Statement of Cash Flows Tutorial - Script

Statement of Cash Flows
Tutorial
Welcome to the IMA® Statement of Cash Flows tutorial.
In this tutorial, we will explain:

 The basic use of a Statement of Cash Flows
 The various components of the Statement of Cash Flows.
 We will distinguish the differences between the Indirect and Direct methods of
preparing Statement of Cash Flows.
 You will be taken step by step through the process of preparing a Statement of
Cash Flows using each the Indirect and the Direct method.
In order to accomplish our course objectives, this tutorial will take you through the
following contents:
• An overview about the Statement of Cash Flows
• We’ll start with The Direct Method of preparing a Statement of Cash Flows
specifically reviewing – Cash Flows from Operating Activities
• After which we will complete a quick knowledge check on the materials
presented to that point.
• This will be followed by reviewing the preparation of the Cash Flows from
Operating Activities using the Indirect Method
• And A quick interactive review exercise to test your comprehension
• We will then continue by showing you how to complete Cash Flows from
Investing and Financing Activities
• Followed by a second Knowledge Check
• After this knowledge check we will explain the Reporting Differences between
IFRS and GAAP
• And a brief summary of our achieved objectives.
• You will then be prepared to take your CPE Credit Examination for this tutorial
Let’s begin by providing an overview about the Statement of Cash Flows
When used in conjunction with other financial statements, the information found in the
Statement of Cash Flows is widely used by internal management, external auditors,
potential investors, banks and other creditors such as vendors and leasing companies.
By properly analyzing the Statement of Cash Flows, one can determine a company’s
ability to generate cash needed to meet critical debt obligations and sustain the overall
growth and financial health of the organization. Historical Cash Flow information is
Statement of Cash Flows Tutorial  Script

Copyright © 2013 by Institute of Management Accountants (IMA). All rights reserved.
Further copying without permission of the Institute of Management Accountants is prohibited.
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often used as an indicator of the amount, timing and certainty of future cash flows. It can
also be used to gauge the accuracy of previous cash flow forecasts.
As businesses expand into global markets, the need for a common global accounting
framework becomes more important than ever before. The International Financial
Reporting Standards (or IFRS) is attempting to establish a global framework that will
satisfy accounting consistencies world-wide, however it is important to note that there
still remain differences between U.S. GAAP and the IFRS regarding the treatment of
specific cash flow related accounting and reporting. As we further delve into the details
regarding the Statement of Cash Flows, we will bring these differences to your attention.
To begin understanding how a Statement of Cash Flow works, let’s start by viewing a
typical bank statement you may receive in the mail from your bank. Typically our bank
statement will show us our beginning balance, the cash into our account, the cash
disbursed from our account, and the ending balance in the account. When a bank
statement comes in the mail, we typically reconcile it to our checkbook to make certain
we’ve recorded all transactions properly and that no errors were made in the
recordkeeping by us or the bank.
For our purposes, we will refer to the Cash In and the Cash Out as Cash Flow (as it
reflects the flow of cash itself through your account).
The Statement of Cash Flows for a company is merely a document which explains the
cash flow in a formal financial statement. Essentially the document answers the
question, “How has our cash position changed?”
Where understanding Cash Flows usually becomes confusing is in distinguishing

between things like:
• Actual cash received from sales versus sales which include items sold on credit
which have not yet been collected or perhaps other accruals we’ve made to
record sales we’ve recognized, but haven’t collected.
• Regarding expenditures, it can get confusing distinguishing between Actual
expenses paid versus expenses recorded on our books but not yet paid or
expenses we accrued for but haven’t yet paid.
Let’s begin looking at our Statement of Cash Flows by taking a look at the categories
and components involved in the Statement of Cash Flows.

