Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Reporting Format for the Statement of Cash Flows Operating Activities Investing Activities Financing Activities The statement of cash flows must include the following three sections: 12-1

Cash Flows from Operating Activities Inflows (Receipts) Receipts from sales Commissions and fees Interest and dividends received Inflows (Receipts) Receipts from sales Commissions and fees Interest and dividends received Outflows (Payments) Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes Outflows (Payments) Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes 12-2

Cash Flows from Investing Activities Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans 12-3 Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others

Cash Flows from Financing Activities Inflows (Receipts) Borrowing Issuing stock Inflows (Receipts) Borrowing Issuing stock Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends 12-4

Prepare the operating activities section of a statement of cash flows using the indirect method. LO

Cash flows from operating activities can be prepared using either the direct method or the indirect method. Cash Flow: Operating Activities 12-6

Net Income Cash Flows from Operating Activities Operating Activities: Indirect Method Changes in current assets and current liabilities as shown on the following table. + Losses and - Gains + Noncash expenses such as depreciation and amortization. 12-7

Indirect Method – The Reconciliation Approach This method examines the relationships between items reported on the income statement and the related assets and liabilities. Income Statement Balance Sheet 12-8

Comparative Balance Sheet 12-9

Comparative Balance Sheet (Continued) 12-10

Income Statement 12-11

Reconciliation of Accounts Receivable and Interest Receivable 12-12

Reconciliation of Inventory and Accounts Payable 12-13

Reconciliation of Prepaid Insurance and Salaries Payable 12-14

Reconciliation of Other Operating Expenses Payable and Interest Payable 12-15

Reconciliation of Unearned Rent Revenue 12-16

Cash Flows from Operating Activities – Indirect Approach 12-17

Indirect Method: Rules Approach 12-18

Indirect Method: Rules Approach 12-19

Prepare the operating activities section of a statement of cash flows using the direct method. LO

Operating Activities: Direct Method The operating activities section of the statement of cash flows can also be shown under the direct approach. Shows specific sources and uses of cash associated with operating activities. Only the operating activities section is affected by the difference

Operating Activities: Direct Method 12-22

Operating Activities: Compare Methods The direct method is easy to understand and is recommended by the FASB. However, most companies use the indirect method since they use accrual accounting systems and it’s easier and less expensive for them to prepare

LO 1 Prepare the investing activities section of a statement of cash flows. LO

Cash Flows from Investing Activities Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others 12-25

Investing Activities Let’s look at New South’s financial statements to determine cash flow from investing activities

Investing Activities Because there were no sales of investment securities, the $1,600 increase was due to the purchase of additional securities

Investing Activities New South sold fixtures costing $1,700 that had a book value of $400. The income statement shows a gain of $600 on the sale. How much cash was received? Cash inflow = book value + gain = $400 + $600 = $1,

Investing Activities New South purchased land, but used a mortgage note instead of cash. The purchase is shown on the Schedule of Noncash Investing and Financing Activities

Investing Activities 12-30

Prepare the financing activities section of a statement of cash flows. LO

Cash Flows from Financing Activities Inflows (Receipts) Borrowing Issuing stock Inflows (Receipts) Borrowing Issuing stock Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends 12-32

Financing Activities The financing activities section of the statement of cash flows shows changes in three areas. DebtCapital Accounts Retained Earnings Notes or Bonds Stock or Treasury Stock Dividends 12-33

Financing Activities Look on the balance sheet for changes in the balances of debt and equity accounts. Examine each account to determine the cause of changes

Financing Activities A mortgage issued to purchase land does not involve a cash flow

Financing Activities Assuming no new bonds were issued, the $3,000 decrease in the bonds payable account must have been the result of a cash outflow to pay off bonds

Financing Activities New South must have issued $2,000 of additional common stock

Financing Activities A $1,500 decrease is required to balance the Retained Earnings account. We assume this decrease is due to the payment of dividends

Financing Activities Because there was no indication that any treasury stock was reissued, New South must have purchased $600 of additional treasury stock. This is a cash outflow for financing activities

Financing Activities 12-40

The Completed Statement: Indirect Method 12-41

The Completed Statement: Direct Method 12-42

End of Chapter Twelve 12-43