Presentation on theme: "Chapter 23: Statement of Cash Flows"— Presentation transcript:
1 Chapter 23: Statement of Cash Flows Intermediate Accounting, 11th ed.Kieso, Weygandt, and WarfieldChapter 23: Statement of Cash Flows2
2 Chapter 23: Statement of Cash Flows After studying this chapter, you should be able to:Describe the purpose of the statement of cash flows.Identify the major classifications of cash flows.Differentiate between net income and net cash flows from operating activities.Contrast the direct and the indirect methods of calculating net cash flow from operating activities.
3 Chapter 23: Statement of Cash Flows Determine net cash flows from investing and financing activities.Prepare a statement of cash flows.Identify sources of information for a statement of cash flows.Identify special problems in preparing a statement of cash flows.Explain the use of a work sheet in preparing a statement of cash flows.
4 Usefulness of the Statement of Cash Flows The information may help users assess the following aspects:The entity’s ability to generate future cash flowsThe entity’s ability to pay dividends and meet obligationsThe reasons as to why net income and net cash flow from operating activities differCash and non-cash investing and financing activities during the year
5 The Cash Flow Statement The cash flow statement provides information about:the cash receipts (cash inflows), anduses of cash (cash outflows) during the periodInflows and outflows are reported for:operating activities,investing activities, andfinancing activities during the period
6 Statement of Cash Flows: Concept OperatingactivitiesInvestingFinancinginflowsCashPoolOperatingactivitiesInvestingFinancingoutflows
7 Preparing a Statement of Cash Flows There are two methods of preparing the statement of cash flows:the indirect method andthe direct methodThe indirect method derives cash flows from accrual basis statements.The direct method determines cash flows directly for each source or use of cash.
9 The Statement of Cash Flows: Indirect Method Accrual Basis StatementsCash Flow StatementIncome Statementitems & Changes inCurrent Assets andCurrent LiabilitiesOperating activities:Adjust net income for accrualsand non-cash charges to getcash flowsBalance Sheet: ChangesIn Non-Current AssetsInvesting activities:Inflows from sale of assets andOutflows from purchases ofassetsBalance Sheet: Changes inNon-Current Liabilitiesand EquityFinancing activities:Inflows and outflowsfrom loan and equitytransactions
10 Direct Method: Operating Activities InflowsOutflowsFrom sales of goods or servicesFrom returns on loans (interest) and returns on equity securities (dividends)To suppliers for inventoryTo employees for servicesTo government for taxesTo lenders for interestTo others for expenses
11 Investing and Financing Activities For the direct and indirect methods the sections reporting investing and financing activities are the same.The net inflows or outflows for each section (under the two methods) are identical.The operating activities are reported differently.
12 Format of the Statement of Cash Flows: Indirect Method Cash flows from operating activities:Net Income $ XXXAdjustments (to arrive at cash flow from operations) $ XX(List of individual inflows and outflows)Net cash flow from operating activities $ XXXCash flows from investing activities:(List of individual inflows and outflows) $ XXNet cash flow from investing activities $ XXXCash flows from financing activities:(List of individual inflows and outflows) $ XXNet cash flow from financing activities $ XXX
14 Formula to Compute Cash Receipts from Customers
15 Formula to Compute Cash Payments for Operating Expenses
16 Indirect Method: Special Items Note the following adjustments to net income in deriving operating cash flow:Loss on sale of assets is added to net incomeGain on sale of assets is deducted from net incomeDiscount on bonds payable (as amortized) is added to net incomePremium on bonds payable (as amortized) is deducted from net income
17 Format of the Statement of Cash Flows: Direct Method Cash flows from operating activities:Cash receipts (individually): Inflows $ XXXCash payments to suppliers (separately): outflows ($ XXX)Net cash flow from operating activities $ XXXCash flows from investing activities:(List of individual inflows and outflows) $ XXNet cash flow from investing activities $ XXXCash flows from financing activities:(List of individual inflows and outflows) $ XXNet cash flow from financing activities $ XXX
18 Direct Method: Concept Cash ReceiptsFrom sale ofgoods andservices tocustomersFrom receiptsof interest anddividendsCash PaymentsTo suppliersTo employeesFor operating expFor interestFor taxesCashflowfromoperationslessequals
19 Cash Flow Statement: Direct Method Cash receipts from customers:= Revenue from credit sales + Decrease in A/Rec balances- Increase in A/Rec balances
20 Cash Flow Statement: Direct Method Cash payments to suppliers:= Cost of goods sold + Increase in inventory- Decrease in inventory+ Decrease in accounts payable- Increase in accounts payable
21 Cash Flow Statement: Direct Method Cash payments for operating and other expenses:= Operating expenses + Increase in prepaid expenses- Decrease in prepaid expenses+ Decrease in accrued expenses payable- Increase in accrued expenses payable
22 Reporting Significant Non-Cash Transactions Transactions not involving cash inflows or cash outflows are non-cash transactions.They are not reported in the body of the cash flow statement.If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements.Example: Issue of bonds (payable) for purchase of land.
23 WorksheetA work sheet may be useful when a number of adjustments are needed.Involves three steps:Enter beginning and ending balance sheet data.Enter the data that explains the changes in balance sheet accounts (other than cash).Enter the increase or decrease in cash on cash line and at the bottom of the work sheet. This entry results in the totals of the reconciling items to agree.