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To answer the how our cash position has changed, the Statement of Cash Flows will
follow a very specific structure in classifying cash movement. The cash movement or
cash flow will be broken down into 3 categories:
• Cash Flow from Operating Activities
• Cash Flow from Investing Activities and
• Cash Flow from Financing Activities
Cash Flow from Operating activities are those activities that pertain to the main
operations of the business. Any cash flow used to generate revenues, including the
expenses associated with each, is considered operating activities of a business. The
amount of cash flows arising from the day-today operations of the business is
considered a key indicator in determining if the entity generates sufficient cash to repay
loans, maintain operating capabilities, pay dividends, and make new investments which
will further benefit the growth and financial health of the company.
Cash Flow from Investing activities include those activities are related to investments
made by a company that will result in a recognized asset in the Balance Sheet. Types of
investing activities can include either an investment in or disposal of long-term assets,
such as buildings, equipment, land, or even investments in stocks of other companies
not held for trading nor available for sale.
Cash Flow from Financing activities which include those activities that go into obtaining
funds from outside sources. These activities include obtaining or paying off a loan, the
issuance of stock, paying dividends, and buying or selling of treasury stock.
Although the Statement of Cash Flows always reflects these three types of activities
there are two different methods used in preparing this financial statement:
• the Indirect method
• or the Direct method
The only difference between the Direct Method and the Indirect Method is in how we
derive our cash flow from operating activities. Both the Cash Flow from Investing
Activities and the Cash Flow from Financing Activities are prepared the same way using
either method.
To complete our Statement of Cash Flows we will need:

• The Balance Sheet,

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• Income Statement,
• Knowledge of the business activities and transactions which impacted the
movement of cash during the specified period
And specifically for the Direct Method we will be looking to our Cash Receipts and Cash
Disbursement Journals to piece all of the cash movement together. The first three
components are needed for either of the two preparation methods we mentioned earlier,
known as the Direct Method or the Indirect Method whereas the cash receipts and
disbursement Journals are primarily used in the Direct Method. Although the Direct
Method is considered by some to be easier to visualize, it tends to be very cumbersome
to assemble and time consuming to validate. Perhaps it is for this reason that the
Indirect Method is by far the most widely used in business. It should be noted that both
the Direct Method and the Indirect Method are permitted by the U.S. GAAP and the
IFRS.
Since it is often considered to be the easier method to initially grasp, let’s briefly go over
how the Direct Method works
First, remember that the Cash Flow from Investing Activities and the Cash Flow from
Financing Activities is handled the same using either the Indirect Method or the Direct
Method. Cash Flow from Operating Activities however, is handled very differently. So as
we look exclusively at the Direct method, we will only focus on Cash Flow from
Operating Activities.
Much like our personal checkbook registers, companies keep track of their cash
balances by monitoring the cash going into their bank accounts via deposits and other
bank credits as well as cash going out of their bank accounts via written checks,
electronic funds payments, transfers, bank fees and other types of disbursements from
the account. Let’s discuss how this typically occurs using a small retail business as our
example. To determine the cash going into this small retail business, we’ll look at our
Cash Receipts Journal and to determine the cash going out of the business we’ll look at
our Cash Disbursement Journals.
Under the Direct Method, we’ll look at our Cash Receipts Journal to document cash
movement relating to operating activities including things like:
• Cash collected from customers (perhaps they paid off an invoice or reduced the
amount of money they owed us (also known as our Accounts Receivable)

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• Cash collected from interest owed to us on loans we made or bonds we
purchased
• Cash collected from dividends on stock we own in other companies
• And any other cash going into our account which is not related to investing or
financing activities. We’ll discuss the Investing and Financing activities in greater
detail later in this presentation.
Operating Activities would also include any Cash Payments we made such as
• Cash payments made to suppliers (either up front, to pay an invoice which has
become due, or to pay down any previous debt or money owed to our suppliers)
• Cash payments made to our employees for things like regular salaries, incentives
or commissions or perhaps special bonus payments made.
• Cash payments for interest we owe on loans we took or bonds we issued as a
company.
• Cash payments to the tax authorities to pay the taxes we owe.
• And any other cash disbursements made not related to Investing or Financing
Activities which we will discuss later on in this presentation.
Once we’ve documented all Cash Receipts and Cash Disbursements relating to
operating activities we must VALIDATE our data by analyzing the company’s Balance
Sheet and Income Statement.
To begin this validation process demonstration we are going to first audit our cash in
figures. For this example we will assume that we only documented collections from
customers, Interest received and Dividends received. We will assume we found no
other cash in. Let’s start by looking at how we validate collections from customers.
To do this, we will first need to look at our income statement. In this example we are
looking at revenues for the full year 2011. According to our income statement we see
that Sales Revenues totaled $185,900. We know however, that not all sales are paid for
in cash. Sometimes a company may make a sale by extending credit to the customer
allowing them a certain period of time before payment is actually due. In order to
determine how much of the $185,900 in total sales reflects cash which has not yet been
collected, we must look at the comparative balance sheet.

