
June 20 Dividends declared 14,000 14,000
July 10 Cash paid 14,000 -- --
Dec. 20 Dividends declared 14,000 14,000

Total
Total cash
cash paid
paid $24,000
$24,000
24
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities

Because
Because paying
paying of of dividends
dividends
affects
affects equity,
equity, itit isis aa negative
negative
$24,000
$24,000 cash
cash flow
flow fromfrom
financing
financing activities
activities transaction.
transaction.

25
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Sale
Sale of
of Common
Common Stock
Stock
ACCOUNT Common Stock ACCOUNT
NO. 33 Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 16,000
Nov. 1 4,000 shares issued for cash 8,000 24,000

26
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Sale
Sale of
of Common
Common Stock
Stock

ACCOUNT Paid-In Capital in Excess of Par--Common ACCT.

NO. 34 Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 80,000
Nov. 1 4,000 shares issued for cash 40,000 120,000

27
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Issuing
Issuing common
common stock
stock affects
affects equity;
equity;
therefore,
therefore, wewe have
have aa total
total positive
positive cash
cash
flow
flow of
of $48,000
$48,000 from
from this
this financing
financing
activities
activities transaction.
transaction.

28
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
Retirement
Retirement of
of Bonds
Bonds Payable
Payable

ACCOUNT Bonds Payable ACCOUNT.

NO. 25 Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 150,000
June 30 Retired by payment of cash
at face amount 50,000 100,000

29
 Cash
Cash Flows
Flows from
from
Financing
Financing Activities
Activities
This
This transaction
transaction isis aa negative
negative
cash
cash flows
flows from
from financing
financing
activities
activities item
item because
because long-
long-
term
term debt
debt isis involved.
involved.

30
 Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Purchased
Purchased aa Building
Building

ACCOUNT Building ACCOUNT NO. 18

Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 200,000
Dec. 27 Purchased for cash 60,000 260,000

31
 Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Purchased
Purchased aa Building
Building
Purchasing
Purchasing aa building
building involves
involves aa
noncurrent
noncurrent asset,
asset, so
so this
this isis aa
negative
negative cash
cash flows
flows from
from
investing
investing activities
activities item.
item.

32
 Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Land
Land Transactions
Transactions
ACCOUNT Land ACCOUNT NO. 16
Balance
Date Item Debit Credit Debit Credit
2006
Jan. 1 Balance 125,000
June 8 Sold for $72,000 cash 60,000 65,000
Oct. 12 Purchased for $15,000 cash 15,000 80,000

33
 Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Land
Land Transactions
Transactions
The
The first
first transaction,
transaction, thethe sale
sale of
of
land,
land, results
results in in aa positive
positive cash
cash flow
flow
from
from investing
investing activities
activities because
because
land
land isis aa noncash
noncash asset.
asset.

34
 Cash
Cash Flows
Flows from
from
Investing
Investing Activities
Activities
Land
Land Transactions
Transactions

The
The $12,000
$12,000 gain
gain was
was recorded
recorded earlier
earlier on
on
previous
previous slide
slide as
as an
an operating
operating activity.
activity. The
The
purchase
purchase of
of land
land also
also is
is an
an investing
investing activity.
activity.

35
 Refer
Refer to to Exhibit
Exhibit 66 inin your
your
textbook
textbook to to see
see the
the formal
formal
statement
statement of of cash
cash flows
flows using
using
the
the indirect
indirect approach.
approach.

Rundell Inc.
Statement of Cash Flows
For the Year Ended December 31, 2006

Cash flows from operating activities:

Net income $108,000
Add: Depreciation $ 7,000
Decrease in inventor. 8,000
Increase in accrued exp. 2,200 17,200
$125,000
Deduct: Increase in A/R $9,000
Decrease in accts. Pay. 3,200
Decrease in ITP 500
Gain on sale of land 12,000 24,700
Net cash flow from operating act. $100,500
Cash flows from investing activities:
Cash from sale of land $72,000
Less: Cash paid to pur. land $15,000
Cash paid for bldg. 60,000 75,000(3,000)
Cash flows from financing activities:
Cash received from sale of c.s. $48,000
Less: Cash paid to retire b. $50,000
Cash paid for divid. 24,000 74,000
Net cash flow for financing (26,000)
Increase in cash $71,500
Cash at beginning of year 26,000
Cash at end of year $97,500

