Statement of Cash Flows Statement of Cash Flows

Statement
Statement of
of Cash
Cash Flows
Flows
Chapter
23
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield
Chapter
23-1
Learning
Learning Objectives
Objectives
1. Describe the purpose of the statement of cash flows.
2. Identify the major classifications of cash flows.
3. Differentiate between net income and net cash flows from
operating activities.
4. Contrast the direct and indirect methods of calculating net cash
flow from operating activities.
5. Determine net cash flows from investing and financing activities.
6. Prepare a statement of cash flows.
7. Identify sources of information for a statement of cash flows.
8. Discuss special problems in preparing a statement of cash flows.
9. Explain the use of a worksheet in preparing a statement of cash
flows.
Chapter
23-2
Statement
Statement of
of Cash
Cash Flows
Flows
Special Problems in
Preparation of the
Statement Use of a Worksheet
Statement
Preparation
Usefulness Adjustments similar to Preparation of

Classification of cash depreciation worksheet
flows Accounts receivable (net) Analysis of
Format of statement Other working capital transactions
changes Preparation of final
Steps in preparation
Net losses statement
Examples
Gains
Sources of information
Stock options
Indirect vs. direct Postretirement benefit
method costs
Extraordinary items
Significant noncash
Chapter
23-3 transactions
Section
Section 11 -- Preparation
Preparation of
of the
the
Statement
Statement ofof Cash
Cash Flows
Flows
Primary purpose:
To provide information about a company’s cash
receipts and cash payments during a period.
Secondary objective:
To provide cash-basis information about the
company’s operating, investing, and financing
activities.
Chapter
23-4 LO 1 Describe the purpose of the statement of cash flows.
Usefulness
Usefulness of
of the
the Statement
Statement
of
of Cash
Cash Flows
Flows
Provides information to help assess:

1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and obligations.
3. Reasons for difference between net income and

net cash flow from operating activities.
4. Cash and noncash investing and financing
transactions.
Chapter
23-5 LO 1 Describe the purpose of the statement of cash flows.
Classification
Classification of
of Cash
Cash Flows
Flows
Operating
Activities Investing
Activities Financing
Income
Statement
Activities
Generally
Items Long-Term Generally
Asset Items Long-Term
Liability
The term “Cash” = and
Cash and cash equivalents.
Equity Items
Chapter
23-6 LO 2 Identify the major classifications of cash flows.
Classification
Classification of
of Cash
Cash Flows
Flows
Cash and Cash Equivalent Text Footnote 3
3 The basis recommended by the FASB for the statement of

cash flows is actually “cash and cash equivalents.” Cash
equivalents are short-term, highly liquid investments that
are both: (a) readily convertible to known amounts of cash,
and (b) so near their maturity that they present insignificant
risk of changes in interest rates. Generally, only investments
with original maturities of three months or less qualify under
this definition. Examples of cash equivalents are Treasury
bills, commercial paper, and money market funds purchased
with cash that is in excess of immediate needs.
Chapter
Classification
Classification of
of Cash
Cash Flows
Flows
Classification of Typical Inflows and Outflows
Illustration 23-1
Income
Statement
Items
Chapter
Classification
Classification of
of Cash
Cash Flows
Flows
Illustration 23-1
Generally
Long-Term
Asset Items
Chapter
Classification
Classification of
of Cash
Cash Flows
Flows
Illustration 23-1
Generally
Long-Term
Liability and
Equity Items
Chapter
Classification
Classification of
of Cash
Cash Flows
Flows
Typical
Company
Product Life
Cycle
Chapter
Sources of Information for the
Statement of Cash Flows
 Comparative balance sheet

 Current income statement
 Additional information
Chapter 12
23-12
Comparative Balance Sheet
Information in this statement indicates

