Chapter 16

Three types of statements of cash flows:

1. Cash flows from operating activities: Affect net income of the company. (Sale of products/providing
services) – Inflows; (paying taxes, wages) – Outflows.
2. Cash flows from/used for financing activities: Affect/used for financing activities such as debt and
equity. (Sale of property plant/ investments) – Inflow; (Buying these things) Outflows.
3. Cash flows from/used for investing activities: Affect/used for investment activities in the non-current
assets of the company. (Issuing stock or liabilities) Inflows; (Paying dividends or purchasing stock or
repaying liabilities) Outflows.

Reported as:
Cash flows from operating activities $XXX.
Cash flows from (used for) investing activities XXX.
Cash flows from (used for) financing activities XXX.
Increase (decrease) in cash $XXX.
Cash at the beginning of the period XXX.
Cash at the end of the period.

- Ending cash on the statement of cash flows equals the cash reported on the company’s balance sheet
at the end of the year.
- Remember inflows and outflows for all statements.

Direct Method of reporting cash flows from operating activities:

Cash received from customers $ XXX. - Inflow; remaining are outflows.
Cash payments for merchandise (XXX). Cash payments for operating expenses (XXX).
Cash payments for interest (XXX).
Cash payments for income taxes (XXX).
Net cash flow from operating activities $
Adv: Directly reports cash receipts.
Disadv: Costly.

The Indirect Method:

Net income $XXX.
Adjustments to reconcile net income to net cash flow from operating activities XXX. - Includes
gains/losses on fixed assets such as depreciation or changes to A/P or A/R.
Net cash flow from operating activities $XXX

- Cash flows from (used for) investing activities:

Cash from investing activities $ XXX.
Cash used for investing activities (XXX).
Net cash flows from (used for) investing activities $XXX.
Cash flows from (used for) financing activities:
Cash from financing activities $ XXX.
Cash used for financing activities (XXX).
Net cash flow from (used for) financing activities $XXX.

Statement of cash flows:

Cash flows from operating activities:
(List of individual items, as illustrated in Exhibit 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Net cash flows from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Cash flows from (used for) investing activities:
(List of individual items, as illustrated in Exhibit 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Net cash flows from (used for) investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Cash flows from (used for) financing activities:
(List of individual items, as illustrated in Exhibit 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Net cash flows from (used for) financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Cash at the beginning of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXX
Cash at the end of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Noncash investing and financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX

- No cash flow/share reported in the statement of cash flows.

A – Investing.
B – Financing.
C – Operating.
D – Operating.
E – Financing.
F – Operating.

Preparing the Statement of Cash Flows— The Indirect Method:

- By analyzing changes in noncash balance sheet accounts, any change in the cash account can be
indirectly determined: Change in Cash = Change in Liabilities + Change in Stockholders’ Equity - Change
in Noncash Assets. Net income is the first amount reported- hence Retained Earnings analyzed first.
- Under the accrual method of accounting, revenues and expenses are recorded at different times from
when cash is received or paid. Net income determined thru accrual method of accounting. For ex:
merchandise may be sold on account and the cash received later.

Adjustments to Net Income (Loss) Using the Indirect Method:

- Step 1: Non-cash expenses added to net income. (Depreciation and amortization)
- Step 2: Disposal (sale) of assets – a loss is added and a gain is subtracted. Land costing $100,000 is sold
for $90,000. The loss of $10,000 is added back to net income.
Step 3: Increases in noncash current operating assets are deducted.
• Decreases in noncash current operating assets are added.
• Increases in current operating liabilities are added.
• Decreases in current operating liabilities are deducted.
Hack: Increase in noncash current operating assets (such as A/R) deducted and vice versa; increase in
liabilities added.

Format:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000
Adjustments to reconcile net income to net cash flow from operating activities:
Changes in current operating assets and liabilities:
Increase in accounts receivable . . . . . . . . (1,600)
Decrease in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (400)
Net cash flow from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,700

- Cash dividends paid during the year can also be computed by adding a decrease in dividends payable
and subtracting an increase in dividends payable.
- Cash used to retire bonds – subtracted in financing activities.

Statement of Cash Flows:

Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Gain on sale of land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,000)
Changes in current operating assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,000)
Decrease in inventories.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Decrease in accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,200)
Increase in accrued expenses payable. . . . . . . . . . . . . . . . . . . . . . . 2,200
Decrease in income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . (500)
Net cash flow from operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,500
Cash flows from (used for) investing activities:
Cash from sale of land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,000
Cash used for purchase of land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,000)
Cash used for purchase of building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,000)
Net cash flow used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . (3,000)
Cash flows from (used for) financing activities:
Cash from sale of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,000
Cash used to retire bonds payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,000)
Cash used for dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,000)
Net cash flow used for financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . (26,000)
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,500
Cash at the beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000
Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,500

Direct Method of preparing statement of cash flows:

Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ XXX
Cash payments for merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (XXX)
Cash payments for operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (XXX)
Cash payments for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (XXX)
Cash payments for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (XXX)
Net cash flow from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $XXX
Hack: Cash Received – Cash Payments. Dep expense and gain on sale of land are not adjusted.
- Financing and investing section is the same under the direct method of preparing the statement of
cash flows.

- To find cash received from customers:

Sales +/- Decrease in A/R)/Increase in A/R.
- To find cash payments for merchandise:
Cost of merchandise sold +/- Incr in inventories/dec in inventories +/- dec in AP/Inc in Ap.
- To determine the cash payments for operating expenses, the other operating expenses (excluding
depreciation) of $196,000 ($203,000 – $7,000) are adjusted for any increase or decrease in prepaid and
accrued expenses.
- To find cash payment for interest expense:
Interest expense +/- Dec in AP/Inc in AP.
- To find cash payment for income taxes:
Income tax exp +/- Dec in income tax P/Inc in income tax AP.