1 Statement of Cash Flows Sid Glandon, DBA, CPA Associate Professor of Accounting

2 Purpose n Reports on cash inflows and outflows for an accounting period n Provides information regarding u ability of firm to generate cash from operations u ability to maintain and expand operating capacity u ability to meet financial obligations and pay dividends

3 Types of Cash Flow Activities n Cash Flows from Operating Activities n Cash Flows from Investing Activities n Cash Flows from Financing Activities

4 Operating Activities n Receipts from revenues n Payments for expenses

5 Investing Activities n Receipts from sale of noncurrent assets n Payments for acquisition of noncurrent assets

6 Financing Activities n Receipts from issuance of equity and debt securities n Payments for u dividends u redemption of equity securities (treasury stock) u redemption of debt securities

7 Noncash Investing/Financing n Supplementary schedule to the statement u Noncash Investing Activities F Acquisition of plant assets by issuing bonds or capital stock F Purchase a building through a mortgage loan u Noncash Financing Activities F Issuance of capital stock in exchange for convertible preferred stock or debt

8 Method of Reporting Cash Flows from Operating Activities n Direct Method n Indirect Method (reconciliation method)

9 Cash Flows from Operating Activities: Direct Method n Cash received from customers n Cash paid for inventory, labor, and services

10 Cash Flows from Operating Activities: Indirect Method Net income u plus noncash charges to net income u plus/minus changes in current assets u plus/minus changes in current liabilities u plus/minus gains/losses on investing activities u plus/minus gains/losses on financing activities

11 Cash Flows From Operating Activities-Indirect Method Net income (from the income statement) $ Add: Amortization + Depreciation + Changes in current assets: Increases - Decreases + Changes in current liabilities: Increases + Decreases - Gains from investing or financing - Losses from investing or financing + Net cash flows from operating activities $

12 The Three Foolers Reported as Operating Activities n Interest paid on debt n Interest received on investments n Dividends received on investments

13 Using the Worksheet Approach n Prepare comparative balance sheets n Identify changes in cash for each account n Using income statement and T-account analysis u Spread changes in cash to appropriate columns u Reconcile balances of each type of activity

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26 Format for Operating Activities