Learning Objective

Classification of Cash Flows 2

Distinguish among
operating, investing, and
financing activities.

Operating Investing Financing

Activities Activities Activities

Income Changes in Changes in

Statement Items Investments Non-current
and Non- Liabilities and
current Equity
Assets

13-1 LO 2
 Classification of Cash Flows

Operating activities—Income statement items

Cash inflows: Illustration 13-1
Typical receipt and payment
classifications
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.

13-2 LO 2
 Classification of Cash Flows

Investing activities—Changes in investments and non-

current assets Illustration 13-1
Typical receipt and payment
Cash inflows: classifications

From sale of property, plant, and equipment.

From sale of investments in 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 investments in debt or equity securities of
other entities.
To make loans to other entities.
13-3 LO 2
 Classification of Cash Flows

Financing activities—Changes in non-current

liabilities and equity Illustration 13-1
Typical receipt and payment
Cash inflows: classifications

From sale of ordinary shares.

From issuance of long-debt (bonds and notes).
Cash outflows:
To shareholders as dividends.
To redeem long-term debt or reacquire
ordinary shares (treasury shares).

13-4 LO 2
 Significant Non-Cash Activities

1. Direct issuance of ordinary shares to purchase assets.

2. Conversion of bonds into ordinary shares.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Companies report non-cash activities in either a

 separate schedule (bottom of the statement) or
 separate note to the financial statements.

13-5 LO 2
 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.
 Analyze changes to non-cash current asset and current
liability accounts.
13-6 LO 3
 Step 1: Operating Activities

Summary of Conversion to Net Cash Provided

by Operating Activities—Indirect Method

Illustration 13-12
Adjustments required to convert net income to net cash provided by operating activities
13-7 LO 3
 Illustration 13-14
Cash flows from operating activities:
Statement Net income € 145,000
of Cash Adjustments to reconcile net income to net cash
provided by operating activities:
Flows Depreciation expense
Loss on disposal of plant assets
9,000
3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Indirect Increase in accounts payable 16,000
Method Decrease in income taxes payable (2,000)
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 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
13-8
 Using Cash Flow to Evaluate a
Company
Learning Objective
Free cash flow describes the cash 4
Analyze the statement of
cash flows.
remaining from operations after adjustment
for capital expenditures and dividends.

Illustration 13-15
Free cash flow

13-9 LO 4
 APPENDIX 13A DIRECT METHOD
Learning Objective 5
Prepare a statement of
1. Compute net cash provided by cash flows using the direct
method.
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.

13-10 LO 5
 Step 1: Operating Activities

Illustration 13A-2
13-11 Major classes of cash receipts and payments LO 5
 Step 1: Operating Activities

CASH RECEIPTS FROM CUSTOMERS

For Computer Services, accounts receivable decreased
€10,000. Illustration 13A-4
Analysis of accounts receivable
Accounts Receivable
1/1/017 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000

12/31/17 Balance 20,000

Illustration 13A-5
Formula to compute cash receipts from customers—direct method

13-12 LO 5
 Step 1: Operating Activities

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Inventory
1/1/17 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000

12/31/17 Balance 15,000

Accounts Payable
Payment to suppliers 139,000 1/1/17 Balance 12,000
Purchases 155,000

12/31/17 Balance 28,000

Illustration 13A-8
13-13 Analysis of accounts payable LO 5
 Step 1: Operating Activities

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.

Illustration 13A-9
Formula to compute cash payments to suppliers—direct method

13-14 LO 5
 Step 1: Operating Activities

CASH PAYMENTS FOR OPERATING EXPENSES

Cash payments for operating expenses were €115,000.

Illustration 13A-10
Computation of cash payments for operating expenses

Illustration 13A-11
Formula to compute cash payments for operating expenses—direct method
13-15 LO 5
 Step 1: Operating Activities

CASH PAYMENTS FOR INTEREST

In 2017, Computer Services’ had interest expense of €42,000.

Interest Payable
Cash paid for interest 42,000 1/1/17 Balance
0
Interest expense
42,000
12/31/17 Balance
0

13-16 LO 5
 Step 1: Operating Activities

CASH PAYMENTS FOR INCOME TAXES

Cash payments for income taxes were €49,000.

Income Tax Payable

Cash paid for taxes 49,000 1/1/17 Balance
8,000
Income tax expense
47,000
12/31/17 Balance
6,000

Illustration 13A-13
Formula to compute cash payments for income taxes—direct method

13-17 LO 5
 Step 1: Operating Activities

Illustration 13A-14
Operating activities section of the statement of cash flows

13-18 LO 5
 Using a Worksheet to Prepare the
APPENDIX 13B Statement of Cash Flows—Indirect
Method
Learning Objective 6
Explain how to use a
worksheet to prepare the
statement of cash flows
using the indirect method.

Illustration 13B-1
13-19 Format of worksheet LO 6
 Preparing a Worksheet

1. Enter in the statement of financial position accounts section the

statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the statement of financial position
accounts other than cash and their effects on the statement of
cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.

13-20 LO 6
 Preparing a
Worksheet

Illustration 13B-3
Completed worksheet—
indirect method
13-21 LO 6