CHAPTER 14 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14-2 The Purpose of the Statement of Cash Flows To make informed investment and credit decisions, financial statement users need information to help them asses the amounts, timing and uncertainty of a company’s prospective cash flows. The statement of cash flows reports how a company obtained and spent cash during an accounting period.

14-3 Reporting Format for the Statement of Cash Flows The Statement of Cash Flows organizes cash coming into and going out of a business into three main categories: The Statement of Cash Flows organizes cash coming into and going out of a business into three main categories: Operating Activities Investing Activities Financing Activities

14-4 Cash Flows from Operating Activities Inflows Receipts from sales Commissions and fees Interest and dividends received Inflows Receipts from sales Commissions and fees Interest and dividends received Outflows Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes Outflows Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes

14-5 Cash Flows from Investing Activities Inflows Selling property, plant, and equipment Selling property, plant, and equipment Selling investment securities Selling investment securities Collecting loans Collecting loansInflows Selling property, plant, and equipment Selling property, plant, and equipment Selling investment securities Selling investment securities Collecting loans Collecting loans Outflows Purchasing property, plant, and equipment Purchasing investment securities Lending to others Outflows Purchasing property, plant, and equipment Purchasing investment securities Lending to others

14-6 Cash Flows from Financing Activities Inflows Borrowing Borrowing Issuing stock Issuing stockInflows Borrowing Borrowing Issuing stock Issuing stock Outflows Repaying debt (excluding interest) Purchasing treasury stock Paying dividends Outflows Repaying debt (excluding interest) Purchasing treasury stock Paying dividends

14-7 Significant noncash investing and financing transactions must be reported separately. Significant noncash investing and financing transactions must be reported separately. Example: Issuing common stock in exchange for land. Example: Issuing common stock in exchange for land. Significant noncash investing and financing transactions must be reported separately. Significant noncash investing and financing transactions must be reported separately. Example: Issuing common stock in exchange for land. Example: Issuing common stock in exchange for land. Noncash Investing and Financing Transactions

14-8 Statement of Cash Flows

14-9 Cash flows from operating activities can be prepared using either the direct method or the indirect method. Let’s look at the indirect method first. Cash Flows from Operating Activities

14-10 Operating Activities: Indirect Method

14-11 Operating Activities: Indirect Method

14-12 Operating Activities: Indirect Method

14-13 Net Income Cash Flows from Operating Activities Indirect Method: Rule-Base Approach Rule 1: + Decreases and - increases in current assets Rule 2: + Increases and - decreases in current liabilities. Rule 1: + Decreases and - increases in current assets Rule 2: + Increases and - decreases in current liabilities. Rule 4: + Losses and - Gains Rule 4: + Losses and - Gains Rule 3: + Noncash expenses such as depreciation and amortization. Rule 3: + Noncash expenses such as depreciation and amortization.

14-14 Operating Activities: Direct Method

14-15 The Financial Analyst A rapidly growing company might be short of cash in spite of large reported net income. Because accruals and deferrals affect operating income, cash flow from operating activities may be more stable than operating income.

14-16 End of Chapter 14