the amount of the changes in assets,
liabilities, and stockholders' equities
from the beginning to the end of the
period.
Chapter
23-13
The comparative balance sheet for the beginning and end of 1997, showing
increases or decreases appears as follows:
COMPUTER SERVICES COMPANY
December 31
Change
Assets Dec. 31, 1997 Jan. 1, 1997 Increase/Decrease
Cash $34,000 $0 $34,000 increase
Accounts receivable 30,000 0 30,000 increase
Equipment 10,000 0 10,000 increase
Total $74,000 $0
Liabilities and
stockholders’ equity
Accounts payable $4,000 $0 $4,000 increase
Common stock 50,000 0 50,000 increase
Retained
Chapter earnings 20,000 0 20,000 increase
23-14
Total $74,000 $0
Current Income Statement
Information in this
statement helps the reader
determine the amount of
cash provided or used by
operations during the
period.
Chapter
23-15
Additional Information
Additional information
includes transaction data
that are needed to
determine how cash was
provided or used during
the period.
Chapter 16
23-16
Income Statement and Additional
Information
Income Statement
For the Year Ended December 31, 1997
Revenues $85,000
Operating expenses 40,000
Income before income taxes 45,000
Income tax expense 10,000
Net income $35,000
Additional Information:
(a) Examination of selected data indicates that a dividend of
$15,000 was declared and paid during the year.
(b) The equipment was purchased at the end of 1997. No
depreciation was taken in 1997.
Chapter
23-17
Indirect and Direct Methods
 In order to determine the cash
provided/used by operating activities,
net income must be converted from
an accrual basis to a cash basis.
 This conversion may be done by
either of two methods:
 indirect
 direct
Chapter
23-18
Indirect and Direct Methods
 Both methods arrive at the same total
amount for "Net cash.” provided by
operating activities.
 The methods differ in disclosing the
items that make up the total amount.
 The choice of methods affects only the
operating activities section; the
investing and financing activities
sections are the same.
Chapter
23-19
Indirect Method
 The indirect method is used extensively in
practice.
 Most companies favor the indirect
method for the following reasons:
 it is easier to prepare,
 it focuses on the differences between net
income and net cash flow from operating
activities, and
 it tends to reveal less company information to
competitors.
Chapter
23-20
20
Direct Method
 The FASB prefers the direct method but
allows the use of either method.
 When the direct method is used, the net
cash flow from operating activities as
computed using the indirect method must
also be reported in a separate schedule.
Chapter
23-21
Net Income Versus Net Cash Provided by
Operating Activities
Chapter
23-22
Step 2 - Indirect Method
 Receivables, payables, prepayments, and inventories
must be analyzed for their effects on cash.
 Accounts receivable - When accounts receivable
increase during the year, revenues on an accrual
basis are higher than revenues on a cash basis.
 Although operations of the period led to revenues,
not all of these revenues resulted in an increase in
cash.
Chapter
23-23
 Computer Services Company had revenues of
$85,000 in its first year of operations.
 However, CSC collected only $55,000 in cash.
Although accrual basis revenue was $85,000, cash
basis revenue would be only $55,000.
 The increase in accounts receivable of $30,000 must
be deducted from net income.
 If accounts receivable decrease, the decrease must
be added to net income.
Chapter
23-24
 Accounts payable - When accounts payable increase
during a year, operating expenses on an accrual
basis are higher than they are on a cash basis.
 For Computer Services Company, operating
expenses reported in the income statement were
$40,000.
 However, since Accounts Payable increased $4,000
only, $36,000 ($40,000 – $4,000) of the expenses were
paid in cash.
 To convert net income to net cash provided by
operating activities, an increase in accounts payable
25
must be added to net income.
Chapter
23-25
 Conversely, a decrease in accounts payable would have
to be subtracted from net income.
 For Computer Services Company, the changes in
accounts receivable and accounts payable were the
only changes in current assets and current liability
accounts.
 Any other revenues or expenses reported in the income
statement were received or paid in cash, and no
adjustment of net income is necessary.
Chapter
23-26
 Study the balance sheet to determine changes in
noncurrent assets.
 Changes in each noncurrent account are then
analyzed using selected transaction data to
determine the effect, if any, the changes had on
cash.
 Computer Service Company's three noncurrent
accounts are Equipment, Common Stock, and
Retained Earnings, all three of which had
increases during the year.
Chapter
23-27
 No data are given for the increases in Equipment of
$10,000 and Common Stock of $50,000. When other
explanations are lacking, assume any differences involve
cash.
 The increase in equipment is assumed to be a purchase of
equipment for $10,000 cash. This purchase is reported
as a cash outflow in the investing activities section.
 The increase of common stock is assumed to result from
the issuance of common stock for $50,000 cash. It is
reported as an inflow of cash in the financing activities
section of the statement of cash flows.
Chapter
23-28
 The reasons for the increase of $20,000 in the
Retained Earnings account are determined by
analysis.
 First, net income increased retained earnings by
$35,000.
 Second, the additional information indicates that a
cash dividend of $15,000 was declared and paid.
 The $35,000 increase due to net income is reported
in the operating activities section. The cash dividend
paid is reported in the financing activities section.
Chapter
23-29
 The $20,000 increase in Retained Earnings in 1997
is a net change.
 Having completed the three steps, we can prepare
the statement of cash flows by the indirect method.
 The statement starts with the operating activities
section, followed by the investing activities section,
and then the financing section.
Chapter
23-30
Partial Statement of Cash Flows--Indirect Method
For the Year Ended December 31, 1997
Cash from operating activities
Net income $35,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable $(30,000)
Increase in accounts payable 4,000 (26,000)
Net cash provided by operating activities $ 9,000
Cash flows from investing activities
Purchase of equipment (10,000)
Cash flows from financing activities
Issuance of Common Stock $50,000
Payment of cash dividends (15,000)
Net cash provided by financing activities 35,000
Net increase in cash
Chapter $34,000
23-31
Steps in Preparing
Chapter
23-32
After determining the net cash
provided by operating activities, the
remaining changes in balance sheet
accounts must be analyzed in order to
determine net cash provided/used by
investing and financing activities.
Chapter
23-33
 Land - Land of $130,000 was
purchased through the issuance of
long-term bonds.
 Although the exchange of bonds
payable for land has no effect on cash,
it is a significant noncash investing and
financing activity that must be
disclosed.
Chapter
23-34
 Building - An office
building was acquired
using cash of
$160,000.
 This transaction is a
cash outflow reported
in the investing
activities section.
Chapter
23-35
 Equipment - The equipment account increased
$17,000.
 The additional information provided, reveals that
this was a net increase resulting from two
transactions
 (1) a purchase of equipment for $25,000
 (2) sale of equipment costing $8,000 for
$4,000.
 The purchase of equipment should be shown as a
$25,000 outflow of cash and the sale of equipment
should be shown as a cash inflow of $4,000.
Chapter
23-36
 Bonds Payable - The bonds payable
account increased by $130,000. The
issuance of bonds for land is a noncash
transaction reported in a separate
schedule at the bottom of the statement
of cash flows.
Chapter
23-37
 Retained Earnings - Retained Earnings increased by
$124,000.
 The increase is a net of
 (1) Net income of $139,000 that increased Retained
Earnings and
 (2) dividends of $15,000 that decreased Retained
earnings.
 Net income is converted to net cash provided by
operations.
 Payment of the dividend is a cash outflow that is
reported as a financing activity.
Chapter
23-38
Example
Example –– Operating
Operating Section
Section
Direct Method
Deducts operating cash disbursements from
operating cash receipts. Illustration 23-6
“Net cash provided by operating activities” is the

