BE 601

Class 3 – Cash Flow Statement

Presented by: Michelle Lennox

Conrad School of Entrepreneurship and Business

Recap
 What does the income statement tell us?

 What is the relationship between the income statement and the balance sheet?

 What’s the difference between cash and accrual accounting?

Class 3 – Cash Flow Statement 2

Review of Income Statement Concepts
Assets – Liabilities
or = Owners Equity
Net assets

Permanent Temporary Accounts

Accounts (Operations)

Common/ Retained Treasury Other

AOCI Net
Preferred Earnings Stock Comprehensive
Stock Issues Income Income

Class 3 – Cash Flow Statement

Today’s Learning Objectives
 Understand the cash flow statement

 Understand the difference between direct and indirect cash flow statement

 Prepare the cash flow statement from the recorded transactions

Class 3 – Cash Flow Statement 4

Cash Flow Statement Example
 What information does the cash flow statement tell us?

 Why is the cash flow statement important?

 What are the three components does the cash flow statement contain?

Magnet Forensics’ Cash

Flow Statement (Pg. 167)

Class 3 – Cash Flow Statement 5

Cash Flow Activities

Operating • Day-to-day operations

Investing • Long-term assets

Financing • Equity & Long-term

liabilities

Class 3 – Cash Flow Statement 6

Direct Statement of Cash Flows

 This is easier so let’s start here

 Revisit Fast Apartment example

 Identify which transactions have an effect on cash

 For those cash transactions, identify whether they are operating, investing, or financing
activities

Class 3 – Cash Flow Statement 7

In-class Exercise
With the tight apartment space in Waterloo due to the newly arriving undergraduate and graduate students,
Em(ily) Bet, long term Waterloo resident, spots an opportunity. She decides to open an apartment-locator
business – Fast Apartment Locators. During the first month of operations, April 2021, the following transactions
occurred:
a) Em Bet invests $35,000 of personal funds to start the business.
b) The business purchases, on account, office supplies costing $350.
c) Fast Apartment Locators pays cash of $30,000 to acquire a parcel of land. The business intends to use the land as a future
building site for its business office.
d) Em Bet locates apartments for clients and receives cash revenue of $1,900.
e) The business pays $100 on the account payable created in Transaction (b).
f) Em Bet pays $2,000 from her personal bank account for a vacation with her boyfriend.
g) The business pays cash expenses for office rent, $400, and utilities, $100.
h) The business returns office supplies to the supplier that cost $150. The wrong supplies had been shipped.
i) Em Bet withdraws $1,200 cash from the business for personal use to have a big party

1. Analyze the preceding transactions in terms of their effects on the accounting equation, A = L + OE, of Fast Apartment
Locators.
2. Prepare the balance sheet, income statement and owner’s equity statement for Em Bet’s company after analysing these
transactions

Class 3 – Cash Flow Statement

Indirect Statement of Cash Flows
 This is the more common presentation on financial
statements. However, this requires additional
analysis.

 The difference from Direct Statement of Cash Flows is

only in the “OPERATING” section

Class 3 – Cash Flow Statement 9

Indirect Statement of Cash Flows
In the ISCF, we begin with Net Income and adjust to arrive at cash. The question is:
How do we get from “Net Income” to “Net Cash” Provided by Operating Activities”?

Eliminate non-cash
revenue (gains) Adjust Working Capital
Earned Accounts
Revenues

Net Income Net Cash Provided by

Operating Activities

Incurred
Expenses
Eliminate non-cash
expenses (losses)19

Class 3 – Cash Flow Statement 10

An Example
Information for the year ended Dec 31, 2020:
 Beginning cash (Jan 1, 2020) is $10,000
 Cash revenues are $20,000
 Truck that was bought on Jan 1, 2020 for $30,000 is being depreciated over a
five year life.
 Securities previously purchased for $10,000 were sold for $12,000
 Equipment previously purchased for $30,000 sold for $25,000

 What is net income for this year?

Class 3 – Cash Flow Statement 11

An Example
Revenues $20,000

Depreciation Expense (6,000)

Gain on sale of securities 2,000
Loss on sale of equipment (5,000) (9,000)
Net Income $11,000

What are the differences in cash flow reporting between the Direct SOCF
and the Indirect SOCF?

