1. The Statement of Cash Flows
Chapter 12

2. Objective 1
Identify the purposes of the statement of cash flows.

3. Basic Concepts
Reports the entity’s cash flows (cash receipts and cash payments) during the period

4. Purposes of the Statement of Cash Flows
Predict future cash flows
Evaluate management decisions
Determine the ability to pay dividends to stockholders’ and payments to creditors
Show the relationship of net income to the business’s cash flows

5. What is Cash? Cash on hand Cash in the bank
Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay
Money-market investments
U.S. Government Treasury bills

6. Objective 2
Distinguish among operating, investing, and financing cash flows.

7. Operating, Investing, and Financing Activities
Operating activities create revenues, expenses, gains, and losses.
Investing activities increase and decrease long-term assets.
Financing activities obtain cash from investors and creditors.

8. Two Formats for Operating Activities
Indirect method reconciles from net income to net cash provided by operating activities
Direct method reports all cash receipts and cash payments from operating activities
The two methods have no effect on investing or financing activities.

9. Two Formats for Operating Activities
Indirect Method
Net income $XXX
Adjustments:
Depreciation, etc XXX
Net income provided by operating activities $XXX
Direct Method
Collection from customers $XXX
Deductions:
Payment to suppliers, etc XXX
Net cash provided by operating activities $XXX
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

10. Objective 3
Prepare a statement of cash flows by the indirect method.

11. The Indirect Method: Operating Activities
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other than cash
Increases in current liabilities
Negative Items
Net loss
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current liabilities

12. The Indirect Method: Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assets
Purchase of investments that are not cash equivalents
Making loans to others

13. The Indirect Method: Financing Activities
Positive Items
Issuing stock
Selling treasury stock
Borrowing money
Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of debts

14. Comparative Balance Sheets
Assets
Current:
Cash
Accounts receivable
Interest receivable
Inventory
Prepaid expenses
Long-term receivable
Plant assets, net
Total
$ 22 93 3
135 8 11
453
$725
$ 42 80 1
138 7 –
219
$487
$ (20) 13 2
(3)
234
$238
(In thousands)
20x2
20x1
Inc/dec)
Anchor Corporation – December 31

15. Comparative Balance Sheets
Anchor Corporation – December 31
(In thousands)
20x2
20x1
Inc/dec)
Liabilities
Current:
Accounts payable
Salary payable
Accrued liabilities
Long-term debt
Stockholders’ equity
Common stock
Retained earnings
Total
$ 91 34 1
160
359
110
$725
$ 57 6 3 77
258 86
$487
$ 34
(2) 83
101 24
$238

16. Income Statement Anchor Corporation Year Ended December 31, 20x2
(In thousands)
Revenues and gains:
Sales revenue $284
Interest revenue
Dividend revenue
Gain on sale of plant assets
Total revenues and gains $313

17. Income Statement Anchor Corporation Year Ended December 31, 20x2
(In thousands)
Expenses:
Cost of goods sold $150
Salary and wage expense 56
Depreciation expense
Other operating expense
Interest expense
Income tax expense
Total expenses $272

18. Income Statement Anchor Corporation Year Ended December 31, 20x2
(In thousands)
Total revenues and gains $313
Total expenses
Net income $ 41

19. Statement of Cash Flows: Operating Activities
Depreciation does not affect cash, but it decreases net income – add it back in.
Sales of long-term assets are investing
Activities – remove gains from net income.
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
Cash flows from operating activities:
Net Income $41
Adjustments to reconcile net income to
net cash provided by operating activities:
A Depreciation
B Gain on sale of plant (8)

20. Statement of Cash Flows: Operating Activities
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)
C Increase in accounts receivable (13)
C Increase in interest receivable (2)
C Decrease in inventory 3
C Increase in prepaid expenses (1)
C Increase in accounts payable 34
C Decrease is salary payable (2)
C Decrease in accrued liabilities (2) 27
Net cash provided by operating activities $68

21. Changes in Current Asset and Current Liability Accounts – C
1. An increase in a current asset other
than cash indicates a decrease in cash.
2. A decrease in a current asset other
than cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.
4. An increase in a current liability
indicates an increase in cash.

22. Statement of Cash Flows: Investing Activities
Cash flows from investing activities:
Acquisition of plant assets $(306)
Loan to another company (11)
Proceeds from sale of plant assets
Net cash used for investing activities $(255)
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)

23. Statement of Cash Flows: Financing Activities
Cash flows from financing activities:
Proceeds from issuance of common stock $101
Proceeds from issuance of long-term debt 94
Payment of long-term debt (11)
Payment of dividends (17)
Net cash provided by financing activities $167
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)

24. Statement of Cash Flows
Net cash provided by operating activities $ 68
Net cash used for investing activities (255)
Net cash provided by financing activities
Net decrease in cash $ (20)
Cash balance, December 31, 20x
Cash balance, December 31, 20x2 $ 22
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 20x2 (In thousands)

25. Computing Acquisition and Sales of Plant Assets
Anchor had plant assets, net of depreciation, of $219,000 at the beginning of the year and $453,000 at year end. The acquisition of plant assets amounted to $306,000 during the year.

