1. Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm

2. CASH FLOW STATEMENT CHAPTER 19

3. PURPOSE OF THE CASH FLOW STATEMENT The primary purpose of the cash flow statement is to provide information about all cash receipts and cash payments of an entity during a period. A secondary objective is to provide information about its –Operating activities –Investing activities –Financing activities

4. Include –Cash effects of transactions that create revenues and expenses and –Enter into determination of net income (loss) OPERATING ACTIVITIES Balance Sheet: Current Assets and Current Liabilities; Income Statement Items

5. Include –Purchasing and disposing of investments and productive long-lived assets using cash and –Lending money and collecting the loans Balance Sheet: Investment and Long-Term Asset Items INVESTING ACTIVITIES

6. Include –Obtaining cash from issuing debt and repaying the amounts borrowed and –Obtaining cash from owners/shareholders and paying them drawings/dividends FINANCING ACTIVITIES Balance Sheet: Long-Term Liability and Equity Items

7. If it does not affect cash, do NOT report in the body of the cash flow statement Reported in a separate note to the financial statements SIGNIFICANT NONCASH ACTIVITIES

8. Operating, investing, and financing plus the significant noncash investing and financing activities constitute the general format of the cash flow statement, an example of which is shown on the right. FORMAT OF CASH FLOW STATEMENT COMPANY NAME Cash Flow Statement Period Covered Cash flows from operating activities (List of individual items)XX Net cash provided (used) by operating activitiesXXX Cash flows from investing activities (List of individual items) XX Net cash provided (used) by investing activitiesXXX Cash flows from financing activities (List of individual items) XX Net cash provided (used) by financing activitiesXXX Net increase (decrease) in cashXXX Cash at beginning of periodXXX Cash at end of period XXX Note x: Noncash investing and financing activities (List of significant noncash transactions)XXX

9. PREPARING THE CASH FLOW STATEMENT The cash flow statement is prepared differently from the three other basic financial statements. 1.It is not prepared from the adjusted trial balance. 2. The cash flow statement deals with cash receipts and payments, so the accrual concept is not used in the preparation of this statement. Therefore, you need to remove all non-cash totals. The information to prepare this statement usually comes from three sources: 1.Comparative balance sheet 2.Current income statement 3.Additional information

10. STEP 1: DETERMINE NET INCOME (DECREASE) IN CASH

11. STEP 2: DETERMINE NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net income must be converted from an accrual basis to a cash basis in the operating activities section Conversion may be done by two methods: –Indirect (used extensively in practice) –Direct

12. INDIRECT AND DIRECT METHODS Both methods arrive at the same total amount of cash provided (used) by operating activities Methods differ in disclosing the items that make up the total amount Choice of methods affects only the operating activities section; the investing and financing activities sections are the same

13. Operating activities used $1,000 cash and investing activities used $10,000 cash, while financing activities provided $45,000 cash. CASH FLOW STATEMENT INDIRECT METHOD COMPUTER SERVICES COMPANY Cash Flow Statement — Indirect Method For the Year Ended December 31, 2002

14. The cash flow statement shows that operating activities used $1,000 cash and investing activities used $10,000 cash, while financing activities provided $45,000 cash. CASH FLOW STATEMENT DIRECT METHOD COMPUTER SERVICES COMPANY Cash Flow Statement — Direct Method For the Year Ended December 31, 2002

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