1. The Statement of Cash Flows
Chapter 13 1 1

2. Identify the purposes of the Statement of Cash Flows
Learning Objective 1
Identify the purposes of the Statement of Cash Flows

3. Statement of Cash Flows
Shows where cash came from and how it was spent
Reports why cash increased or decreased during the period
Communicating link between the Income Statement and cash reported on the Balance Sheet
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4. Use of Cash-Flow Information
Predict future cash flows
Evaluate management decisions
Predict ability to pay debts and dividends
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5. Cash Equivalents Highly liquid investments
Can convert into cash quickly
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6. Distinguish among operating, investing, and financing cash flows
Learning Objective 2
Distinguish among operating, investing, and financing cash flows

7. Basic Cash Flow Activities
Operating
Investing
Financing
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8. Operating Activities Most important category
Create revenues, expenses, gains and losses
Transactions that make up net income
Also affect current assets and current liabilities on the Balance Sheet
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9. Investing Activities
Transactions that increase and decrease long- term assets
Purchase and sales of plant assets including:
Computers, land, buildings, and equipment
Includes loans receivable
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10. Financing Activities
Increases and decreases in long-term liabilities and owner’s equity
Issuing stock and paying dividends
Buying and selling treasury stock
Borrowing money and paying off loans
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11. Operating, Investing & Financing Activities and the Balance Sheet
Current assets
Current liabilities
Long-term assets
Long-term liabilities
Owners’ equity
Operating cash flows
Operating cash flows
Investing cash flows
Financing cash flows
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12. Payment of long-term debt–financing outflow
Exercise provides practice in identifying in which cash flow category each item belongs on the indirect method statement.
Loss on sale of land– added back to net income in the operating section
Acquisition of equipment by issuance of note payable–noncash investing & financing
Payment of long-term debt–financing outflow
Acquisition of building by issuance of stock–noncash investing and financing
Accrual of salary expense–this item by itself does not appear on the Cash Flow Statement. An increase or decrease in salaries payable would, however.
Decrease in inventory–change in current assets–operating inflow
Increase in prepaid expenses–change in current assets–operating outflow
Decrease in accrued liabilities–change in current liability–operating outflow
Cash sale of land–investing inflow
Issuance of long-term note payable to borrow cash–financing inflow
Depreciation–this is added back to net income in the operating section
Purchase of treasury stock–financing outflow
Issuance of common stock–financing inflow
Increase in accounts payable– change in current liability–operating inflow
Net income–this is the starting point of the operating section
Payment of cash dividend–financing outflow
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13. Exercise 13-13 + + - - (a) O (b) NIF (c) F (d) (e) N (f) (g) (h) (i) I
(j) F
(k) O
(l) -
(m)
(n)
(o)
(p)
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14. Format for Operating Activities
Indirect method
Starts with net income and adjusts it to net cash provided by operating activities
Used by most companies
Direct method
Restates Income Statement in terms of cash
Shows cash receipts and payments from operating activities
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15. Prepare the Statement of Cash Flows by the indirect method
Learning Objective 3
Prepare the Statement of Cash Flows by the indirect method