26. Computing Acquisition and Sales of Plant Assets
The income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. What is the book value of the assets sold?
Beginning balance + Acquisitions – Depreciation
– Book value of assets sold = Ending balance

27. Computing Acquisition and Sales of Plant Assets
$219, ,000 – 18,000 – X = $453,000
X = $219, ,000 – 18,000 – 453,000
X = $54,000 (book value)
How much are the proceeds
from the sale of plant assets?

28. Computing Acquisition and Sales of Plant Assets
Book value + Gain – Loss = Sale proceeds
$54,000 + $8,000 – 0 = $62,000

29. Computing Acquisition and Sales of Plant Assets
Plant Assets (Net)
Beginning bal ,000
Acquisitions 306,000
Ending bal ,000
Depreciation 18,000
Book val ,000
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

30. Computing Acquisition and Sales of Investments
Beginning balance + Purchases
– Book value of investment sold
= Ending balance

31. Computing Loans and Their Collections
Beginning balance + New loans made
– Collections
= Ending balance

32. Computing Issuances and Payments of Long-Term Debt
Beginning balance was $77,000.
New debt amounting to $94,000
was incurred during the year.
The ending balance for the Long-Term
Debt account was $160,000.
How much was the payment?

33. Computing Issuances and Payments of Long-Term Debt
Beginning bal ,000
New debt ,000
Ending bal ,000
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

34. Computing Issuances of Stock: Purchases of Treasury Stock
Beginning balance of common stock +
Issuance of new stock = Ending balance
Beginning balance of treasury stock +
Purchase of treasury stock = Ending balance

35. Computing Dividend Payments
Retained earnings beginning balance +
Net income – Dividends declared
= Ending balance
$86,000 + $41,000 – X = $110,000
X = $110,000 – $86,000 – $41,000
X = $17,000

36. Noncash Investing and Financing Activities
Suppose Anchor Corporation issued
Common stock valued at $300,000
to acquire a warehouse.
Warehouse Building 300,000
Common Stock ,000

37. Noncash Investing and Financing Activities
Acquisition of building by issuing common stock $300
Acquisition of land by issuing note payable
Payment of long-term debt by issuing
common stock 100
Total noncash investing and financing activities $470
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

38. Learning Objective 4
Prepare a statement of cash flows by the direct method.

39. The Direct Method
The FASB has expressed a preference for the direct method
Provides clearer information about the sources and uses of a company’s operating cash

40. Statement of Cash Flows
The Direct Method
Statement of Cash Flows
Year Ended December 31, 20x2
(In thousands)
Cash flows from operating activities:
Receipts:
Collections from customers $271
Interest received on notes receivable 10
Dividends received on investments in stock
Total cash receipts $290

41. Statement of Cash Flows
The Direct Method
Statement of Cash Flows
Year Ended December 31, 20x2
(In thousands)
Payments:
To suppliers $133
To employees 58
For interest 16
For income tax
Total payments
Net cash provided by operating activities $ 68

42. The Direct Method Statement of Cash Flows
Year Ended December 31, 20x2 (In thousands)
Net cash provided by operating activities $ 68
Net cash used for investing activities (255)
Net cash provided by financing activities 167
Net decrease in cash $(20)
Cash balance, December 31, 20x
Cash balance, December 31, 20x2 $ 22
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

43. Cash Flows from Operating Activities
Cash collections from customers
Cash receipts of interest
Cash receipts of dividends
Payments to suppliers
Payments to employees
Payments for interest and income tax expense

44. Cash Flows from Investing Activities
Purchases of plant assets; investments in, and loans to, other companies
Proceeds from the sale of plant assets and investments; and the collections of loans

45. Cash Flows from Financing Activities
Proceeds from the issuance of stock and debt
Payment of debt and purchases of the company’s own stock
Payment of cash dividends

46. Computing Cash Collections from Customers
Beginning accounts receivable balance
+ Sales on account – Collections
= Ending accounts receivable balance

47. Computing Payments to Suppliers
Step 1: How much were the purchases?
Beginning inventory + Purchases – Cost of goods sold = Ending Inventory
$138,000 + X – $150,000 = $135,000
X = $150,000 – $138,000 + $135,000
X = $147,000

48. Computing Payments to Suppliers
Accounts Payable
Payments for inventory
Beg. balance 57,000
Purchases 147,000
End. balance 91,000

49. Computing Payments to Suppliers
Step 2: How much did the business pay for this inventory?
Beginning Accounts Payable + Purchases – Payments = Ending Accounts Payable
$57,000 + $147,000 – X = $91,000
X = $57,000 + $147,000 – $91,000
X = $113,000

50. Computing Payments for Operating Expenses
Beginning prepaid expense + Payments
– Expiration of prepaid expense
= Ending balance
Beginning accrued liabilities + Accrual of
expense at year end – Payments
= Ending balance
Accrual of other operating expenses at year end
+ Expiration of prepaid expense + Payments
= Ending balance

51. Computing Payments to Employees
Salary Payable was $6,000 at the beginning of the year and $4,000 at year end. During the year, Salary Expense was $56,000. How much did the business pay?
$58,000

52. Measuring Cash Adequacy: Free Cash Flow
The amount of cash available from operations after paying for planned investments in plant, equipment, and other long-term assets.
Net cash flow from operating activities –
Cash outflow earmarked for investments in
plant, equipment, and other long-term assets