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The Comparative Balance Sheet will show us the current period and the prior period for
comparison purposes. In this example we also show a column which clearly identifies
the Increases or decreases in account balances reflected on this financial statement.
Since we know all sales do not necessarily reflect cash being collected, we will use the
comparative balance sheet to next analyze how our Accounts Receivables have
changed during the corresponding period of Sales (which in our case reflects a full
year).
Looking at our Accounts Receivable balances we notice they were $58,500 as of

December 31st , 2011 versus $47,450 the year prior. This reflects a year over year
increase in Accounts Receivable of $11,050. In other words, $11,050 of our sales is
represented by additional extension of credit to our customers, which effectively means
they still owe us the $11,050. Since our Sales revenues figure reflects total sales,
We’ll need to SUBTRACT out those portion of sales which were not yet paid for in cash
(in this case, we’ve determined that amount is reflected in our increase in accounts
receivable of $11,050.) After we deduct this amount from the sales our net collections
from customers should be $174,850.
Next we will look at Interest Received. As we look at our Income Statement we notice
that this interest was $7,800. The next question we must ask is: “Does all or part of this
figure reflect Accrual entries?”
To determine that, we must look at our balance sheet to see if any interest receivable
exists. In reviewing the current asset section of our balance sheet we can identify that
in fact, no such interest receivable exists.
Just as we did for Interest Receivable, we must apply the same validation process to
Dividends we Received. Using our Income Statement we see that Dividend Income was
$5,850, and again, we must determine if this income reflects any type of accrual.
As before, we look to our balance sheet for further validation. We don’t see any Accrued
receivables for dividends. So, we can add that to our Cash Receipts and validate it to
our Cash Receipts Journal as well.
As we scroll down our Income Statement we do note another source of Income which
may translate to cash in the line item “Gain on sale of plant assets.” It is considered part
of the Cash Flow from Investing Activities and will be discussed later in this
presentation.

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Our validation concludes Total Cash Receipts of $188,500 which should tie into our
figures from our Cash Receipts Journal.
Now that we’ve completed validating the Cash Receipts, let’s move onto our Cash
Disbursements relating to Operating Activities. The first section we will look at under
Cash Payments are funds paid to our Suppliers. As you can imagine, suppliers can
mean many different things such as suppliers of inventory, office supplies, coffee we
provide to our employees, legal or accounting fees and any other number of items we
have paid for.
We will also want to look at funds paid to employees, cash disbursed for interest due on
loans besides those funds paid to our employees, for income taxes, or any other
disbursements we may have made which don’t relate to Investing or Financing
Activities. Just as we did on the Cash Receipts side, once we’ve documented all of our
cash disbursements, we’ll need to validate these numbers to using our financial
statements.
We’ll start this validation process on Cash Disbursements by focusing on our supplier
payments and looking to our Income Statement for validation. Let’s begin by focusing
on cash payments for inventory. Again, we are going to look at this as though XYZ
Company is merely a small retailer. We are doing it this way, because it is really the
easiest way to comprehend this material.
As we look at our Income Statement, the first expense Item we want to consider is cost
of goods sold. We see that our cost of goods sold were $101,400. Let’s start the
validation by recording these costs. Although we may reflect the total expense of the
goods we have sold, we also want to account for any other costs associated with our
inventory. To accomplish this task, we must look again at our comparative Balance
Sheet.
Looking at our comparative balance sheet, we notice that inventory was greater last
year than it is this year. In other words, part of the cost of goods sold related to prior
period inventory, so, we will want to deduct that amount from our cost of goods sold
figure. If the opposite were true, meaning our ending inventory this year was more than
the ending inventory last year, we would add the increase to the cost of goods sold

