12

STATEMENT OF
CASH FLOWS

Prepared by: Muhammad Gaus Samdani,

Head of Financial Controls
BRAC BANK LIMITED (BBL)
12-1
 Study
Study Objectives
Objectives

1. Indicate the usefulness of the statement of cash flows.

2. Distinguish among operating, investing, and financing

activities.

3. Prepare a statement of cash flows using the indirect

method.

12-2
 Usefulness
Usefulness and
and Format
Format

Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net

cash provided (used) by operating activities.

4. Cash investing and financing transactions during the

period.

12-3
 Usefulness
Usefulness and
and Format
Format

Classification of Cash Flows

Operating Investing Financing

Activities Activities Activities

Income Changes in Changes in

Statement Items Investments Long-Term
and Long-Term Liabilities and
Asset Items Stockholders’
Equity

12-4
 Usefulness
Usefulness and
and Format
Format
Illustration 12-1
Classification of Cash Flows Typical receipt and
payment classifications

12-5
 Usefulness
Usefulness and
and Format
Format
Illustration 12-1
Classification of Cash Flows Typical receipt and
payment classifications

12-6
12-7
 Usefulness
Usefulness and
and Format
Format

Format of the Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.

3. Financing activities.

12-8
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 12-2

12-9
 Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Illustration: Classify each of these

transactions by type of cash flow activity.

1. Issued 100,000 shares of CU5 par value

Financing
common stock for CU800,000 cash.
2. Borrowed CU200,000, signing a 5-year note Financing
bearing 8% interest.
3. Purchased two semi-trailer trucks for Investing
CU170,000 cash.
4. Paid employees CU12,000 for salaries and Operating
wages.
5. Collected CU20,000 cash for services Operating
provided.
12-10
 Usefulness
Usefulness and
and Format
Format

Preparing the Statement of Cash Flows

Three Sources of Information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

12-11
 Usefulness
Usefulness and
and Format
Format

Preparing the Statement of Cash Flows

Three Major Steps:
Illustration 12-3

12-12
 Usefulness
Usefulness and
and Format
Format

Preparing the Statement of Cash Flows

Three Major Steps:
Illustration 12-4

12-13
 Usefulness
Usefulness and
and Format
Format

Preparing the Statement of Cash Flows

Three Major Steps:
Illustration 12-5

12-14
 Usefulness
Usefulness and
and Format
Format

Indirect and Direct Methods

Companies favor the indirect
method for two reasons:
1. Easier and less costly to
prepare.

2. Focuses on differences
between net income and net
cash flow from operating
activities.

12-15
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration – Indirect Method
Illustration 12-6

12-16
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 12-5

12-17
 Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 12-5

Additional information for 2012:

1. Depreciation expense was comprised of CU6,000 for building and CU3,000 for equipment.
2. The company sold equipment with a book value of CU7,000 (cost CU8,000, less
accumulated depreciation CU1,000) for CU4,000 cash.
3. Issued CU110,000 of long-term bonds in direct exchange for land.
4. A building costing CU120,000 was purchased for cash. Equipment costing CU25,000 was
also purchased for cash.
5. Issued common stock for CU20,000 cash.
6. The company declared and paid a CU29,000 cash dividend.
12-18 SO 4.
 Preparation
Preparation ofof the
the Statement
Statement of
of Cash
Cash Flows
Flows
–– Indirect
Indirect Method
Method

Step 1: Operating Activities

Determine net cash provided/used by operating activities by
converting net income from accrual basis to cash basis.

Common adjustments to Net Income (Loss):

 Add back non-cash expenses (depreciation, amortization,
or depletion expense).
 Deduct gains and add losses.
 Changes in noncash current assets and current liabilities.

12-19
 Step
Step 1:
1: Operating
Operating Activities
Activities

Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of capital stock.
c. Payment of cash dividends to the company’s
stockholders.
d. None of the above.

12-20
 Step
Step 1:
1: Operating
Operating Activities
Activities

Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 12-6
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities $ 154,000

12-21
 Operating
Operating Activities
Activities

Loss on Sale of Equipment

Companies report as a source of cash in the investing
activities section the actual amount of cash received from
the sale.

 Any loss on sale is added to net income in the

operating section.

 Any gain on sale is deducted from net income in the

operating section.

12-22
 Operating
Operating Activities
Activities

Loss on Sale of Equipment

Illustration 12-7

Cash flows from operating activities:

Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Net cash provided by operating activities $ 157,000

12-23
 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 12-8
Accounts Receivable

1/1/012 Balance 30,000 Receipts from customers 517,000

Revenues 507,000

12/31/12 Balance 20,000

Company adds to net income the amount of the decrease in

accounts receivable.

12-24
 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

Illustration 12-09
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Decrease in accounts receivable 10,000
Net cash provided by operating activities $ 167,000

12-25 SO 4 Prepare a statement of cash flows using the indirect method.

 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

When the Inventory balance increases, the cost of
merchandise purchased exceeds the cost of goods sold.

