13-1

Chapter

13
STATEMENT OF CASH FLOWS

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-2

Let’s look at the

indirect method
that is used by
over 97% of all
companies.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-3

Learning Objective
Compute net cash flows
from operating activities
using the indirect method.

LO7
Business Studies Department, BUKC
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-4

Indirect Method
Changes in current assets and current
liabilities as shown on the following table.

Cash Flows
Net
from Operating
Income
Activities

+ Losses and + Noncash

- Gains expenses such as
depreciation and
amortization.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-5

Indirect Method

Use this table when adjusting Net

Income to Operating Cash Flows.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-6

Indirect Method
Joyce, Inc. has prepared the Balance Sheet
as of March 31, 2006, and March 31, 2007.
The Income Statement for the year ended
3/31/07 has also been prepared. Joyce
needs help preparing the Statement of
Cash Flows using the indirect method.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-7

The $8,000Indirect Method

gain was the
result of selling land
Joyce, Inc.
costing $32,000 for $40,000
Income Statement
cash during the period.
For the Year Ending 3/31/07
Revenues $ 727,000
Operating Expenses (748,000)
Depreciation Expense (6,000)
Gain on Sale of Land 8,000
Net Loss $ (19,000)

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-8

Indirect Method

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-9

Indirect Method
Joyce issued $50,000 of no
par common stock to
settle the $50,000 note
payable.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-10

Indirect Method

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-11

Indirect Method

With the indirect method, always

start with the net income or net
loss for the period.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-12

Indirect Method

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-13

Indirect Method

Accounts receivable decreased.

3/31/07 3/31/06
$23,000 - $40,000 = $(17,000)

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-14

Indirect Method

Accounts payable increased.

3/31/07 3/31/06
$38,000 - $27,000 = $11,000

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-15

Indirect Method

Inventory increased.
3/31/07 3/31/06
$350,000 - $300,000 = $50,000

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-16

Indirect Method

Salaries payable decreased.

3/31/07 3/31/06
$ 9,000 - $14,000 = $(5,000)
Business Studies Department, BUKC
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-17

Indirect Method

Add back non-cash expenses.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-18

Indirect Method

Subtract gains.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-19

Indirect Method

The operating cash

flows amount comes
from the schedule
just prepared.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-20

Indirect Method

Land originally costing $32,000

was sold for $40,000.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-21

Indirect Method

Dividends of $20,000 were paid to

owners during the year.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-22

Indirect Method

Compute the net change in cash

for the period.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-23

Indirect Method

Complete the Statement of Cash

Flows by reconciling beginning
cash to ending cash.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-24

Indirect Method
Note that the ending
cash amount ties
back to Joyce’s
Balance Sheet at
3/31/07.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-25

Indirect Method
In addition, on the face of the statement or in
a supplemental schedule, disclose the
$50,000 noncash financing activity.

Cash interest payments and cash tax

payments must be disclosed.

Business Studies Department, BUKC

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-26

Any Questions?

26
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-27

Thanks

27
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
 13-28

End of Chapter 13

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008