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figure. In this example, we do reflect a decrease so we will deduct that from the cost of
goods sold number.
Our next expense line item in the Income statement reflecting potential cash payments
is the Salary and Wage Expense line item. This amounts to $36,400. The next step in
our validation process is to record this item, but before we do, we need to make sure
this is an actual cash disbursement and not an accrual entry of expenses incurred but
not yet paid for. For that answer we look once again to our Comparative Balance
Sheet.
Since we don’t see any accruals for wage related items, it appears that cash was
actually disbursed for the $36,400. Therefore, we will add it to our equation.
The next expense item on our Income Statement is Depreciation Expense. Since
depreciation is a non-cash transaction, we can conclude that this item would not be
reflected in our cash movement and does not need to be considered using the Direct
Method.
On our Income Statement we also see an expense line item called Other Operating
Expenses for $10,400. This too reflects potential cash disbursements. Much like our
other suppliers previously mentioned, this should be added to our equation.
Despite our best attempts thus far to capture all potential cash disbursements, we still
don’t know yet how much of these expenses reflect actual cash versus credit or
accounts payables not yet paid. To figure this out we must turn again to our
Comparative Balance Sheet.
Within our Balance Sheet, we see our Accounts Payable increased by $26,000. This
year over year increase tells us that although we reflect various supplier expenses,
many of them still reflect items we have not actually paid for yet (meaning we may not
yet have actually disbursed cash for these items). As such, we’ll want to deduct this
non- cash portion from our expenses. If these liabilities reflected a decrease, the
implication would be that additional payments BEYOND our current debt were actually
paid and the additional cash disbursed would not be reflected in our current supplier
expense and must therefore be added back.
As we look through the remaining line items on our Income statement in search of other
potential sources of cash disbursements, we come across interest expenses for $9,750.

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We will add this expense as a cash disbursement, and be sure to capture any potential
accrual related to this amount into our figure as well. To figure this out, we need to refer
back to our Balance Sheet. We don’t see any accrued liabilities specific to interest
expenses, so, therefore, we can add it to our equation.
As we look on our balance sheet we do notice a line item called Accrued Liabilities. By
definition, accrued liabilities reflect expenses incurred, but not yet paid for. In looking at
this item we see that the amount of these accruals last year totaled $6,500. This year
our ending balance is only $3,250 which reflects a year over year decrease of $3,250.
What this tells us, is that we must have actually paid for some of the accrued expenses
in order for the balance to go down. In paying for these accrued expenses, we
disbursed cash and therefore this change of $3,250 would be added to our cash
disbursements equation. Much like our Accounts Payable figure, if these liabilities
INCREASED year over year, it would indicate that additional expenses were recorded in
our numbers from the income statement but not YET paid for and therefore would be
deducted from our equation.
Our final point of validation to our Cash Disbursement figures, relates to Income Tax
Expenses. Of course, just like we previously did, we’ll want to turn to our balance sheet
and see if this was accrued for or actually paid. This time we clearly see the impacting
accrual and must deduct this from our cash disbursements, as it reflects a non-payment
of the expense noted. As you can see, the impact of the full $9,100 accrual effectively
negates the $9,100 income tax expense netting the two amounts to zero.
As we review our Income Statement for other disbursements not relating to investing or
financing activities; or our Balance Sheet, we can clearly see that no items have been
un-accounted for. Therefore our total of $133,900 should tie into our total cash
disbursed.
When we take our Cash Receipts for our small retail business and subtract our Cash
Disbursements, we get a positive Cash Flow from Operating Activities of $54,600.
In summary, to prepare our Cash Flow from Operating Activities using the Direct
Method we
• Reviewed our cash receipts and cash disbursements journals.
• From those, we documented our cash movement (which was much like recording
our personal cash movement into our check register).

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• Then we verified the cash movement by validating our findings to the income
statement and balance sheet.
By now you’re probably seeing the complexity and intricacy of completing a statement
of cash flows using the direct method and are asking yourself… Isn’t there an easier
way? After a brief knowledge check to make sure you understand the Direct Method,
we’ll look at the Indirect Method which many consider to be a bit more sensible
approach to creating a statement of cash flows.
<Knowledge Check 1 – User Interactive>
When preparing a Statement of Cash Flows, which section is different between

the Direct and Indirect Methods?
a. Financing Activities
b. Operating Activities
c. Investing Activities
d. Cash Disbursements
The correct answer is b. The Operating Activities section.
When preparing a statement of cash flows the Investing and Financing Activities
section are the same regardless of whether you are using the Indirect or the
Direct Method. Cash Flows from Operating Activities is different under the
Indirect Method than it is under the Direct Method. After the knowledge check is
complete we will demonstrate the exact methodology used under the Direct
Method.
Which of the following is NOT considered a cash disbursement under the Direct
Method?
a. Depreciation
b. Interest paid
c. Dividends paid
d. Payments to suppliers
The correct answer is A. Depreciation is a non-cash transaction and would not
be considered a cash disbursement.
How would a decrease of $50,000 in Accounts Payable be reflected in our

