1. Statement of Cash Flows
Chapter 10
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Learning Objectives
Discuss the nature and purpose of the statement of cash flows.
Distinguish between operating activities, investing activities, and financing activities.
Analyze and calculate the effects of operating activities on cash.
Learning objectives appear in the text margins at the start of the section where the corresponding content is taught. Also, the chapter summary is organized by learning objective to aid student mastery of these objectives.
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Learning Objectives
Analyze and calculate the effects of investing activities on cash.
Analyze and calculate the effects of financing activities on cash.
Prepare a statement of cash flows using the direct and indirect methods.
Learning objectives appear in the text margins at the start of the section where the corresponding content is taught. Also, the chapter summary is organized by learning objective to aid student mastery of these objectives.
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4. Discuss the nature and purpose of the statement of cash flows
Learning Objective 1
Discuss the nature and purpose of the statement of cash flows
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5. The Importance of the Statement of Cash Flows
Managing cash flow is essential to the success of any business.
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6. Statement of Cash Flows
A financial statement primarily intended to provide information about the cash receipts and cash payments of a business during the period of time covered by the income statement
Provides users of financial statements with information that allows them to:
Observe reasons for changes in a company’s cash balance
Judge the company’s ability to pay its debts and to pay dividends to stockholders
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7. Statement of Cash Flows
Assess the company’s need to borrow money
Discover the reasons for differences between a company’s net income, cash payments, and cash receipts
Observe reasons for changes in a company’s financial position, including investment and borrowing activities, during an accounting period
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Learning Objective 2
Distinguish between operating activities, investing activities, and financing activities
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9. Classification of Cash Flows
Operating Activities
Transactions that enter into the calculation of net income
Investing Activities
Transactions involving the purchase and sale of long-term assets and transactions that involve making and collecting loans
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10. Classification of Cash Flows
Financing Activities
Transactions that involve cash receipts or payments from changes in long-term liabilities and stockholders’ equity
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11. Classification of Cash Receipts and Payments
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12. Classification of Cash Receipts and Payments
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13. Classification of Cash Receipts and Payments
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14. Cash and Cash Equivalents
The statement of cash flows should explain changes in
cash and cash equivalents.
Cash
Currency and coin on hand and in the bank
Cash equivalent
A highly liquid, short-term investment that can easily be converted to cash
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15. Cash and Cash Equivalents
Examples of cash equivalent include
US government Treasury bills
Money market investments
Commercial paper
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16. Methods of Preparing the Statement of Cash Flows
Two acceptable methods of preparing the statement of cash flows
Direct Method
Indirect Method
Both yield identical results
The only difference is in the way cash flows from operating activities is determined
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The Direct Method
A format for preparing the statement of cash flows that discloses each major class of cash inflow and cash outflow from operating activities
Shows the amount of cash received or paid for revenues and expenses reported on the income statement
Recommended by the FASB
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18. Steps in Preparing a Statement of Cash Flows
Determine how much cash has changed.
Determine the cash provided (used) by operating activities.
Determine the cash provided (or used) by investing activities.
Determine the cash provided (or used) by financing activities.
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19. Determine How Much Cash Has Changed
We can see the change in cash based on the comparative balance sheets for Ajax Company.
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20. Determine How Much Cash Has Changed
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21. Determine How Much Cash Has Changed
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22. Determine How Much Cash Has Changed
Why is it important to know how much cash has changed?
If a company consistently generates more cash than it uses, the company will be able to reduce debt, grow, make investments in other companies, increase its dividend, and buy treasury stock.
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23. Analyze and calculate the effects of operating activities on cash
Learning Objective 3
Analyze and calculate the effects of operating activities on cash
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24. Determine Cash Flows from Operating Activities
We are interested in analyzing cash inflows and outflows relating to operating activities.
Refer back to Table 22-1 on page 969.
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25. Cash Received from Customers
The Combined Statement of Income and Retained Earnings for Ajax Company
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26. Cash Received from Customers
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash received from customers amounted to $395,000.
Cash received
from
customers
+ Decrease in Accounts Receivable =
Sales revenue or
– Increase in Accounts Receivable
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Quick Check
Gilbert Corporation reports credit sales of $300,000 on its income statement for the year ending December 31, 20X3. Accounts receivable on January 1, 20X3, amounted to $55,000 and $58,500 on December 31, 20X3. The amount of cash received from customers during 20X3 amounted to
$303,500.
$300,000.
$296,500.
$299,000.
$302,500.
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Review Quiz 15-1
Klack Company had sales of $256,000 in 20X3, accounts receivable of $45,000 at the beginning of the year, and $51,000 at the end of the year. Calculate the amount of cash received from customers:
Cash received from customers:
Sales
$256,000
Increase in accounts receivable
(6,000)
Review Quiz 22-1 appears on page 974.
