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 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 12-3

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

Cash flows from operating activities can be prepared using either the direct method or the indirect method. Cash Flow: Operating Activities 12-5

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. 12-6

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 12-7

Cash Flows from Operating Activities – Indirect Approach 12-8

Indirect Method: Rules Approach 12-9

Indirect Method: Rules Approach 12-10

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: 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

Investing Activities 12-13

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 12-14

Financing Activities 12-15

The Completed Statement: Indirect Method 12-16

The Completed Statement: Direct Method 12-17

End of Chapter Twelve 12-18