Statement of Cash Flows under the Direct Method?
A. It should be included in cash disbursements decreasing cash.
B. It should be included in cash disbursements increasing cash.

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C. It should be included in cash receipts decreasing cash.
D. It should be included in cash receipts increasing cash.
The correct answer is A. It should be included in cash disbursements decreasing
cash. Period over period decreases in Accounts Payable reflect cash
disbursements to pay down outstanding debt. This disbursement would
ultimately create a decrease to our cash
In this next section we will explain how to prepare the Cash Flow from Operating
Activities section of the Statement of cash flows using the Indirect Method.
As previously stated, The Indirect method of preparation is by far the most commonly
used in business today. It is perceived to be less complex and more structured
than the Direct method. Again, we remind you that only the cash flow from operating
activities is different using the Indirect method. Up to now, we haven’t discussed the
preparation of Cash Flow from Investing or Financing activities, which is the same using
either method. The goal of preparing a Statement of Cash Flows remains the same
under the Indirect method in that we strive to answer the question, “How has our cash
position changed?”
Using the Indirect method, we start by taking our net income from the Income
Statement. From that figure we will make adjustments which will reconcile Net Income
to Net Cash movements provided by operating activities.
So let’s begin the Indirect method by first determining our Net Income. In this example,
XYZ Company is showing a Net Income of $26,000.
From this Net Income Figure we’ll want to extract out any non-cash related transactions
or activities which may have impacted net income but did not actually impact cash
movement. This will be accomplished by adding back to net income things like:
 Depreciation or amortization expense (since these are non-cash transactions that
impact net income but not actual cash movement).
 Decreases in current assets other than cash (which would likely impact net
income, but obviously does not impact cash movement).
 Increases in current liabilities (which are expenses incurred but not yet paid for).
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And, we will subtract items including:
 Increases in current assets other than cash as these do not reflect physical cash
movement.
 And decreases in current liabilities – which reflect cash disbursements in
repayment of outstanding debts.
Finally, we’ll need to back out any loss or gain on the sale of long-term assets from the
Cash Flows from Operating Activities section as this will be included in our Cash Flow
from Investing Activities section as this will be included in our Cash Flows from
Investing Activities section which will be explained a bit later on in this presentation.
Let’s begin our adjustments by looking at our Income Statement and adding back any
depreciation or amortization expense listed. We can see that there is $13,000 in
Depreciation expense which reflects a non-cash transaction and should be added back
to Net Income if we are only to reflect only CASH movement.
So now let’s move on to decreases in current assets other than cash. To obtain this
information we must refer to our balance sheet. As we review our current asset section
of the balance sheet we notice that other than cash, we show a decrease in inventory
year over year in the amount of $1,300. Although our Net Income figure reflects cost of
goods sold in total, it would appear as though some of the sales were on inventory from
the prior period. We will want to back out those inventory costs associated with the
prior period out of our net income number. We accomplish this by adding back the
$1,300 to our equation.
Next, we look at our current liabilities. An increase in current liabilities suggests that a
portion of the expenses reported in net income reflect an extension of credit or money
which has not yet been paid, we will want to add this portion of those expenses back to
our net income in order for us to reflect strictly cash movement. In this example we see
there is an increase in current liabilities in the amount of $31,850, which we will add
back.
Although our Income Statement reflects an income tax expense of $9,100, we must
remember that this doesn’t mean we actually disbursed cash for these expenses. To
validate this we’ll return to the Comparative Balance Sheet and determine if we are

