CHAPTER 13

Statement of
Cash Flows
 Learning Objective 1

Understand the
purpose of a statement
of cash flows.
 What Does The Statement of
Cash Flows Do?
 Summarizes a company’s cash flows for a
period of time.
 Explains how a company’s cash was
generated and how that cash was used.
 Complementary to the income statement.
 Indicates ability of a company to generate
income in the future.
Learning Objective 2

Recognize the
different types of
information
reported in the
statement of cash
flows.
 What Are Cash Equivalents?

Short-term, highly liquid investments

that can be converted easily into
cash.
Examples:
Treasury Bills
Money Market Funds
Commercial Paper
 The Flow of Cash
Cash received Cash received Cash received
from operating from investing from financing
activities activities activities

inflows Cash and

cash
equivalents outflows

Cash paid Cash paid Cash paid

for operating for investing for financing
activities activities activities
Match Classifications of Cash Flows
1.Transactions and events that enter
Operating
Operating into the determination of net income.
Activities
Activities 2.Transactions and events that involve
the purchase and sale of securities,
property, plant, equipment, and other
Financing
Financing assets not generally held for resale,
Activities
Activities and the making and collecting of
loans.
3.Transactions and events whereby
Investing
Investing resources are obtained from, or repaid
Activities
Activities to, owners and creditors.
Statement of Cash Flows
Operating Activities
Financing Activities
Cash Inflows Investing Activities

Cash
Statement of Cash Flows

Cash Outflows
Cash

Operating Activities
Financing Activities
Investing Activities
 What Items Are Classified as
Operating Activities?
Cash Inflow Cash Outflow
• Sale of goods or • Inventory
services payments
• Sale of investments • Interest payments
in trading securities
• Wages
• Interest revenue
• Utilities, rent
• Dividend revenue
• Taxes
 Investing Activities

Cash Inflow Cash Outflow

• Sale of plant • Purchase of plant
assets assets
• Sale of securities, • Purchase of
other than trading securities, other
securities than trading
• Collection of securities
principal on loans • Making of loans
to other entities
 Financing Activities

Cash Inflow Cash Outflow

• Issuance of own • Dividend
stock payments
• Borrowing • Repaying
principal on
borrowing
• Treasury stock
purchase
 Define Noncash Items
Noncash items are items included in
the determination of net income on
an accrual basis that do not affect
cash; examples are depreciation
and amortization.
 Learning Objective 3

Prepare a simple
statement of cash
flows.
 What is the Format of
the Statement of Cash Flows?

Cash provided by (used in):

Operating activities $XXX
Investing activities XXX
Financing activities XXX
Net increase (decrease) in cash $XXX
Cash—beginning of year XXX
Cash—end of year $XXX
 A Simple Example
Red Bull Corporation
Trial Balance, 1/1/03

Debit Credit
Cash $ 500
Accounts Receivable 1,300
Property, Plant & 500
Equipment
Accumulated Depreciation $ 350
Accounts Payable 1,100
Long-Term Debt 250
Common Stock 300
Retained Earnings 300
Totals $2,300 $2,300
 A Simple Example
The following transactions were
conducted by Red Bull Corp during
2003:
1. Sales on account, $1,300
2. Collections on account, $1,800
3. Paid accounts payable, $1,000
4. Paid long-term debt, $100
5. Issued stock at par value, $200
6. Paid interest on debt, $50
7. Sold equipment, $100 (original cost,
$250, accumulated depreciation, $225)

Record the appropriate journal entries.

 A Simple Example
Accounts Receivable . . . . . . . . . . . . . . 1,300
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Accounts Receivable . . . . . . . . . . . . . . 1,800
Accounts Payable . . . . . . . . . . . . . . . . . 1,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Long-Term Debt . . . . . . . . . . . . . . . . . . 100
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Common Stock . . . . . . . . . . . . . . . . . . . 200
Interest Expense . . . . . . . . . . . . . . . . . . 50
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Accumulated Depreciation . . . . . . . . . . 225
Property, Plant, & Equipment . . . . . . . . 250
Gain on Sale of Equipment . . . . . . . . . . 75
 A Simple Example
Red Bull Corporation
Trial Balance, 12/31/03

Debit Credit
Cash $1,450
Accounts Receivable 800
Property, Plant &
Equipment 250
Accumulated Depreciation $ 125
Accounts Payable 100
Long-Term Debt 150
Common Stock 500
Retained Earnings 1,625
Totals $2,500 $2,500
 A Simple Example
STATEMENT OF CASH FLOWS
Operating activities:
Collections on account. . . . . . . . . . . . . $ 1,800
Payment of accounts payable . . . . . . . $1,000
Payment for interest . . . . . . . . . . . . . . . 50 (1,050)
Cash flows from operating activities. . . $ 750
Investing activities:
Sold equipment. . . . . . . . . . . . . . . . . . . $ 100
Cash flows from investing activities . . . 100
Financing activities:
Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200
Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . 100
 A Simple Example

Statement of Cash Flows (continued)

Net increase in cash. . . . . . . . . . . . . . . . $ 950

Beginning cash balance. . . . . . . . . . . . . 500
Ending cash balance . . . . . . . . . . . . . . . $1,450
 Learning Objective 4

Analyze financial
statements to
prepare a
statement of cash
flows.
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent
accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a
cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow
effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity
accounts to determine the cash flow effects of any financing
transactions.
5. Prepare a formal statement of cash flows by classifying all
cash inflows and outflows according to operating, investing,
and financing activities.
6. Report any significant investing or financing transactions
that did not involve cash in a narrative or in a separate
schedule.
 Example: Change in Cash