36
 Let’s prepare
another
Statement of
Cash Flows
using the
Indirect Method.
37
 Indirect Method - Example
Joe’s
Joe’s Place
Place has
has prepared
prepared the
the Balance
Balance Sheet
Sheet
as
as of
of March
March 31,
31, 2003,
2003, and
and March
March 31,
31, 2002.
2002.
The
The Income
Income Statement
Statement for
for the
the year
year ended
ended
3/31/03
3/31/03 has
has also
also been
been prepared.
prepared. JoeJoe
needs
needs help
help preparing
preparing the
the Statement
Statement ofof
Cash
Cash Flows.
Flows.

Joe’s
Place
38
 Indirect Method - Example
The
The $8,000
$8,000 gain was
gainJoe's the
wasPlace
the
Joe's Place
result
result of
of selling
selling
Income land
land
Statement
Income Statement
costing
costing $32,000
For thefor
$32,000
Forthe for
Year$40,000
Year$40,000
Ending
Ending 3/31/03
3/31/03
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)

39
Indirect Method - Example

40
 Indirect Method - Example
Joe’s
Joe’s Place
Place 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.

41
Indirect Method - Example

42
Indirect Method - Example

With
With the
theindirect
indirect method,
method, always
always
start
startwith
withthe
thenet
net income
incomeor or net
net
loss
loss for
forthe
theperiod.
period.

43
Indirect Method - Example

44
Indirect Method - Example

Accounts
Accountsreceivable
receivabledecreased.
decreased.
3/31/03
3/31/03 3/31/02
3/31/02
$23,000
$23,000 --$40,000
$40,000 == $(17,000)
$(17,000)

45
Indirect Method - Example

Accounts
Accountspayable
payable increased.
increased.
3/31/03
3/31/03 3/31/02
3/31/02
$38,000
$38,000-- $27,000
$27,000== $11,000
$11,000

46
Indirect Method - Example

Inventory
Inventoryincreased.
increased.
3/31/03
3/31/03 3/31/02
3/31/02
$350,000
$350,000-- $300,000
$300,000==$50,000
$50,000
47
Indirect Method - Example

Salaries
Salaries payable
payable decreased.
decreased.
3/31/03
3/31/03 3/31/02
3/31/02
$$9,000
9,000-- $14,000
$14,000==$(5,000)
$(5,000)
48
Indirect Method - Example

Add
Addback
backnon-cash
non-cashexpenses.
expenses.

49
Indirect Method - Example

Subtract
Subtractgains.
gains.

50
Indirect Method - Example

The
Theoperating
operating cash
cash
flows
flowsamount
amount comes
comes
from
fromthetheschedule
schedule
just
justprepared.
prepared.

51
 Indirect Method - Example

Land
Landoriginally
originallycosting
costing$32,000
$32,000
was
wassold
soldfor
for$40,000.
$40,000.

52
 Indirect Method - Example

Dividends
Dividendsof
of $20,000
$20,000were
werepaid
paidto
to
owners
ownersduring
duringthe
the year.
year.

53
 Indirect Method - Example

Compute
Computethe
the net
net change
change in
in cash
cash
for
forthe
theperiod.
period.

54
 Indirect Method - Example

Complete
Completethe
theStatement
Statement of
of Cash
Cash
Flows
Flowsby
byreconciling
reconciling beginning
beginning
cash
cashtotoending
endingcash.
cash.

55
Indirect Method - Example
Note
Notethat
that the
theending
ending
cash
cashamount
amount ties
ties
back
backtotothe
theJoe’s
Joe’s
Place
PlaceBalance
BalanceSheet
Sheet
at
at3/31/03.
3/31/03.