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showing this as an accrued current liability (indicating that this has not yet been paid
for).
As we look through our current liabilities we notice that we have an accrual called
Income Taxes Payable. This accrual indicates that the $9,100 in income taxes have
been booked as an expense but not yet paid. It is also important to note that this accrual
is included as part of our total current liabilities which have already been accounted for
in our equation.
Next we’ll want to see if there are any Increases in current assets other than cash. To
accomplish this we must again turn to our Comparative Balance Sheet. We see that our
Accounts Receivable has increased year over year by $11,050. This implies that at
least some of the Sales recognized in our Net Income were made by us extending credit
to our customers. Since we only want to focus on Sales that increased our CASH, we
will want to deduct that increase from our Net Income in order to reflect the appropriate
cash movement.
Finally, if we had any decreases in current liabilities, we would want to deduct them
from Net Income since this would imply that cash was disbursed to pay down this
outstanding debt, however, as we noted previously, our total current liabilities actually
increased and were added to our net income.
The last two items we need to discuss under Cash Flow From Operating Activities
relates to the Loss or Gain on sale of long-term assets. Although a loss or gain involving
the sale of long-term assets will impact cash, This type of activity is not considered to be
normal day-to-day business activity, but rather part of Investing activities which, as you
may recall, deals specifically with investments made by a company that result in a
recognized asset in the balance sheet. Activity related to the disposal of these types of
assets also fall into this category. Therefore, activity of this nature which is reported in
our Net Income number must be removed from the Cash Flow From Operating Activities
section. That said, as we look at our Income Statement we do see a gain on sale of
Plant Assets. This reflects cash flow from Investing Activities, so we will go ahead and
deduct it from our net income figure. Had this activity actually reflected a Loss on sale
of long-term assets, we would have ADDED it to our equation.
As we sum up all of the items listed under Cash Flow from Operating Activities, it equals
$54,600.

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Before we continue the preparation of the Statement of Cash Flows and delve into Cash
Flows from Investing and Financing Activities, let’s do a quick exercise regarding what
you’ve just learned.
In this exercise we will review our Cash Flow from Operating Activities line by line and
see if you remember where we obtained the information needed to add to or deduct
from our Net Income in order to reflect the net cash flow using the indirect method.
<Review Exercise – User Interactive>
The following section will explain how to complete the cash flow from Investing Activities
and the Cash Flow from Financing Activities.

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Now that we’ve determined our Cash Flow from Operating Activities, we need to move
onto the next component of our Statement of Cash Flows. The cash flows derived from
investing Activities (which are those cash activities which resulted in a recognized asset
in the balance sheet). Remember, the Cash Flow from Investing Activities is the same
whether we are talking about the indirect or the direct method.
Under either of these methods, we first must determine if there were any cash receipts
based on assets we might have sold. This would have increased our cash or created a
positive cash flow, so we want to add that to our equation. Conversely, if we bought or
acquired assets by paying cash, this would have reduced our cash, so we want to
deduct that amount from our equation. So, where do we get this information from?
This specific information that we are talking about must be gathered by researching the
major business events which impacted cash.
The cash related business events comes from examining and analyzing your General
Ledger, or any means of determining cash movement, even if it is simply pulling
information from a properly reconciled check register. Understanding your business
and the key business events is critical to efficiently documenting those items which
impact cash.
We’ll use our balance sheet (as we demonstrated previously) to confirm that these
items reflect cash receipts or payments and not accruals, receivables or payables. For
purposes of this demonstration, the list of significant business activities should be
considered in preparing this section of the cash flow statement. The first thing we want
to look for is any cash receipts resulting from the sale of plant assets. The item
immediately preceding the last item states we “Received cash from selling equipment
($26,000 book value). We see that the actual cash received was $32,500. Since we are
focusing on those items impacting cash, we use the $32,500 and add it to our cash flow
from investing activities. Next we want to see if we purchased anything which ultimately
became an asset. In this example, the very first item indicates we purchased new
equipment in the amount of $208,000. Since our purchase reflects a cash payment we
will deduct $208,000 from our cash flow. If we add these activities up, we come up with
a net reduction in cash flow from investing activities in the amount of $175,500.
The final category in our Statement of Cash Flows is the Cash Flow from Financing
Activities. Cash Flow from Financing Activities refers to those activities related to

