Chapter 23: Statement of Cash Flows Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield Chapter 23: Statement of Cash Flows Prepared by Jep Robertson and Renae Clark New Mexico State University 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.

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.

Usefulness of the Statement of Cash Flows The information may help users assess the following aspects: The entity’s ability to generate future cash flows The entity’s ability to pay dividends and meet obligations The reasons as to why net income and net cash flow from operating activities differ Cash and non-cash investing and financing activities during the year

The Cash Flow Statement The cash flow statement provides information about: the cash receipts (cash inflows), and uses of cash (cash outflows) during the period Inflows and outflows are reported for: operating activities, investing activities, and financing activities during the period

Statement of Cash Flows: Concept Operating activities Investing Financing inflows Cash Pool Operating activities Investing Financing outflows

Preparing a Statement of Cash Flows There are two methods of preparing the statement of cash flows: the indirect method and the direct method The indirect method derives cash flows from accrual basis statements. The direct method determines cash flows directly for each source or use of cash.

Statement of Cash Flows: Indirect Method: Concept Earned Revenues Eliminate Non-cash revenues Net Income + - Operating cash flow Eliminate Non-cash charges Expenses Incurred

The Statement of Cash Flows: Indirect Method Accrual Basis Statements Cash Flow Statement Income Statement items & Changes in Current Assets and Current Liabilities Operating activities: Adjust net income for accruals and non-cash charges to get cash flows Balance Sheet: Changes In Non-Current Assets Investing activities: Inflows from sale of assets and Outflows from purchases of assets Balance Sheet: Changes in Non-Current Liabilities and Equity Financing activities: Inflows and outflows from loan and equity transactions

Direct Method: Operating Activities Inflows Outflows From sales of goods or services From returns on loans (interest) and returns on equity securities (dividends) To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses

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.

Format of the Statement of Cash Flows: Indirect Method Cash flows from operating activities: Net Income $ XXX Adjustments (to arrive at cash flow from operations) $ XX (List of individual inflows and outflows) Net cash flow from operating activities $ XXX Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

Major Classes of Cash Receipts and Payments

Formula to Compute Cash Receipts from Customers

Formula to Compute Cash Payments for Operating Expenses

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 income Gain on sale of assets is deducted from net income Discount on bonds payable (as amortized) is added to net income Premium on bonds payable (as amortized) is deducted from net income

Format of the Statement of Cash Flows: Direct Method Cash flows from operating activities: Cash receipts (individually): Inflows $ XXX Cash payments to suppliers (separately): outflows ($ XXX) Net cash flow from operating activities $ XXX Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

Direct Method: Concept Cash Receipts From sale of goods and services to customers From receipts of interest and dividends Cash Payments To suppliers To employees For operating exp For interest For taxes Cash flow from operations less equals

Cash Flow Statement: Direct Method Cash receipts from customers: = Revenue from credit sales + Decrease in A/Rec balances - Increase in A/Rec balances

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

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

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.

Worksheet A 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.

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