equivalent of cash basis net income.
Chapter LO 4 Contrast the direct and indirect methods of calculating
23-39
E23-5
E23-5 (Operating
(Operating Activities—Direct
Activities—Direct Method)
Method)
Krauss Company’s financial statements for the year ended December
31, 2007, contained the following condensed information.
2007 2006 Change
Revenues from fees $ 840,000
Depreciation expense 60,000 Assume accounts
payable relates
Loss on sale of equipment 26,000
to operating
Income before income tax 130,000 expenses.
Income tax 40,000
Net income $ 90,000
Accounts receivable $ 37,000 $ 54,000 $ (17,000)

Accounts payable 41,000 31,000 10,000
Income taxes payable 4,000 8,500 (4,500)

23-40
E23-5
E23-5 (Operating
Method)
Prepare the operating activities section of the statement of
cash flows using the Direct method (Step 2).
Illustration 23-22
Computation of cash receipts from customers:
Revenue from fees $ 840,000

Add: Decrease in accounts receivable 17,000
Cash receipts from customers $ 857,000

23-41
E23-5
E23-5 (Operating
Method)
Alternate computation of cash receipts from customers:
Accounts receivable, balance 2006 $ 54,000

Add: Revenue from fees 840,000
Deduct: Cash receipts from customers (857,000)
Accounts receivable, balance 2007 $ 37,000

23-42
E23-5
E23-5 (Operating
Method)
Computation of cash payments for operating expenses:
Operating expenses $ 624,000

Deduct: Increase in accounts payable (10,000)
Cash payments for operating expenses $ 614,000
or
Accounts payable, balance 2006 $ 31,000
Add: Operating expenses 624,000
Deduct: Cash payments for operating expenses (614,000)