Total
$250,000
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29. Cash Received from Interest Income
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash received from interest income amounted to $4,000.
Cash received
from interest
income
+ Decrease in Interest Receivable =
Interest income or
– Increase in Interest Receivable
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30. Cash Received from Dividends
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash received from dividends amounted to $3,000.
Cash received
from
dividends =
Dividend
income
+ Decrease in Dividends Receivable
account
– Increase in Dividends Receivable or
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31. Cash Paid for Inventory
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash paid for inventory amounts to $179,000.
Payments for
inventory =
Cost of
goods
sold
Increase in
Decrease in
and
Accounts Payable + – or or
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Quick Check
Gilbert Corporation reports cost of goods sold of $300,000 for the year ending December 31, 20X3. Accounts payable on January 1, 20X3, amounted to $55,000 and $58,500 on December 31, 20X3. Merchandise inventory on January 1, 20X3, amounted to $45,000 and $52,500 on December 31, 20X3. The amount of cash paid for inventory during 20X3 amounted to
$303,500.
$304,000.
$307,500.
$355,500.
$358,500.
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Review Quiz 15-2
Klack Company reported cost of goods sold of $243,000 on its income statement. Klack’s balance sheet showed that Merchandise Inventory increased by $15,400 and Accounts Payable decreased by $14,000. Calculate the amount of cash paid for inventory:
Cash paid for inventory:
Cost of goods sold
$243,000
Increase in merchandise inventory +
15,400
Review Quiz 22-2 appears on page 976.
Decrease in accounts payable +
14,000
Total
$272,400
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34. Cash Paid for Operating Expenses
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash paid for operating expenses amounts to $86,000.
Increase in
Prepaid Expenses
Decrease in
Accrued Liabilities
Payments
for operating
expenses
Operating
expenses
other than
depreciation + + = or
and or
Decrease in
Prepaid Expenses
Increase in
Accrued Liabilities – –
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Cash Paid for Interest
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash paid for interest expense amounts to $6,000.
Payment for
interest
expense =
Interest expense
+ Decrease in Interest Payable
– Increase in Interest Payable or
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Quick Check
Gilbert Corporation reports interest expense of $25,000 for the year ending December 31, 20X3. Interest payable on January 1, 20X3, amounted to $1,500 and $2,500 on December 31, 20X3. Cash paid for interest expense during 20X3 amounted to
$25,000.
$26,500.
$27,500.
$23,500.
$24,000.
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37. Cash Paid for Income Taxes
The formula:
Looking at the income statement and referring back to the balance sheet for Ajax Company, we can see that cash paid for income tax amounts to $30,050.
+ Decrease in Income Tax Payable
Payment for
income taxes =
Income taxes or
– Increase in Income Tax Payable
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38. Operating Activities Section of a Statement of Cash Flows
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Review Quiz 15-3
Refer to the comparative balance sheet and combined income and retained earnings statement of West Company on page 978.
Calculate the net cash flow from operating activities:
Cash received from customers:
Sales
$256,000
Increase in accounts receivable
(10,000)
Review Quiz 22-3 appears on page 978.
Total
$246,000
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Review Quiz 15-3
Calculate the net cash flow from operating activities: (Continued)
Cash paid for inventory:
Cost of goods sold
$97,400
Increase in merchandise inventory
5,000
Decrease in accounts payable
(6,000)
Total
$96,400
Review Quiz 22-3 appears on page 978.
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Review Quiz 15-3
Calculate the net cash flow from operating activities: (Continued)
Cash paid for operating expenses:
Operating expenses other than dep.
$71,000
Increase in prepaid expenses
1,000
Increase in accrued salaries payable
(200)
Total
$71,800
Review Quiz 22-3 appears on page 978.
Cash paid for interest
$2,500
Cash paid for income taxes
$14,464
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Review Quiz 15-3
Calculate the net cash flow from operating activities: (Continued)
Summary
Cash flows from operating activities:
Cash received from customers
$246,000
Cash paid for inventory
(96,400)
Cash paid for operating expenses
(71,800)
Review Quiz 22-3 appears on page 978.
Cash paid for interest
(2,500)
Cash paid for income taxes
(14,464)
Net cash inflow from operating activities
$60,836
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43. Analyze and calculate the effects of investing activities on cash
Learning Objective 4
Analyze and calculate the effects of investing activities on cash
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44. Determine Cash Flows from Investing Activities
We are interested in analyzing cash inflows and outflows relating to investing activities.
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45. Determine Cash Flows from Investing Activities
Referring back to the balance sheet for Ajax Company, we can see Ajax made a $60,000 purchase of the stock of Cramer Company.
We can also see the Plant Assets section shows a $50,000 increase in the Land account.
The purchase of the stock and the land are both investing activities.
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46. Investing Activities Section of a Statement of Cash Flows
This partial statement of cash flows appears as Figure 22-3 on page 980.