56
Indirect Method - Example

In
In addition,
addition, on
on the
the face
face
of
of the
the statement
statement oror in
in aa
supplemental
supplemental
schedule,
schedule, disclose
disclose the
the
$50,000
$50,000 noncash
noncash
financing
financing activity.
activity.

57
Indirect Method - Example

In
In addition,
addition, cash
cash
interest
interest payments
payments and
and
cash
cash tax
tax payments
payments
must
must also
also be
be disclosed
disclosed
separately.
separately.

58
 Managing Cash Flows
Cash
CashBudgets
Budgetsare
areused
usedby bymanagement
managementtotoplan
plan and
and
forecast
forecast future
futurecash
cashflows.
flows.

A C a s h B u d g e t c a n b e u s e d to :

F o r c e m a n a g e m e n t to c o o r d in a te a c tiv itie s .

P r o v id e m a n a g e r s w ith a d v a n c e n o tic e o f a v a ila b le r e s o u r c e s .

P r o v id e ta r g e ts u s e fu l in e v a lu a tin g p e r fo r m a n c e .

P r o v id e a d v a n c e w a r n in g s o f p o te n tia l c a s h s h o r ta g e s .

59
 Managing Cash Flows
•• Increase
Increase collection
collection of of accounts
accounts
receivables.
receivables.
•• Keep
Keep inventory
inventory low.
low.
•• Delay
Delay payment
payment of of liabilities.
liabilities.
•• Plan
Plan timing
timing of
of major
major expenditures.
expenditures.
•• Invest
Invest idle
idle cash.
cash.

60
 Cash Budgeting
Cash
CashBudget
Budget
May
May June
June July
July August
August
Beginning
Beginningcash
cashbalance
balance $$ 27,500
27,500 $$ 15,000
15,000 $$ -- $$ --
Add:
Add: Cash
Cashreceipts
receipts 3,500
3,500
Total
Totalavailable
available cash
cash $$ 31,000
31,000

Less:
Less: Cash
Cashdisbursements
disbursements 16,000
16,000
Excess
Excess(deficiency)
(deficiency)of
of
available
available cash
cashover
overcash
cash
disbursements
disbursements $$ 15,000
15,000
Financing
Financingneeded
needed
Financing
Financingrepayments
repayments --
Ending
Endingcash
cashbalance
balance $$ 15,000
15,000

The
Theending
endingcash
cashbalance
balanceof
of one
onemonth
monthbecomes
becomesthe
the
beginning
beginning cash
cash balance
balanceof
of the
thenext
nextmonth.
month.
61
 Cash Budgeting
Cash
CashBudget
Budget
May
May June
June July
July August
August
Beginning
Beginningcash
cashbalance
balance $$ 27,500
27,500 $$ 15,000
15,000 $$ 10,000
10,000 $$ 10,000
10,000
Add:
Add: Cash
Cashreceipts
receipts 3,500
3,500 2,000
2,000 9,000
9,000 14,000
14,000
Total
Totalavailable
available cash
cash $$ 31,000
31,000 $$ 17,000
17,000 $$ 19,000
19,000 $$ 24,000
24,000

Less:
Less: Cash
Cashdisbursements
disbursements 16,000
16,000 18,000
18,000 6,000
6,000 8,000
8,000
Excess
Excess(deficiency)
(deficiency)of
of
available
available cash
cashover
overcash
cash
disbursements
disbursements $$ 15,000
15,000 $$ (1,000)
(1,000) $$ 13,000
13,000 $$ 16,000
16,000
Financing
Financingneeded
needed 11,000
11,000 -- --
Financing
Financingrepayments
repayments -- -- 3,000
3,000 6,000
6,000
Ending
Endingcash
cashbalance
balance $$ 15,000
15,000 $$ 10,000
10,000 $$ 10,000
10,000 $$ 10,000
10,000

Financing
Financingis
isneeded
neededin
inJune
Junebecause
becausethe
thecompany
company
must
must maintain
maintainaaminimum
minimumcash
cashbalance
balanceof
of$10,000.
$10,000.
62
End of Chapter 13

63