16. Cash Flow Steps
Need Income Statement and beginning and ending Balance Sheets
Step 1: Lay out statement format
Step 2: Compute the change in cash from the Balance Sheets
Step 3: Take the following figures from the Income Statement—
Net Income, depreciation, any gains or losses
Step 4: Complete the Statement
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17. Cash Flows from Operating Activities: Indirect Method
Begins with net income–an accrual based number
Adjustments are made to convert to a cash amount:
Depreciation, depletion, and amortization expenses
Added back to net income
Gains and losses on sales of plant assets
Gains are subtracted
Losses are added
Changes in current assets and current liabilities
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18. Changes in Current Assets (other than cash) and Current Liabilities
Current Liability
Cash
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19. Statement of Cash Flows (partial)
Cash flows from operating activities
Net Income
Adjustments to reconcile net income to net cash provided by
operating activities
+ Depreciation expense
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
Net cash provided by operating activities
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20. Exercise 13-15 Cash flows from operating activities Net Income $42,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation expense
11,000
+ Loss on sale of land
7,000
- Increases in current assets other than cash
(8,000)
- Decreases in current liabilities
(20,000)
(10,000)
Net cash provided by operating activities
$ ?
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21. Cash Flows from Investing Activities
Sales and acquisitions of long-term assets
Plant assets and Investments
Analyze accounts to determine activity
Use of T-account is helpful
If gain or loss appears on the Income Statement, a long-term asset has been sold
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22. Plant Assets, Net Beginning balance Depreciation Acquisitions Sales
From Income Statement
Beginning balance
Depreciation
Acquisitions
Sales
Ending balance
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Cash
??????
Gain on sale of plant asset
$$$$
Plant assets
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23. Computing Cash Flows from Investing Activities
Cash Receipts:
From sales of plant assets:
Beginning plant asset, net +
Acquisition -
Depreciation expense
Book value of asset sold =
Ending plant assets, net
Cash receipt
Gain on sale or
Loss on sale
Cash Payments:
For acquisitions of plant assets:
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24. Cash Flows from Financing Activities
Issuance of and payments on long-term notes payable
Issuances of stock and purchases of treasury stock
Analyze accounts to determine activity
Use of T-accounts helpful
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25. Long-term notes payable
Beginning balance
Payments
New notes issued
Ending balance
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26. Common stock Retained earnings Beginning balance Retirements
Issuance of shares
Retained earnings
Beginning balance
Dividends
From Income Statement
Net income
Ending balance
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27. Treasury stock Beginning balance Sales Purchases Ending balance
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28. Computing Cash Flows from Financing Activities
Cash Receipts:
From issuance of notes payable:
Beginning notes payable +
Cash receipt from issuance of note payable -
Payment of note payable =
Ending notes payable
From issuance of stock:
Beginning stock
Cash receipt from issuance of stock
Ending stock
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29. Computing Cash Flows from Financing Activities
Cash Payments:
Of notes payable:
Beginning notes payable +
Cash receipt from issuance of note payable -
Payment of note payable =
Ending notes payable
To purchase treasury stock:
Beginning treasury stock
Cost of treasury stock purchases
Ending treasury stock
Of Dividends
Beginning Retained earnings
Net Income
Dividends
Ending Retained earnings
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30. Noncash Investing and Financing
Investing and financing activities that do not affect cash. Some examples are:
Acquire land by issuing a note payable
Retire debt by issuing stock
Convert preferred stock to common stock
Report in separate schedule or in a note
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31. Free Cash Flow Free cash flow
Amount of cash available from operations after paying for planned investments in long-term assets
Free cash flow
Net cash provided by operating activities
Cash payments planned for investments in long-term assets
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32. Prepare the Statement of Cash Flows by the direct method
Learning Objective 4
Prepare the Statement of Cash Flows by the direct method

33. The Direct Method Preferred by FASB
Provides clearer information about cash receipts and payments
Normally not used by private companies
Only operating activities presentation changes
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34. Statement of Cash Flows (partial)
Cash flows from operating activities
Receipts:
Collections from customers
Interest received
Dividends received on investments
Total cash receipts
Payments:
To suppliers
To employees
For interest and income taxes
Total cash payments
Net cash provided by operating activities
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35. Converting Income Statement Amounts to Cash Flows
Cash receipts:
Collection from customers =
Sales +
Decrease in accounts receivable or -
Increase in accounts receivable
Cash payments:
To suppliers
Cost of goods sold
Increase in inventory
AND
Decrease in accounts payable
Decrease in inventory
Increase in accounts payable
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36. Converting Income Statement Amounts to Cash Flows (continued)
Cash payments:
For other operating expenses =
Operating expenses +
Increase in prepaid expenses
AND
Decrease in accrued liabilities or Or -
Decrease in prepaid expenses
Increase in
accrued liabilities
For interest
Interest expense
Decrease in interest payable
Increase in interest payable
For income taxes
Income tax expense
Decrease in income tax payable
Increase in income tax payable
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37. End of Chapter 13