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Review Quiz 15-4
Using the financial statements of West Company in Review Quiz 22-3, prepare the Cash Flows from Investing Activities section of West’s statement of cash flows:
Cash flows from investing activities:
Cash paid for purchase of equipment
$(2,000)
Net cash outflow from investing activities
$(2,000)
Review Quiz 22-4 appears on page 979.
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48. Analyze and calculate the effects of financing activities on cash
Learning Objective 5
Analyze and calculate the effects of financing activities on cash
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49. Determine Cash Flows from Financing Activities
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50. Determine Cash Flows from Financing Activities
We are interested in analyzing cash inflows and outflows relating to financing activities.
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51. Determine Cash Flows from Financing Activities
Referring back to the balance sheet and the combined income and retained earnings statement for Ajax Company, we can see Ajax has several items that involve the flow of cash from financing activities.
The Liabilities section of the balance sheet reveals that a $40,000 note payable was paid and that bonds payable of $100,000 were issued.
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52. Determine Cash Flows from Financing Activities
The Stockholders’ Equity section of the balance sheet shows an increase of $44,050, representing stock issued during the year.
Referring to the combined income and retained earnings statement, we see dividends of $11,000 were paid to stockholders.
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53. Financing Activities Section of a Statement of Cash Flows
This statement of cash flows appears as Figure 22-4 on page 981.
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54. Financing Activities Section of a Statement of Cash Flows
This statement of cash flows appears as Figure 22-4 on page 981.
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Review Quiz 15-5
Using the financial statements presented for West Company in Review Quiz 22-3, determine the net cash outflow (or inflow) from financing activities:
Cash flows from financing activities:
Cash received from sale of stock
$ 3,964
Cash paid for notes payable
(20,000)
Cash paid for dividends
(17,800)
Review Quiz 22-5 appears on page 981.
Net cash outflow from financing activities
$(33,836)
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56. Schedule of Noncash Investing and Financing Activities
Some investing and financing activities do not involve cash but do represent a significant change in the financial position of the company.
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Example
Schedule of Noncash Investing and Financing Activities
Assume Sawyer Company purchased a building by issuing a mortgage note payable for $500,000 on Mar. 10, 20X6.
Sawyer prepared the following journal entry:
20X6
Mar. 10
Building
500,000
Mortgage Note
Payable
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Example
Schedule of Noncash Investing and Financing Activities
This transaction would appear at the bottom of the statement of cash flows as shown below:
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Learning Objective 6
Prepare a statement of cash flows using the direct and indirect methods
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60. Preparing a Statement of Cash Flows—The Indirect Method
Provides less information because it does not disclose the individual cash inflows and outflows from operating activities
A format that adjusts the net income figure in order to calculate net cash flows from operating activities
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61. Steps in Using the Indirect Method
We start out with net income and make the following adjustments:
Add depreciation expense.
Subtract an increase in current assets other than cash.
Add a decrease in current assets other than cash.
Add an increase in current liabilities.
Subtract a decrease in current liabilities.
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62. Preparing the Operating Activities Using the Indirect Method
Referring to the balance sheet and the combined income and retained earnings statement for Ajax Company, we can prepare the operating activities of the statement of cash flows using the indirect method.
This statement appears as Figure 22-6 on the bottom of page 984.
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63. Statement of Cash Flows Statement-Indirect Method
This statement appears as Figure 22-5 on the top of page 984.
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64. Statement of Cash Flows Statement-Indirect Method
This statement appears as Figure 22-5 on the top of page 984.
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Quick Check
Gilbert Corporation reports net income of $85,000 for the year ending December 31, 20X3. Included in the calculation of net income is depreciation expense of $5,200. Accounts receivable increased $500 and accounts payable decreased $1,200. Cash flows provided by operating activities for 20X3 amount to
$85,000.
$90,200.
$88,500.
$89,500.
$81,500.
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Review Quiz 15-6
Using the financial statements presented for West Company in Review Quiz 22-3, prepare the Cash Flows from Operating Activities section of the statement of cash flows using the indirect method:
Cash flows from financing activities:
Net income
$62,636
Add depreciation expense
8,000
Subtract increase in accounts receivable
(10,000)
Review Quiz 22-6 appears on page 984
Subtract increase in merchandise inventory
(5,000)
Subtract increase in prepaid expenses
(1,000)
Add increase in accounts payable
6,000
Add increase in accrued salaries payable
200
Net cash inflow from operating activities
$60,836
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Focus on Ethics
Refer to the Focus on Ethics box on page 985 in your text.
Auditors are supposed to be independent in fact and in appearance. How was this concept violated by Arthur Andersen?
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Joining the Pieces
Cash Inflows and Outflows
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Joining the Pieces
Cash Inflows and Outflows
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Joining the Pieces
Cash Inflows and Outflows
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