ACCT6174 - Introduction to

Financial Accounting
Week 9
Statement of Cash Flows
 Objectives
• Explain the usefulness of the statement of cash
flows.

• Distinguish between operating, investing, and

financing activities.

• Prepare a statement of cash flows using the direct

and indirect method.

• Analyze the statement of cash flows.

 The Purposes of Cash
Flow
To give the information to users of:
1. The ability to generate cash in the future
2. The ability to meet the obligations
3. The ability to pay dividends
4. Cash flow (cash in and out) relate to
operating, financing, and investing activities
 Classification of Cash
Flow
3 main activities:
1. Operating Activities
Income statement items
2. Investing Activities
Changes in Investments and Non-Current Asset
3. Financing Activities
Changes in Non-Current Liabilities and Equity
Classification of Cash
Flow

Source: Financial Accounting IFRS

edition 2e, Weygandt, Kimmel,
Kieso
Classification of Cash
Flow

Source: Financial Accounting IFRS

edition 2e, Weygandt, Kimmel,
Kieso
 Classification of Cash
Flow
Not all activities involve cash. The examples of
significant non-cash activities:
• Issuance of ordinary shares to purchase assets
• Issuance of debt to purchase assets
• Exchange of assets
• Conversion of bonds into ordinary shares
These activities are reported in a separate note
or supplementary schedule to financial
statements
 Format of Cash Flow
2 method to prepare the statement of cash
flow:
1. Direct method
Shows operating cash receipt and
payments, more consistent with the
objectives of statement of cash flow
 Format of Cash Flow
2. Indirect method
Adjusts net income for items that do not
affect cash. Most of the companies using
indirect method for some reasons:
• Easier and less costly
• Focuses on the differences between net
income and net cash flow from operating
activities
Format of Cash Flow
Source: Financial Accounting IFRS
edition 2e, Weygandt, Kimmel,
Kieso
 Preparing the statement
of Cash Flow
The information needed in preparing statement
of cash flow:
1. Comparative statements of financial position
(to see the changes in assets, liabilities and
equity)
2. Current Income Statement (to determine the
amount of cash provided or used by operating
activities)
3. Additional information
 Preparing the statement
of Cash Flow
• Determine net cash provided/used by
operating activities by converting net
Step 1 income from an accrual basis to cash basis

• Analyze changes in non-current asset and

liability accounts and record as investing and
Step 2 financing activities

• Compare the net change in cash on the

statement of cash flow with the change of
Step 3 cash in statement of financial position
Source: Financial Accounting IFRS
edition 2e, Weygandt, Kimmel,
Kieso
 Preparing the statement
of Cash Flow
Example:

Source: Financial Accounting IFRS

edition 2e, Weygandt, Kimmel,
Kieso
 Preparing the statement
of Cash Flow
Source: Financial Accounting IFRS
edition 2e, Weygandt, Kimmel,
Kieso
Preparing the statement
of Cash Flow

Source: Financial Accounting IFRS

edition 2e, Weygandt, Kimmel,
Kieso
 Preparing the statement
of Cash Flow
Other information for 2014:
1. Depreciation expense was comprised of €6,000 for building and
€3,000 for equipment.
2. The company sold equipment with a book value of €7,000 (cost
€8,000, less accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment
costing €25,000 was also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
 Preparing the statement
of Cash Flow
Step 1:

Source: Financial Accounting IFRS

edition 2e, Weygandt, Kimmel,
Kieso
 Preparing the statement
of Cash Flow
Step 1: Source: Financial Accounting IFRS
edition 2e, Weygandt, Kimmel,
Kieso
Cash flows from operating activities:
Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
Net cash provided by operating activities € 172,000
 Preparing the statement
of Cash Flow
Source: Financial Accounting IFRS

Step 2: edition 2e, Weygandt, Kimmel,

Kieso

Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000

Disclosure: Issuance of bonds to purchase land € 110,000

 Preparing the statement
of Cash Flow
Cash flows from operating activities:
Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Source: Financial Accounting IFRS Loss on disposal of plant assets 3,000
edition 2e, Weygandt, Kimmel, Decrease in accounts receivable 10,000
Kieso Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000
 Preparing the statement
of Cash Flow
Step 3:
In statement of cash flow, cash increased by
$22,000. In comparative statement of
financial position, cash also increased by
$22,000.
 Free Cash Flow
Free cash flow describes the cash remaining
from operations after adjustment for capital
expenditures and dividends.
Free cash flow:

Cash provided
Capital Cash
by operating
Expenditures Dividends
activities
Thank You