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obtaining funds from outside sources. Just like the cash flow from investing activities,
the process is the same for both the Indirect and the direct method.
When we think of cash in or out of our company in terms of Financing Activities we must
look at:
 Any funding or cash received from our issuance of common stock
 Cash received from issuance of notes payables or bank loans
 Of course, any repayments on outstanding notes payable or bank loans would be
subtracted from our cash flow
 If we were to buy back or purchase treasury stock this too would be deducted
from our cash flow
 And of course, any dividends we have actually paid to our shareholders during
this period.
To obtain this level of detail regarding cash movement, we must refer back to our cash
related business events which occurred during this period.
Looking at this information, we note that we did receive $75,400 in cash from issuing
common stock. So we add that to our cash flow from financing activities.
We should also note that we took out a $57,000 bank loan (or notes payable) to receive
cash for an equipment purchase. This will get added to our equation.
We further note that a $5,000 payment was made to pay back a portion of these notes
payable. Since money is being expended, it will come out of cash and therefore must be
reflected as a negative to this cash flow.
In this example we also show a purchase of treasury stock which will reduce our cash
flow by $13,000.
And finally we paid out cash dividends to our shareholders in the amount of $6,500,
further reducing our cash.
In review, to determine our Cash Flow from Financing Activities we referred to the cash
related business events. Keep in mind this isn’t a formal financial statement, but rather
is derived from knowing your business and the transactions that have had an impact on
cash. Based on that knowledge we used the list of business activities and transactions
which occurred during that period to determine:
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 Cash received from issuance of common stock
 Cash received from issuance of notes payable
 Cash paid on notes payable
 Cash paid for purchase of treasury stock
 And cash paid for dividends.
This gives a total net cash provided by financing activities of $107,900. The only other
two remaining items on our list are the Purchase of new equipment and the Cash Flow
from Investing Activities. You may recall that these two activities were accounted for
under the Cash Flow from Investing Activities section as they represented investments
made by the Company to create an asset. Further note that the information provided
under the Cash Flow from Financing Activities heading is treated the same for both the
indirect method and the direct method.
So, now we know the Cash Flow from Operating Activities, the Cash Flow from
Investing Activities, and the Cash Flow from Financing Activities. The sum of these
three activities reflects a net decrease in cash of $13,000.
Keeping in mind our figures for each of these categories, let’s see how a real Statement
of Cash Flows looks using the Indirect Method. As you can see, the computations we
used to derive the Cash Flow from Operating activities amounting to a positive $54, 600
are clearly listed out in our preparation. The same applies for our Cash Flow from
Investing Activities and our Cash Flow from Financing Activities determining our net
decrease in cash of $13,000. Much like our bank statement, if we were to deduct this
net decrease in cash from our beginning balance, in this case we are stating our
beginning balance was $27,300 our ending cash balance would be $14,300.
As previously stated the only difference when preparing a Statement of Cash Flows,
between the indirect and direct method lies in the Cash Flow from Operating Activities.
The remaining cash flow from investing activities and Cash Flow from Financing
Activities are treated the same under either method.
If we look at the actual Statement of Cash Flows prepared using the direct method,
you’ll note that although we prepared our Cash Flow from Operating Activities quite
differently, we still come up with the same $54,600 figure and ultimately the same result
in our cash flow change.

18
Whether we prepare our Statement of Cash Flows using the less popular direct method,
or the more commonly used indirect method, we note our end results are the same for
cash flow provided by Operating Activities, Investing Activities, and Financing Activities.
Before moving onto our last topic on Statement of Cash Flows, Let’s complete another
quick knowledge check based on what you’ve learned so far.
<Knowledge Check 2 – User Interactive>
What are the 3 things you will need in order to complete your statement of Cash
Flows using the Indirect method?
a. The Comparative Balance Sheet; The Income Statement; and your
knowledge of cash related business events
b. The Bank Statement, The Income Statement; and your knowledge of cash
related business events
c. The Direct Method; The Indirect Method; and the Comparative Balance
Sheet, or
d. The Income Statement; The Comparative Balance Sheet and your Bank
Statement
The correct answer is a.
To create a statement of cash flows you will need the Balance Sheet, The Income
Statement and the knowledge or list of business activities or events which
impacted cash. When preparing the Statement of Cash Flows using the Direct
Method you will also need your cash receipts and Cash disbursements journals.
Which method of preparation was used to complete the Statement of Cash Flows
shown here?
A. The Accrual Method
B. The Indirect Method
C. The Direct Method
D. The Business Activities Method
There are only two methods used to prepare a Statement of Cash Flows
The Indirect Method and The Direct Method. The correct answer is C. The Direct
Method. If this Statement of Cash Flows were prepared using the Indirect method