Red Bull Corporation

Beginning cash balance. . . . . . . . . . . . . $ 500

Ending cash balance . . . . . . . . . . . . . . . 1,450
Net increase in cash. . . . . . . . . . . . . . . . $ 950
Cash Flow Statements—Match
A method of reporting
net cash flows from
Indirect operations that shows
Method the major classes of
cash receipts and
payments for a period of
time.
A method of reporting
net cash flows from
Direct operations that involves
Method converting accrual-basis
net income to a cash
basis.
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent
accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a
cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow
effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity
accounts to determine the cash flow effects of any financing
transactions.
5. Prepare a formal statement of cash flows by classifying all
cash inflows and outflows according to operating, investing,
and financing activities.
6. Report any significant investing or financing transactions
that did not involve cash in a narrative or in a separate
schedule.
 Income Statement Conversion

Cash Flows
Income from
Statement Adjustments Operations

Sales $1,300 +500 $1,800

Accounts payable -1,000 (1,000)
Interest expense (50) No change (50)
$1,250 -500 net adjustment $ 750
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts
for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-
basis summary of operations.
3. Analyze the long-term assets to identify the cash flow
effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts
to determine the cash flow effects of any financing
transactions.
5. Prepare a formal statement of cash flows by classifying all
cash inflows and outflows according to operating, investing,
and financing activities.
6. Report any significant investing or financing transactions that
did not involve cash in a narrative or in a separate schedule.
 Investing Activities
Red Bull Corporation sells a piece of equipment for
$100 during the year. The T-accounts relating to
the equipment and the associated depreciation are
given as follows.

PP&E PP&E Acc. Dep. Acc. Dep.

500 500 350 350
? 250 ? 225
250 250 125 125
 Investing Activities
From the preceding T-Accounts make Red
Bull Corporation’s journal entries relating to
Property, Plant, & Equipment for the year:

Cash. . . . . . . . . . . . . . . . . . . . . . . . 100
Accumulated Depreciation. . . . . . . 225
Property, Plant, & Equipment . . 250
Gain on Sale of Equipment . . . . 75
 Investing Activities
Record the investing activities section of Red
Bull Corporation’s statement of cash flows:

Investing activities:
Proceeds from sale of PP&E . . . . . . .$ 100
Cash flows from investing activities . . $ 100
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts
for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-
basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of
investing activities.
4. Analyze the long-term debt and stockholders’ equity
accounts to determine the cash flow effects of any
financing transactions.
5. Prepare a formal statement of cash flows by classifying all
cash inflows and outflows according to operating, investing,
and financing activities.
6. Report any significant investing or financing transactions that
did not involve cash in a narrative or in a separate schedule.
 Investing Activities

Red Bull Corporation’s financing activities

section of its statement of cash flows is as
follows:

Financing activities:
Issued stock. . . . . . . . . . . . . . . . . . . . . .$ 200
Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . $ 100
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts
for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-
basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of
investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts
to determine the cash flow effects of any financing
transactions.
5. Prepare a formal statement of cash flows by classifying all
cash inflows and outflows according to operating,
investing, and financing activities.
6. Report any significant investing or financing transactions that
did not involve cash in a narrative or in a separate schedule.
 A Simple Example
STATEMENT OF CASH FLOWS
Operating activities:
Collections on account. . . . . . . . . . . . . $1,800
Payment of accounts payable . . . . . . . $1,000
Payment for interest. . . . . . . . . . . . . . . 50 (1,050)
Cash flows from operating activities. . . 750
Investing activities:
Sold equipment. . . . . . . . . . . . . . . . . . . $ 100
Cash flows from investing activities . . . 100
Financing activities:
Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200
Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . 100
Net increase in cash. . . . . . . . . . . . . . . . . $950
Beginning cash balance. . . . . . . . . . . . . . 500
Ending cash balance . . . . . . . . . . . . . . . . $1,450
 6-Step Process for Preparing a
Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts
for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-
basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of
investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts
to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash
inflows and outflows according to operating, investing, and
financing activities.
6. Report any significant investing or financing transactions
that did not involve cash in a narrative or in a separate
schedule.
 Define Noncash Transactions
Noncash transactions are investing and financing
activities that do not affect cash; if significant,
they are disclosed below the statement of cash
flows or in the notes to the financial statements.
 Learning Objective 5

Use information from the

statement of cash flows
to make decisions.
Analysis of Statement of Cash Flows
Cash Flows Cash Flows Cash Flows
General
from from from
Operating Investing Financing Explanation
Building up pile of cash.
1. + + + Possibly looking for
acquisition.
Operating cash flow
being used to buy fixed
2. + – – assets and pay down
debt.
Operating cash flow and
3. + + – sale of fixed assets being
used to pay down debt.
Operating cash flow and
4. + – + borrowed money being
used to expand.
continued
Analysis of Statement of Cash Flows
Cash Flows Cash Flows Cash Flows
General
from from from
Operating Investing Financing Explanation
Operating cash flow
problems covered by sale
5. – + + of fixed assets, borrowing,
and contributions.
Rapid growth, short falls in
6. – – + operating cash flow, and
purchase of fixed assets.
Sale of fixed assets is
7. – + – financing operating cash
flow shortages.
Company is using cash
reserves to finance cash
8. – – – flow short falls and pay
creditors.