23-43
E23-5
E23-5 (Operating
Method)
Computation of cash payments for income taxes:
Income tax expense $ 40,000

Add: Decrease in income tax payable 4,500
Cash payments for income taxes $ 44,500
or
Income tax payable, balance 2006 $ 8,500
Add: Income tax expense 40,000
Deduct: Cash payments for income taxes (44,500)
Income tax payable, balance 2007 $ 4,000

23-44
E23-5
E23-5 (Operating
Method)
Cash flows from operating activities

Cash receipts from customers $ 857,000
Cash paid for operating expenses (614,000)
Cash paid for income taxes (44,500)
Net cash provided by operating activities 198,500

23-45
Step
Step 3:
3: Determine
Determine Net
Net Cash
Cash Flow
Flow from
from
Investing
Investing and
and Financing
Financing Activities
Activities
E23-2 (a) Plant assets that had cost $20,000 6 years
before and were being depreciated on a straight-line basis
over 10 years with no estimated scrap value were sold for
$5,300.
Plant assets (cost) $ 20,000

Accumulated depreciation ([$20,000 / 10] x 6) 12,000
Book value at date of sale 8,000
Sale proceeds (5,300)
Loss on sale $ 2,700
Chapter
23-46 LO 5 Determine net cash flows from investing and financing activities.
E23-2
E23-2 (a)
(a)
Cash flow from operating activities
Net income $
O Adjustment to reconcile net income to cash:
Loss on sale 2,700
Cash from operations
Cash flow from investing activities
I Proceeds from sale of plant asset 5,400
Cash from investing activities
Cash flow from financing activities
F
Cash from financing activities
Net Change in Cash $
Chapter
E23-2
E23-2 (b)
(b)
E23-2 (b) During the year, 10,000 shares of common
stock with a stated value of $10 a share were issued
for $43 a share.
Shares sold 10,000

Market value per share $ 43
Value of shares $430,000
Chapter
E23-2
E23-2 (b)
(b)
Net income $

I
F Sale of common stock 430,000
Chapter
E23-2
E23-2 (d)
(d)
E23-2 (d) The company sustained a net loss for the
year of $50,000. Depreciation amounted to $22,000,
and a gain of $9,000 was realized on the sale of land
for $39,000 cash.
Chapter
E23-2
E23-2 (d)
(d)
Net loss $ (50,000)
Depreciation expense 22,000
Gain on sale (9,000)
I Sale of land 39,000
F
Chapter
E23-2
E23-2 (h)
(h)
E23-2 (h) During the year, treasury stock costing
$47,000 was purchased.
Chapter
E23-2
E23-2 (h)
(h)
Net income (loss)

I
F Purchase of company stock (47,000)
Chapter
Statement
Statement of
of Cash
Cash Flows
Flows (a,b,d,h)
(a,b,d,h)
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Depreciation expense 22,000
Loss on sale 2,700
Gain on sale (9,000)
Cash from operations (34,300)
I Sale of plant assets

Sale of land
5,400
39,000
Cash from investing activities 44,400
F Sale of common stock 430,000
Purchase of company stock (47,000)
Cash from financing activities 383,000
Net Change in Cash $ 393,100
Chapter
23-54 LO 6 Prepare a statement of cash flows.
Sources
Sources of
of Information
Information for
for the
the
Statement
Statement of
of Cash
Cash Flows
Flows
1. Comparative balance sheets.
2. An analysis of the Retained Earnings.
3. Writedowns, amortization charges, and similar

“book” entries, such as depreciation, because they
have no effect on cash.
Chapter
23-55 LO 7 Identify sources of information for a statement of cash flows.
Net
Net Cash
Cash Flow
Flow from
from Operating
Operating Activities—
Activities—
Indirect
Indirect Versus
Versus Direct
Direct Method
Method
Net Income
Indirect Method
Chapter
Net
Net Cash
Cash Flow
Flow from
from Operating
Operating Activities—
Activities—
Indirect
Indirect Versus
Versus Direct
Direct Method
Method
Under the Direct Method, companies adjust each item

in the income statement from the accrual basis to the
cash basis.
Example line items found in the operating section:
Cash receipts from customers (see E23-5)
Cash payments to suppliers (see E23-4 to follow)
Cash payments for operating expenses (see E23-5)
Cash payments for income taxes (see E23-5)
Chapter
BE23-4
BE23-4 (Direct
(Direct Method)
Method)
BE 23-4 Azure Corporation’s financial statements for 2008,
contained the following condensed information (some facts
added).
2008 2007 Change
Sales $ 200,000
Cost of goods sold 120,000
Depreciation expense 21,000
Net income $ 30,000
Inventory $ 65,000 $ 54,000 $ 11,000

Accounts payable 44,000 31,000 13,000
Calculate “Cash Payments to Suppliers.”

