Chapter 13

STATEMENT OF CASH FLOWS

 LAST CLASS REVIEW (CH 12) – INCOME AND EQUITY (1/2)

❑ Corporation
▪ An entity created by law
▪ Existence is separate from owners
▪ Has rights and privileges
❑ Characteristics of Corporations advantages vs.
disadvantages
❑ Rights of Shareholders
❑ Basics of Share Capital – authorized and issued
❑ Basics of Share Capital – Par Value, No-Par Value,
Stated Value
❑ Dividend – Cash, Bonus Issues or Share Dividends
❑ Share Split – no change in par value

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 LAST CLASS REVIEW (CH 12) – INCOME AND EQUITY (2/2)

❑ Preference Shares
❑ Treasury Shares at cost, premium, discount
❑ Statement of Comprehensive Income
❑ Statement of Changes in Equity
❑ Reserve
❑ Earnings Per Share
❑ Price-Earnings Ratio
❑ Dividend Yield
❑ Book Value per Share

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 Chapter 13

STATEMENT OF CASH FLOWS

PURPOSE OF THE STATEMENT OF CASH FLOWS

How does a Where does a

company obtain its company spend its
cash? cash?

What explains the

change in the cash
balance?
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 IMPORTANCE OF CASH FLOWS

How did the Does the business

business fund its have sufficient cash
operations? to pay its debts as
they mature?

Did the business Did the business

make any dividend borrow any funds or
payments? repay any loans?

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 MEASUREMENT OF CASH FLOWS

Cash Cash
Equivalents Currency

▪ Short-term, highly liquid investments.

▪ Readily convertible into cash.
▪ Sufficiently close to maturity so that market value is
unaffected by interest rate changes.
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 CLASSIFICATION OF CASH FLOWS

The Statement of Cash Flows

includes the following three
sections:
▪ Operating Activities
▪ Investing Activities
▪ Financing Activities

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 OPERATING ACTIVITIES

The principal revenue-producing activities of the

entity and other activities that are not investing or
financing activities. These generally include those
transactions and events that determine net profit
or net income.

Examples of inflows are:

• cash receipts from the sale of goods and
the rendering of services.
• cash receipts from royalties, fees,
commissions, and other revenue.

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 OPERATING ACTIVITIES

The principal revenue-producing activities of the

entity and other activities that are not investing or
financing activities. These generally include those
transactions and events that determine net profit
or net income.

Examples of outflows are:

• cash payments to suppliers for goods
and services.
• cash payments to and on behalf of
employees.

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 INVESTING ACTIVITIES

The acquisition and disposal of long-term assets and other

investments not included in cash equivalents.

Examples of inflows are:

• cash receipts from sales of PPE, intangibles and
other long-term assets.
• cash receipts from sales of equity or debt
instruments of other entities.
• cash receipts from the repayment of advances and
loans made to other parties.

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 INVESTING ACTIVITIES

The acquisition and disposal of long-term assets and other

investments not included in cash equivalents.

Examples of outflows are:

• cash payments to acquire PPE, intangibles and
other long-term assets.
• cash payments to acquire equity or debt instruments
of other entities.
• cash advances and loans made to other parties.

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 FINANCING ACTIVITIES

Activities that result in changes in the size and

composition of the contributed equity and
borrowings of the entity.

Examples of inflows are:

• cash proceeds from issuing shares or other equity
instruments.
• cash proceeds from issuing debentures, loans,
notes, bonds, mortgages, and other short-term or
long-term borrowings.

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 FINANCING ACTIVITIES
Activities that result in changes in the size and
composition of the contributed equity and
borrowings of the entity.

Examples of outflows are:

• cash payments to owners to acquire or redeem
the entity’s shares.
• cash repayments of amounts borrowed.

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 CLASSIFICATION OF CASH FLOW ITEMS

Reporting entities have choices in classifying interest and

dividends
Operating Investing Financing

Interest received Yes Yes

Dividends received Yes Yes

Interest paid Yes Yes

Dividends paid Yes Yes

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NONCASH INVESTING AND FINANCING

Items requiring separate disclosure

include:
▪ Retirement of debt by issuing equity
securities.
▪ Conversion of preference shares to
ordinary shares.