Inventory

1/1/12 Balance 10,000 Cost of goods sold 150,000

Purchases 155,000

12/31/12 Balance 15,000

Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
12-26
 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

Illustration 12-10
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Net cash provided by operating activities $ 162,000

12-27
 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

When the Prepaid Expense balance increases, cash paid for

expenses is higher than expenses reported on an accrual
basis. The company deducts the decrease from net income
to arrive at net cash provided by operating activities.

If prepaid expenses decrease, reported expenses are higher

than the expenses paid.

12-28
 Operating
Operating Activities
Activities

Changes to Noncash Current Asset Accounts

Illustration 12-11
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Net cash provided by operating activities $ 158,000

12-29 SO 4 Prepare a statement of cash flows using the indirect method.

 Operating
Operating Activities
Activities

Changes to Noncash Current Liability Accounts

When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.

When Income Tax Payable decreases, the income tax expense

reported on the income statement was less than the amount of
taxes paid during the period. The decrease is subtracted from
net income to determine net cash provided by operating activities.

12-30
 Operating
Operating Activities
Activities

Changes to Noncash Current Liability Accounts

Illustration 12-11
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on sale of equipment 3,000
Decrease in accounts receivable 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 $ 172,000
12-31 SO 4
 Operating
Operating Activities
Activities

Summary of Conversion to
Net Cash Provided by Illustration 12-12

Operating Activities—
Indirect Method

12-32
12-33
 Step
Step 2:
2: Investing
Investing and
and Financing
Financing Activities
Activities

Company purchased land of CU110,000 by issuing long-term

bonds. This is a significant noncash investing and financing activity
that merits disclosure in a separate schedule.

Land
1/1/12 Balance 20,000
Issued bonds 110,000
12/31/12 Balance 130,000

Bonds Payable
1/1/12 Balance 20,000
For land 110,000
12/31/12 Balance 130,000

12-34
 Investing
Investing and
and Financing
Financing Activities
Activities
Partial statement Illustration 12-14

Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000

Disclosure: Issuance of bonds to purchase land $ 110,000

12-35 SO 4
 Investing
Investing and
and Financing
Financing Activities
Activities

From the additional information, the company acquired an

office building for CU120,000 cash. This is a cash outflow
reported in the investing section.

Building
1/1/12 Balance 40,000
Office building 120,000

12/31/12 Balance 160,000

12-36
 Investing
Investing and
and Financing
Financing Activities
Activities
Partial statement Illustration 12-14

Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000

Disclosure: Issuance of bonds to purchase land $ 110,000

12-37 SO 4
 Investing
Investing and
and Financing
Financing Activities
Activities
The additional information explains that the equipment increase
resulted from two transactions: (1) a purchase of equipment of
CU25,000, and (2) the sale for CU4,000 of equipment costing
CU8,000.
Equipment

1/1/12 Balance 10,000 Equipment sold 8,000

Purchase 25,000

12/31/12 Balance 27,000

Cash 4,000
Journal
Accumulated depreciation 1,000
Entry
Loss on sale of equipment 3,000
Equipment 8,000

12-38
 Illustration 12-14
Cash flows from operating activities:
Statement
Statement Net income $ 145,000
Adjustments to reconcile net income to net cash
of
of Cash
Cash provided by operating activities:
Depreciation expense 9,000
Flows
Flows Loss on sale of equipment 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Indirect Decrease in income taxes payable (2,000)
Method Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
12-39
SO 4
 Investing
Investing and
and Financing
Financing Activities
Activities

The increase in common stock resulted from the issuance of

new shares.

Common Stock

1/1/12 Balance 50,000

Shares sold 20,000

12/31/12 Balance 70,000

12-40
 Investing
Investing and
and Financing
Financing Activities
Activities
Illustration 12-14
Partial statement
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000

Disclosure: Issuance of bonds to purchase land $ 110,000

12-41
SO 4
 Investing
Investing and
and Financing
Financing Activities
Activities
Retained earnings increased CU116,000 during the year. This
increase can be explained by two factors: (1) Net income of
CU145,000 increased retained earnings, and (2) Dividends of
CU29,000 decreased retained earnings.

Retained Earnings

1/1/12 Balance 48,000

Dividends 29,000 Net income 145,000

12/31/12 Balance 164,000

12-42
 Illustration 12-14
Cash flows from operating activities:
Statement
Statement Net income $ 145,000
Adjustments to reconcile net income to net cash
of
of Cash
Cash provided by operating activities:
Depreciation expense 9,000
Flows
Flows Loss on sale of equipment 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Indirect Decrease in income taxes payable (2,000)
Method Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
12-43
SO 4
 Step
Step 3:
3: Net
Net Change
Change in
in Cash
Cash

Compare the net change in cash on the Statement of Cash

Flows with the change in the cash account reported on the
Balance Sheet to make sure the amounts agree.

12-44
 Investing
Investing and
and Financing
Financing Activities
Activities

Review Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.

12-45
 Direct
appendix 12A Method

1. Compute net cash provided by operating activities by

adjusting each item in the income statement from the
accrual basis to the cash basis.

2. Companies report only major classes of operating cash

receipts and cash payments.