Chapter
BE23-4
BE23-4 (Direct
(Direct Method)
Method)
Illustration 23-23
Computation of cash payments to suppliers:
Cost of goods sold $ 120,000

Add: Increase in inventory 11,000
Purchases 131,000
Deduct: Increase in accounts payable (13,000)
Deduct: Cash payments to suppliers $ 118,000
Chapter
BE23-4
BE23-4 (Direct
(Direct Method)
Method)
Alternate Computation of cash payments to suppliers:
Inventory, balance 2007 $ 54,000

Add: Purchases 131,000
Deduct: Cost of good sold (120,000)
Inventory, balance 2008 $ 65,000
and
Add: Purchases 131,000
Deduct: Cash payments to suppliers (118,000)
Chapter
Direct
Direct Versus
Versus Indirect
Indirect Controversy
Controversy
In Favor of the Direct Method

Shows operating cash receipts and payments.
Information about cash receipts and payments is
more revealing of a company’s ability
1. to generate sufficient cash from operating
activities to pay its debts,
2. to reinvest in its operations, and
3. to make distributions to its owners.
Chapter
Direct
Direct Versus
Versus Indirect
Indirect Controversy
Controversy
In Favor of the Indirect Method

Focuses on the differences between net income
and net cash flow from operating activities.
Provides link between the statement of cash flows
and the income statement and balance sheet.
Special Rules Applying to Indirect Methods

Disclose Interest paid.
Disclose Income taxes paid.
Chapter
Special
Special Problems
Problems in
in Statement
Statement Preparation
Preparation
1. Adjustments similar to depreciation
Amortization of limited-life intangible assets.
Amortization of deferred costs.
Amortization of bond discount or premium.
Changes in deferred income taxes.
Change related to an investment when recording

income or loss under the equity method.
Chapter
23-63 LO 8 Discuss special problems in preparing a statement of cash flows.
Special
Special Problems
Problems in
in Statement
Statement Preparation
Preparation
2. Accounts receivable, net
3. Other working capital changes
4. Net losses
5. Gains
6. Stock options
7. Postretirement benefits
8. Extraordinary items
9. Significant noncash transactions

Chapter
23-64 LO 8 Discuss special problems in preparing a statement of cash flows.

Statement of Cash Flows Statement of Cash Flows

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Statement of Cash Flows Statement of Cash Flows

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Statement

Usefulness Adjustments similar to Preparation of

Provides information to help assess:

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and

Cash and Cash Equivalent Text Footnote 3

3 The basis recommended by the FASB for the statement of

 Comparative balance sheet

Information in this statement indicates

“Net cash provided by operating activities” is the

Accounts receivable $ 37,000 $ 54,000 $ (17,000)

Chapter LO 4 Contrast the direct and indirect methods of calculating

Computation of cash receipts from customers:

Revenue from fees $ 840,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

Alternate computation of cash receipts from customers:

Accounts receivable, balance 2006 $ 54,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

Operating expenses $ 624,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

Income tax expense $ 40,000

Chapter LO 4 Contrast the direct and indirect methods of calculating

Cash flows from operating activities

Chapter LO 4 Contrast the direct and indirect methods of calculating

Plant assets (cost) $ 20,000

Shares sold 10,000

Cash from operations

Cash from operations

I Sale of plant assets

1. Comparative balance sheets.

2. An analysis of the Retained Earnings.

3. Writedowns, amortization charges, and similar

Under the Direct Method, companies adjust each item

Inventory $ 65,000 $ 54,000 $ 11,000

Calculate “Cash Payments to Suppliers.”

Computation of cash payments to suppliers:

Cost of goods sold $ 120,000

Inventory, balance 2007 $ 54,000

In Favor of the Direct Method

In Favor of the Indirect Method

Special Rules Applying to Indirect Methods

1. Adjustments similar to depreciation

Amortization of limited-life intangible assets.

Amortization of deferred costs.

Amortization of bond discount or premium.

Changes in deferred income taxes.

Change related to an investment when recording

2. Accounts receivable, net

3. Other working capital changes

9. Significant noncash transactions

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