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FORMAT OF THE STATEMENT OF CASH FLOWS

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PREPARING THE STATEMENT OF CASH FLOWS

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 ANALYZING THE CASH ACCOUNT

The Cash account is a natural place to look for

information about cash flows from operating,
investing, and financing activities.

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ANALYZING THE CASH ACCOUNT

Cash from
Operating

Cash from
Investing

Cash from
Financing

Cash
Proved

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 ANALYZING NONCASH ACCOUNT

A second approach to preparing the statement

of cash flows is analyzing noncash accounts.

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INFORMATION TO PREPARE THE STATEMENT

Information to prepare the statement of cash

flows usually comes from three sources:

Comparative
Current
Statements of
Income Statement
Financial Position

Additional
Information

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 Cash Flows from Operating Indirect and Direct Methods of Reporting

Direct
Method

Indirect
Method
The net cash amount
provided by operating
activities is identical under
both the direct and indirect
methods.
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APPLICATION OF THE INDIRECT METHOD OF REPORTING

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 APPLICATION OF THE INDIRECT METHOD OF REPORTING

Additional information on Genesis Inc.’s 2011 transactions:

a) The accounts payable balances result from merchandise
inventory purchases.
b) Purchased $70,000 in PPE by paying $10,000 cash and
issuing $60,000 of notes payable.
c) Sold PPE with an original cost of $30,000 and accumulated
depreciation of $12,000 for $12,000 cash, yielding a $6,000
loss.
d) Received $15,000 cash from issuing 3,000 shares of no-par
ordinary shares.
e) Paid $18,000 cash to retire notes with a $34,000 carrying
amount, yielding a $16,000 gain.
f) Declared and paid cash dividends of $14,000.
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APPLICATION OF THE INDIRECT METHOD OF REPORTING

Changes in noncash
current assets and current
liabilities

3 Cash Flows
Income
from Operating
before
Activities
taxes
1 2

+ Noncash + Losses and

expenses such as - Gains
depreciation and
amortization

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WHY START WITH INCOME BEFORE TAXES?

❑ International Financial Reporting Standards

(IFRS)
▪ Cash flows arising from taxes on income
should be separately disclosed and should be
classified as cash flows from operating
activities.

Cash Flows
Income
from Operating
before
Activities
taxes

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 ADJUSTMENTS FOR CHANGES IN
NONCASH CURRENT ASSETS AND CURRENT LIABILITIES
Change in Account Balance During Year
Increase Decrease
Noncash
Current Subtract from income Add to income
Assets

Current Add to income Subtract from income

Liabilities

Use this table when adjusting income before

taxes to operating cash flows

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ADJUSTMENTS FOR OPERATING ITEMS
NOT PROVIDING OR USING CASH

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ADJUSTMENTS FOR NONOPERATING ITEMS

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ADJUSTMENTS FOR CHANGES IN NONCASH CURRENT
ASSETS AND CURRENT LIABILITIES

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 INTEREST REVENUES, DIVIDEND REVENUES, INTEREST
EXPENSES AND INCOME TAXES

Under IFRS, interest and dividends received, interest paid and

income taxes must be separately shown.

Since interest and dividend revenues are added to

derive income amount, adjustments involve
deducting these amounts from income.
Interest expenses are added to income to
cancel the earlier deduction.

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COMPLETING THE OPERATING SECTION

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 SUMMARY OF ADJUSTMENTS FOR INDIRECT METHOD

Common adjustments to income when computing net cash provided or

used by operating activities under the indirect method:

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 CASH FLOWS FROM INVESTING

A three-stage process to determine cash

provided or used by investing activities:

Explain these
Identify changes in
changes using
investing-related
reconstruction
accounts
analysis

Report their cash

flow effects

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CASH FLOWS FROM INVESTING

This analysis reveals a $40,000

increase in property, plant and
equipment from $210,000 to
$250,000 and a $12,000
increase in accumulated
depreciation from $48,000 to
$60,000.

