ACC60104

Introduction to Accounting
Lecture 10 & 11:
The Statement of Cash Flows

1
 Objectives of Session…
• Define the statement of cash flows

• Identify the importance of preparing a statement of cash flows

• Explain operating, investing and financing cash flow activities

• Prepare the statement of cash flows using the direct method

 Learning Objective 1…

Identify purposes of the Statement of Cash Flows

 What is the Statement of Cash Flows?

A statement that explains the sources of cash

inflow (cash came from) and cash outflow (how
it was spent).
• reports why cash increased or decreased
during the period
• covers a span of time (i. e., one year)
The statement of cash flows explains why net
income as reported on the income statement
does not equal the change in the cash balance.
 Use of Cash Flow Information

Predict
Predict Evaluate
ability to pay
future cash management
debts and
flows decisions
dividends
 Learning Objective 2

Distinguish among operating, investing

and financing cash flows
 Basic Cash Flow Activities

Operating Investing

Financing

The Statement of Cash Flows is divided into

THREE main sections that directly correspond to
the major Activities listed above
 Operating, Investing & Financing
Activities and the SoFP

Current Current
Operating Operating
assets liabilities
cash flows cash flows
Long-term Long-term
assets liabilities
Investing Owners’ Financing
cash flows equity cash flows
Format of the Statement of Cash Flows

• Indirect method
• Direct method***
 How Is the Statement of Cash Flows
Prepared Using the Direct Method?
• The Financial Accounting Standards Board (FASB) &
International Accounting Standards Board (IASB)
prefers the direct method of reporting cash flows
from operating activities.
• This method provides clearer information about the
sources and uses of cash than the indirect method.
• Only the operating section differs between the two
methods.
• Investing & financing sections are the same for the
two methods.
© 2016 Pearson16-10
Education, Ltd.
Two Formats for Operating
Activities
Indirect Direct
method method*
Starts with accrual
Restates the
income and
income in terms
adjusts to net
of cash
cash

Uses account
Shows actual cash
relationships to
receipts and cash
determine
payments
changes in cash

© 2016 Pearson Education, Ltd.

 General Format of the
Statement of Cash Flows
 Company XYZ
Statement of Cash Flows
Year Ended 31 December 2017
Cash flows from operating activities

Receipts:
Collections from customers xxx

Interest received xxx

Dividends received on investments xxx

Total cash receipts xxx

Payments:

To suppliers (xxx)

To employees Section 1: Operating Activities (xxx)

For interest (xxx)

For income tax (xxx)

Total cash payments (xxx)

Net cash provided by operating activities xxx
 Company XYZ
Statement of Cash Flows
Year Ended 31 December 2017
Cash flows from investing activities
Sale of freehold premises Section 2: xxx
Investing
Purchase of motor vehicles Activities (xxx)
Net cash used for investing activities xxx

Cash flows from financing activities

Cash receipts from issuance of common stock / ord shares xxx
Repayment of long-term loans (xxx)
Section 3:
Payment of dividends Financing (xxx)
Activities
Net cash used for financing activities xxx

Net increase/(decrease) in cash -700

Cash balance at beginning of period (1/1 or b/f) 1900
Cash balance at end of period (31/12 or c/f) 1200
A sample
Balance
Sheet to
show us
Direct
Method vs
Indirect
Method
© 2016 Pearson16-15
Education, Ltd.
 A sample
Income
Statement to
show us
Direct
Method vs
Indirect
Method
© 2016 Pearson16-16
Education, Ltd.
Statement of
Cash Flows
Prepared
Using the
Direct
Method
Statement of
Cash Flows
Prepared
Using the
Indirect
Method
 Section 1
Operating Activities
(direct method)

19
 Operating Activities
• Involves activities in the day-to-day running of the
business’ operations
– most important category
• Transactions that make up net income.
– Create revenues, expenses, gains and losses.
– These transactions also affect current assets and
current liabilities on the Balance Sheet.
 Operating Activities
- Major Classes of Cash Receipts and Payments
Cash Receipts
- Cash Payments
= Net Cash Provided By
Operating Activities
To suppliers
for inventory

From sale of goods & To employees for

services to customers salaries
Net Cash
Provided
To other suppliers for
By
operating expenses
Operating
Activities
To lenders for interest
From receipts of interest on loans
& dividends on investments
To government for taxes
Cash Flows from Operating Activities
 Computation involve converting:
• Sales revenues to cash inflows
• Cost of goods sold to cash paid to suppliers
• Operating expenses to a cash outflow
Cash INFLOW from SALES

23
 Converting Sales Revenues to Cash Inflows
Cash receipts: Compute cash from debtors
Collection = Beginning A/C Receivable + Credit Sales
from – Ending A/C Receivable
customers
116000

2016 2017
RM RM
Sales 120,000
Accounts receivable 20,000 24,000
Cash OUTFLOW to Suppliers (Inventory)

25
 Converting Cost of Goods Sold to Cash Paid
to Suppliers
Step : Compute credit purchases and cash paid to
supplier
Cost of Goods = Opening Inventory + Purchases – Closing Inventory
Sold
Cash paid to = Opening Ac Payable + Purchases – Closing Ac Payable
suppliers
78000

2016 2017
RM RM
Cost of goods sold 69,000
Inventory 32,000 38,000
Ac Payable 5,000 2,000
Cash OUTFLOW to Other Suppliers (of services)