19
our Cash Flow from Operating Activities would have started with NET INCOME
from the Income statement and adjusted out all non-cash related items.
How would an increase in current liabilities be treated using the Indirect Method?
a. It should be added back to Net Income in the Operating Activities section
b. It should be subtracted from Net Income in the Operating Activities section
c. It should be added to cash flows in the Financing Activities section
d. It should be subtracted from cash flows in the Financing Activities section
The correct Answer is a.
Under the Indirect Method, Increases or decreases would be included in the Cash
Flow from Operating Activities section which starts with Net Income. An Increase
in current liabilities is added back to net income under this method.
Now that we understand more about what goes into a Statement of Cash Flows, let’s
revisit the differences between how certain items are treated under IFRS versus U.S.
GAAP.
With an increased number of businesses expanding into global markets, more than 100
countries throughout the world are currently adhering to the International Financial
Reporting Standards or IFRS.
In the United States GAAP adherence is strictly followed and is required by outside
audit agencies prior to receiving their approval.
To better understand the differences in accounting treatment with respect to the

Statement of Cash Flows between U.S.GAAP topic ASC 230 and the IFRS IAS 7,
let’s first look at how Bank Overdrafts are handled by each GAAP ASC 230 and the
IFRS IAS 7.
Under GAAP, Bank Overdrafts are considered to be a Financing Activity related to

liabilities. Under IFRS, this would be reflected under Operating Activities and treated as
a cash or cash equivalent.
Interest, whether received or paid is treated as an Operating Activity under GAAP while
under the IFRS, it may be classified as either an Operating, Investing or Financing

20
activity provided the accounting treatment remains consistent treating similar events in
the same manner. However, interest is typically considered Operating Activities.
When we look at Dividends which are received or paid by a company, under GAAP,
there is a difference in the treatment, in that dividends received are considered
operating activities whereas dividends paid are reflected within financing activities.
Much like interest, under the IFRS, dividends may be classified as either an operating,
investing or financing activity provided the accounting treatment remains consistent
treating similar events in the same manner. Here again, dividends are most frequently
classified as operating activities.
In this tutorial we have covered:

 How the Statement of Cash Flows is used,
 The various categories and components of the Statement of Cash Flows,
 The difference between the Indirect Method of preparing a Statement of Cash
Flows versus the Direct Method.
 We went step by step to illustrate how to prepare our Statement of Cash Flows
using our Income Statement, Balance Sheet and noted Business Events.
At this point you have completed the statement of cash flows tutorial and should be
prepared to take your final examination. Please feel free to review any areas you are
uncomfortable with and Good Luck on the exam!
Thank you for joining us for this segment of the Statement of Cash Flows produced by
the IMA®.
We hope you enjoyed this tutorial and join us for other informative topics.

21

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Statement of Cash Flows

In this tutorial, we will explain:

Let’s begin by providing an overview about the Statement of Cash Flows

Statement of Cash Flows Tutorial  Script

Where understanding Cash Flows usually becomes confusing is in distinguishing

Statement of Cash Flows Tutorial  Script

To complete our Statement of Cash Flows we will need:

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Looking at our Accounts Receivable balances we notice they were $58,500 as of

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

<Knowledge Check 1 – User Interactive>

When preparing a Statement of Cash Flows, which section is different between

How would a decrease of $50,000 in Accounts Payable be reflected in our

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

<Review Exercise – User Interactive>

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

Statement of Cash Flows Tutorial  Script

<Knowledge Check 2 – User Interactive>

Statement of Cash Flows Tutorial  Script

To better understand the differences in accounting treatment with respect to the

Under GAAP, Bank Overdrafts are considered to be a Financing Activity related to

Statement of Cash Flows Tutorial  Script

In this tutorial we have covered:

Statement of Cash Flows Tutorial  Script

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