Statement of Cash Flows

23-2 Primary purpose: To provide information about a company’s cash receipts and cash payments during a period. Secondary objective: To provide cash-basis information about the company’s operating, investing, and financing activities. Preparation of the Statement of Cash Flows

23-3 Income Statement Transactions Operating Activities Changes in Investments and Long-Term Asset Items Investing Activities Changes in Long-Term Liabilities and Stockholders’ Equity Financing Activities Classification of Cash Flows

23-4 Classification of Cash Flows

23-5 Classification of Cash Flows

23-6 Format of the Statement of Cash Flows Presentation: 1.Operating activities. 2.Investing activities. 3.Financing activities. Direct Method Indirect Method Report inflows and outflows from investing and financing activities separately.

23-7 Format of the Statement of Cash Flows

23-8 Three Sources of Information: 1.Comparative balance sheets. 2.Current income statement. 3.Selected transaction data. Steps in Preparation Three Major Steps: Step 1. Determine change in cash. Step 2. Determine net cash flow from operating activities. Step 3. Determine net cash flows from investing and financing activities.

23-9 Steps in Preparation Indirect Method Common adjustments to Net Income (Loss):  Depreciation and amortization expense.  Gain or loss on disposition of long-term assets.  Change in current assets and current liabilities.

23-10 Net Cash Flow from Operating Activities— Indirect Versus Direct Method Adjustments Needed to Determine Net Cash Flow from Operating Activities. Indirect Method

23-11 Deducts operating cash disbursements from operating cash receipts. Steps in Preparation Direct Method

23-12 Direct Method Steps in Preparation Accounts Receivable 1/1/09Balance0 Revenues125,000 Receipts from customers89,000 12/31/09Balance36,000

23-13 Direct Method Steps in Preparation Accounts Payable 1/1/09Balance0 Operating expenses85,000 12/31/09Balance5,000 Payments for expenses80,000

23-14 Direct Method Steps in Preparation Income Tax Payable 1/1/09Balance0 Tax expense6,000 12/31/09Balance0 Payments for taxes6,000

23-15 In Favor of the Direct Method  Shows operating cash receipts and payments.  Information about cash receipts and payments is more revealing of a company’s ability 1.to generate sufficient cash from operating activities to pay its debts, 2.to reinvest in its operations, and 3.to make distributions to its owners. Net Cash Flow from Operating Activities— Indirect Versus Direct Method Direct Versus Indirect Controversy

23-16 Net Cash Flow from Operating Activities— Indirect Versus Direct Method Direct Versus Indirect Controversy In Favor of the Indirect Method  Focuses on the differences between net income and net cash flow from operating activities.  Provides link between the statement of cash flows and the income statement and statement of financial position.

23-17 Significant Non-Cash Transactions Common non-cash transactions that a company should disclose: 1.Acquisition of assets by assuming liabilities or by issuing equity securities. 2.Exchanges of non-monetary assets. 3.Conversion of debt or preference shares to ordinary shares. 4.Issuance of equity securities to retire debt.