Let’s start with the Direct Statement

Class 3 – Cash Flow Statement 12
Statement of Cash Flows - Direct
Cash Flows from Operating Activities:
From Revenues $20,000

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000

Total $57,000
Beginning $10,000
Ending $67,000

Class 3 – Cash Flow Statement 13

Statement of Cash Flows - Direct
Cash Flows from Operating Activities:
From Revenues $20,000

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000

Total $57,000
Beginning $10,000
Ending $67,000

Class 3 – Cash Flow Statement 14

Statement of Cash Flows - Indirect
Cash Flows from Operating Activities:
Net Income $11,000
Adjustments to reconcile net income to net cash
Add: Depreciation expense 6,000
Add: Loss on sale of equipment 5,000
Subtract: Gain on sale of securities 2,000
Cash flow from Operating Activities 20,000

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000
Total $57,000
Beginning $10,000
Ending $67,000

Class 3 – Cash Flow Statement 15

Statement of Cash Flows - Indirect
Cash Flows from Operating Activities:
Net Income $11,000
Adjustments to reconcile net income to net cash
Add: Depreciation expense 6,000
Add: Loss on sale of equipment 5,000
Subtract: Gain on sale of securities 2,000
Cash flow from Operating Activities 20,000

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000
Total $57,000
Beginning $10,000
Ending $67,000

Class 3 – Cash Flow Statement 16

Indirect Statement of Cash Flows
In the ISCF, we begin with Net Income and adjust to arrive at cash. The question is:
How do we get from “Net Income” to “Net Cash” Provided by Operating Activities”?

Eliminate non-cash
revenue (gains) Adjust Working Capital
Earned Accounts
Revenues

Net Income Net Cash Provided by

Operating Activities

Incurred
Expenses
Eliminate non-cash
expenses (losses)26

Class 3 – Cash Flow Statement 17

Working Capital Adjustments
 The previous examples reconciled gains and losses shown in the net income
statement to the cash position.
 The other adjustment needed to reconcile net income to cash is the working
capital accounts. The working capital accounts (ARec, Inv, Ppd Expenses, APay,
Salaries Pay, ST loans etc). are generally the “operating” accounts.
 When a non-cash operating account asset increases, a adjustment is
made to reconcile to cash.
 When a non-cash operating account liability increases, a adjustment is
made to reconcile to cash.

Class 3 – Cash Flow Statement 18

An Example
Information for the year ended Dec 31, 2020:
 Beginning cash (Jan 1, 2020) is $10,000
 Revenues are $20,000 and the cash is to be received in the next year from the
customer
 Truck that was bought on Jan 1, 2020 for $30,000 is being depreciated over a five
year life.
 Securities previously purchased for $10,000 were sold for $12,000
 Equipment previously purchased for $30,000 sold for $25,000

 What is net income for this year?

Class 3 – Cash Flow Statement 19

An Example
Revenues $20,000

Depreciation Expense (6,000)

Gain on sale of securities 2,000
Loss on sale of equipment (5,000) (9,000)
Net Income $11,000

Class 3 – Cash Flow Statement 20

Statement of Cash Flows - Direct
Cash Flows from Operating Activities:
From Revenues $0

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000

Total $37,000
Beginning $10,000
Ending $47,000

Class 3 – Cash Flow Statement 21

Statement of Cash Flows - Direct
Cash Flows from Operating Activities:
From Revenues $0

Cash Flows from Investing Activities

From sale of securities $12,000
From sale of equipment $25,000
$37,000

Total $37,000
Beginning $10,000
Ending $47,000

Class 3 – Cash Flow Statement 22

Statement of Cash Flows - Indirect
Cash Flows from Operating Activities:
Net Income $11,000
Adjustments to reconcile net income to net cash
Add: Depreciation expense 6,000
Add: Loss on sale of equipment 5,000
Subtract: Gain on sale of securities 2,000
Change in operating assets and liabilities:
Accounts receivable ($20,000)

Cash flow from Operating Activities $0

Cash Flows from Investing Activities
From sale of securities $12,000
From sale of equipment $25,000
$37,000
Total $37,000
Beginning $10,000
Ending $47,000

Class 3 – Cash Flow Statement 23

Statement of Cash Flows - Indirect
Cash Flows from Operating Activities:
Net Income $11,000
Adjustments to reconcile net income to net cash
Add: Depreciation expense 6,000
Add: Loss on sale of equipment 5,000
Subtract: Gain on sale of securities 2,000
Change in operating assets and liabilities:
Accounts receivable ($20,000)

Cash flow from Operating Activities $0

Cash Flows from Investing Activities
From sale of securities $12,000
From sale of equipment $25,000
$37,000
Total $37,000
Beginning $10,000
Ending $47,000

Class 3 – Cash Flow Statement 24