3. For these major classes, the difference between cash

receipts and cash payments is the net cash provided by
operating activities.

12-46
 Direct
appendix 12A Method

Step 1: Operating Activities

Illustration 12A-2

12-47 SO 6
 Direct
appendix 12A Method

Illustration 12A-1

12-48
 Direct
appendix 12A Method

Illustration 12A-1

12-49
 appendix 12A
Illustration 12A-1

12-50
 Direct
appendix 12A Method

Cash Receipts from Customers

For Computer Services, accounts receivable decreased CU10,000.
Illustration 12A-4

Illustration 12A-5

12-51
 Direct
appendix 12A Method

Cash Payments to Suppliers

In 2012, Computer Services’ inventory increased CU5,000.

Inventory
1/1/12 Balance 10,000
Purchases 155,000 Cost of goods sold 150,000
12/31/12 Balance 15,000

Illustration 12A-8

Payments to suppliers 139,000

Purchases 155,000

12-52
 Direct
appendix 12A Method

Cash Payments to Suppliers

In 2012, Computer Services’ inventory increased CU5,000.
Illustration 12A-9

12-53
 Direct
appendix 12A Method

Cash Payments for Operating Expenses

Cash payments for operating expenses were CU111,000.
Illustration 12A-10

Illustration 12A-11

12-54
 Direct
appendix 12A Method

Cash Payments for Interest

In 2012, Computer Services’ had interest expense of CU42,000.

Interest Payable
Cash paid for interest 42,000 1/1/12 Balance
0
Interest expense
42,000
12/31/12 Balance
0

12-55
 Direct
appendix 12A Method

Cash Payments for Income Taxes

Cash payments for income taxes were CU49,000.

Income Tax Payable

Cash paid for taxes 49,000 1/1/12 Balance
8,000
Income tax expense
47,000
12/31/10 Balance
6,000

Illustration 12A-13

12-56
 Direct
appendix 12A Method

Illustration 12A-14
Operating activities section
of the statement of cash flows

12-57
 Direct
appendix 12A Method

Step 2: Investing and Financing Activities

Increase in Equipment. (1) Equipment purchased for CU25,000,
and (2) sale for CU4,000 of equipment CU8,000.
Illustration 12A-15

Accumulated Depreciation
Equipment sold 1,000 1/1/12 Balance
1,000
Depreciation expense
3,000
12/31/12 Balance
3,000

12-58
 Direct
appendix 12A Method

Step 2: Investing and Financing Activities

Increase in Equipment. (1) Equipment purchased for
CU25,000, and (2) sale for CU4,000 of equipment CU8,000.

Cash 4,000
Accumulated depreciation 1,000
Loss on sale of equipment 3,000
Equipment
8,000

12-59
 Direct
appendix 12A Method

Step 2: Investing and Financing Activities

Increase in Land. Land increased
Significant noncash
CU110,000. The additional information
investing and financing
section indicates that the company
transaction.
exchanged bonds for land.

Increase in Building. Acquired building

Investing transaction.
for CU120,000 cash.

Increase in Bonds Payable. Bonds

Payable increased CU110,000. The Significant noncash
company acquired land by exchanging investing and financing
bonds for land. transaction.

12-60
 Direct
appendix 12A Method

Step 2: Investing and Financing Activities

Increase in Common Stock. Increase
in Common Stock of CU20,000. Financing transaction.
Increase resulted from the issuance of
new shares of stock.

Increase in Retained Earnings. The

CU116,000 net increase in Retained
Earnings resulted from net income of Financing transaction
CU145,000 and the declaration and (cash dividend).
payment of a cash dividend
of CU29,000.

12-61
 Direct
appendix 12A Method

Step 2:
Investing
and
Financing
Activities

Illustration 12A-16
Statement of cash
flows, 2012—direct
method

12-62
 Key Points
 The definition of cash equivalents used in IFRS is similar to that
used in GAAP. A major difference is that in certain situations,
bank overdrafts are considered part of cash and cash
equivalents under IFRS (which is not the case in GAAP). Under
GAAP, bank overdrafts are classified as financing activities in
the statement of cash flows and are reported as liabilities on
the balance sheet.

12-63
 Key Points
 One area where there can be substantial differences between
IFRS and GAAP relates to the classification of interest,
dividends, and taxes. The following table indicates the
differences between the two approaches.

12-64
 Under IFRS, interest paid can be reported as:

a) only a financing element.

b) a financing element or an investing element.

c) a financing element or an operating element.

d) only an operating element.

12-65
 IFRS requires that noncash items:

a) be reported in the section to which they relate, that

is, a noncash investing activity would be reported in
the investing section.

b) be disclosed in the notes to the financial statements.

c) do not need to be reported.

d) be treated in a fashion similar to cash equivalents.

12-66
 In the future, it appears likely that:

a) the income statement and balance sheet will have

headings of operating, investing, and financing,
much like the statement of cash flows.

b) cash and cash equivalents will be combined in a

single line item.

c) the IASB will not allow companies to use the direct

approach to the statement of cash flows.

d) None of the above.

12-67