STATEMENT OF CASH

FLOWS
Accounting | M.D. Wong
SHORT REVIEW
Balance Sheet – a snapshot of the current
financial condition and position of the
company
Income Statement – summarizes the results
(profits) of operations during a specific
period

Cash Flow Statement – changes in the

balance of cash over a specific period
STATEMENT OF CASH FLOWS
• Focus is cash transactions and changes it
brings to the cash account balance.

• Cash receipts - inflows

• Cash payments - outflows
STATEMENT OF CASH FLOWS
• Cash flows from:
– Operating activities
– Investing activities
– Financing activities
OPERATING ACTIVITIES
• Closely related to the nature of your
business
– Revenues
– Expenses
• Changes in Current Assets
• Changes in Current Liabilities
• Basically, changes in your immediate
resources – those exhausted during
normal operations
INVESTING ACTIVITIES
• Here, you are the INVESTOR
– Investments:
• Bonds of another company (principal amount)
• Stocks of another company
– Purchase/Sale of Long-lived Assets (PPE)

– Why is the purchase/sale of non-current part

of investing activities?
FINANCING ACTIVITIES
• Here, you are the ISSUER (the one
creating funds for the business)
– Stocks (for corporations)
• Payment of dividends to your investors
– Additional investments during the period
– Bonds (principal amount of loans) issued to
investors i.e. long-term borrowings
– Other debt instruments
OPERATING ACTIVITIES
(2 Methods)
• Indirect Method
– Begins with net income then adjusts
accordingly
• Direct Method
– Does not begin with net income
– Accrual to cash basis

*cash flows from investing activities and financing

activities are derived the same way for both methods
INVESTING ACTIVITIES
• (Purchase)/Sale of PPE
• (Purchase)/Sale of Investments (stocks,
bonds and other debt securities)
• Receipts from debtors
• (Payments) to debtors
FINANCING ACTIVITIES
• Receipts/(Payments) – issuance of stocks,
bonds and other debt instruments
• (Payments) of dividends
• Receipts from creditors
• (Payments) to investors
INDIRECT METHOD
(Operating Activities)
• Net Income
– Adjust for non-cash items
– Adjust for changes in current operating
accounts (CA/CL)
= Net cash provided by (used in) Operating
Activities
INDIRECT METHOD
• Adjustments for non-cash items:
+ Depreciation
+ Amortization of interest (discount)
+ Losses on sales of assets
- Gains on sales of assets
+/- other non-cash items included in the net
income
INDIRECT METHOD
• Adjustments for changes in CA/CL
(-) increase in CA
+ decrease in CA

+ increase in CL
- decrease in CL
INDIRECT METHOD
(Operating Activities)
• Net Income
• Adjustments for non-cash items
• Adjustments for changes in current
operating accounts
= Net cash provided by (used in) Operating
activities
DIRECT METHOD
(Operating Activities)
• Identify cash transactions
– Examples:
• Cash received from sales
• Cash collected from accounts receivable
• Cash paid for prepaid rent
• Cash paid for salaries