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 CASH FLOWS FROM INVESTING

Item b: Genesis purchased property, plant and equipment of $70,000

by issuing $60,000 in notes payable to the seller and paying $10,000
in cash.

Item c: Genesis sold property, plant and equipment costing $30,000

(with $12,000 of accumulated depreciation) for $12,000 cash,
resulting in a $6,000 loss.

We also reconstruct the entry for Depreciation Expense using

information from the income statement.

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CASH FLOWS FROM INVESTING

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 CASH FLOWS FROM FINANCING

A three-stage process to determine cash

provided or used by financing activities:

Explain these
Identify changes in
changes using
financing-related
reconstruction
accounts
analysis

Report their cash

flow effects

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CASH FLOWS FROM FINANCING

This analysis reveals:

1. an increase in notes payable
from $64,000 to $90,000,
2. an increase in share capital
from $80,000 to $95,000,
and
3. an increase in retained
earnings from $88,000 to
$112,000.

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 CASH FLOWS FROM FINANCING

Item e: Notes with a carrying amount of $34,000 are retired for

$18,000 cash, resulting in a $16,000 gain.

Item b: Genesis purchased property, plant and equipment of $70,000

by issuing $60,000 in notes payable to the seller and paying $10,000
in cash.

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 CASH FLOWS FROM FINANCING

Item d: Issued 3,000 no-par ordinary shares for $5 per share.

Item f: Cash dividends of $14,000 are paid.

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 ANALYZING CASH SOURCES AND USES

Most managers stress the importance of

understanding and predicting cash flows for business
decisions.

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 CASH FLOW ON TOTAL ASSETS

Used, along with income-based ratios, to

assess company performance.

Cash flow on Net cash flow from operating activities

total assets
= Average total assets

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DIRECT METHOD OF REPORTING OPERATING CASH FLOWS

Adjust income statement accounts related to operating activities

for changes in their related statement of financial position
accounts:

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DIRECT METHOD OF REPORTING OPERATING CASH FLOWS

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CLASS SUMMARY (CH 13) – STATEMENT OF CASH FLOWS (1/3)

▪ The Statement of Cash Flows includes the following three sections:

▪ Operating Activities
▪ Investing Activities
▪ Financing Activities
▪ Reporting entities have choices in classifying interest and dividends
Operating Investing Financing
Interest received Yes Yes
Dividends received Yes Yes
Interest paid Yes Yes
Dividends paid Yes Yes

▪ Information to prepare the statement of cash flows usually comes from

three sources:

Comparative Additional
Current
Statements of Information
Income Statement
Financial Position

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CLASS SUMMARY (CH 13) – STATEMENT OF CASH FLOWS (2/3)

❑ Corporation

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 CLASS SUMMARY (CH 13) – STATEMENT OF CASH FLOWS (3/3)
▪ Cash Flows from Operating Indirect and Direct Methods of Reporting

Direct
Method

Indirect
Method
The net cash amount
provided by operating
activities is identical under
both the direct and indirect
methods.
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 QUIZ – 1

❑ Theprimary purpose of the statement of cash

flows is to report all major cash receipts (inflows)
and cash payments (outflows) during a period.

▪ True ( )
▪ False ( )

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 QUIZ – 1

❑ Theprimary purpose of the statement of cash

flows is to report all major cash receipts (inflows)
and cash payments (outflows) during a period.

▪ True ( √ )
▪ False ( )

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 QUIZ – 2

❑ The statement of cash flows reports and proves

the net change in cash for a reporting period.

▪ True ( )
▪ False ( )

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 QUIZ – 2

❑ The statement of cash flows reports and proves

the net change in cash for a reporting period.

▪ True ( √ )
▪ False ( )

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 QUIZ – 3

❑ Internal users of the statement of cash flows often

use cash flow information to plan day-to-day
operating activities and make long-term
investment and financing decisions.

▪ True ( )
▪ False ( )

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 QUIZ – 3

❑ Internal users of the statement of cash flows often

use cash flow information to plan day-to-day
operating activities and make long-term
investment and financing decisions.

▪ True ( √ )
▪ False ( )

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END OF CHAPTER 13

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