27
Converting Operating Expenses to a Cash
Flow
 Types of operating expenses:
Rent
Salary
Depreciation

 Depreciation - is a book entry

 does not involve payment of cash
 Converting Operating Expenses to a Cash
Flow
Prepaid Expense
Cash paid for rent = Ending Prepaid Expense
+ Rent Expense
– Beginning Prepaid Expense
(paid last year but included in
Rent expense)
11000
2016 2017
RM RM
Rent expense 10,000
Prepaid rent - 1,000
 Converting Operating Expenses to a Cash
Flow
Accrued Expenses
Cash paid for = Beginning Salary Payable
salaries + Salary Expense
- Ending Salary Payable
14600

2016 2017
RM RM
Salary expense 15,000
Salary payable 500 900

30
 Statement of Cash Flows
For the Year Ended 31 December 2017
RM RM
Cash flows from operating activities
Receipts:
Collections from customers 116,000
Total cash receipts 116,000
Payments:
To suppliers (78,000)
For expenses * (25,600)
Total cash payments (103.600)
Net cash provided by operating activities 12,400

* Payment for expenses = Rent (RM11,000) + Salary (14,600)

 Section 2
Investing Activities

32
 Investing Activities
• Transactions that increase and decrease long-term assets.
• Acquisition/purchase and disposal/sale of long-term assets
and investments
– Purchase and sale of plant assets including:
• Computers, land, buildings, and equipment
• Includes loans receivable.
 Investing Activities
- Major Classes of Cash Receipts and Payments
Cash Receipts
- Cash Payments
= Net Cash Provided By
Investing Activities
To purchase of
plant assets

From sale of plant assets

To purchase investments Net Cash

Provided
From sale of investments By
Investing
Activities
To make loans to others

From collection of principal on

loans to others
 Cash Flows from Investing Activities

• Acquisitions and disposal of long-term assets and

investments.
• Analyze the accounts to determine activity
– Use of T-account is helpful
• If gain or loss on disposal appears on the Income
Statement, a long-term asset has been sold.
 Computing Cash Flows from Investing Activities
Cash Payments:
For acquisition of plant assets
Purchase of Plant Assets = Ending Plant Assets (Cost) – Beginning
Plant Assets (Cost)

or

Cash Payments:
For acquisition of plant assets
Purchase of Plant Assets = Ending Plant Assets (Book value) + Depreciation
– Beginning Plant Assets (Book value)
 Statement of Cash Flows
For the Year Ended 31 Dec 2017
Cash flows from investing activities
Cash outflow for purchase of equipment (15,000)
Net cash used for investing activities (15,000)
 Section 3
Financing Activities

38
 Financing Activities
• Methods employed by a business to raise funds to finance its
operations.
• Increases and decreases in long-term liabilities and owner’s
equity
– issuing stock/shares and paying dividends
– borrowing money and paying off loans
 Financing Activities
- Major Classes of Cash Receipts and Payments
Cash Receipts
- Cash Payments
= Net Cash Provided By
Financing Activities
To pay
dividends

Net Cash
From sale of common
Provided
stock (ordinary shares)
By
Financing
Activities

To pay off long

From long-term borrowings term loans from
others

40
Cash Flows from Financing Activities

• Issuance of and payments on long-term

notes payable or debentures.
• Issuances of common stock.
• Analyze accounts to determine activity

41
41
 Computing Cash Flows from Financing Activities
Cash Receipts:
From issuance of common stock (Ordinary shares)
Cash =Ending ordinary shares - Beginning ordinary shares
receipt

From issuance of notes payable/loan payable

Cash receipts/ = Ending notes payable - Beginning notes
Proceeds from payable
borrowings/
Increase in notes
payable
 Computing Cash Flows from Financing Activities
Cash Receipts:
From issuance of common stock (ordinary shares)
Cash =Ending ordinary shares - Beginning ordinary shares
receipt
20000

2016 2017
RM RM
Share Capital 40,000 60,000
 Computing Cash Flows from Financing Activities

Cash Payments:
of notes payable/loan payable
Beginning + Cash receipt - Ending Notes = Cash
Notes from Payable payment of
Payable issuance of notes
note payable payable
of dividends:
Beginning + Net - Ending = Dividends paid
Retained Income Retained
Earnings after Earnings
tax

44
44
 Computing Cash Flows from Financing Activities

Cash Payments of Dividends:

Beginning + Net Income - Ending = Dividends paid
Retained after tax Retained
earnings Earnings
13400

2016 2017
RM RM
Net Income 21,000
Retained Earnings 38,500 46,100

45
45
 Statement of Cash Flows
For the Year Ended 31 Dec 2017
Cash flows from financing activities
Proceeds from issue of ordinary shares 20,000
Payment of dividends (13,400)
Net cash used for financing activities 6,600
 Possibility of Non-cash Investing
and Financing Activities
• Sometimes companies make investments that do not
require cash.
• Such transactions are called non-cash investing and
financing activities. Examples are:
– Acquire land by issuing a note payable
– Retire debt by issuing stock
– Convert preferred stock to common stock
• These activities appear as a separate schedule at the
bottom of the statement of cash flows or in the notes
to the financial statements.
© 2016 Pearson Education, Ltd.
Non-cash Investing & Financing Activities

© 2016 Pearson Education, Ltd.

 Tutorial Questions

Short Exercises Questions: S16-2, S16A-12

Exercises: E16A-28, E16A-29, E16A-30

0102723912 Gregory
01128188585

See you next lecture

49