1. Statement of Cash Flows
Lecture 11
(CHAPTER 5)

2. Learning Objectives (LO)
After studying this chapter, you should be able to
Identify the purposes of the statement of cash flows
Classify activities affecting cash as operating, investing, or financing activities
Compute and interpret cash flows from financing activities
Compute and interpret cash flows from investing activities
Use the direct method to calculate cash flows from operations

3. Learning Objectives (LO)
After studying this chapter, you should be able to
Use the indirect method to explain the difference between net income and net cash provided by (used for) operating activities
Understand why we add depreciation to net income when using the indirect method for computing cash flow from operating activities
Show how the balance sheet equation provides a conceptual framework for the statement of cash flows
Identify free cash flow, and interpret information in statements of cash flow

4. LO 1 - Purpose of Cash Flow Statement
The concept underlying the statement
Same as statements of income and retained earnings
Explains change in an account (cash) from the beginning to the end of the reporting period
What is “cash”
Money in bank accounts and on hand
Cash equivalents (maturity less than 90 days and easily and quickly convertible into cash
Money market funds
Treasury bills
Very low probability of
change in value

5. LO 1 - Purpose of Cash Flow Statement
Helps predict future cash flows
Evaluates how management generates and uses cash
Determines a company’s ability to pay interest, dividends, and debts when they are due
Identifies specific increases and decreases in a firm’s productive assets

6. LO 1 - Purpose of Cash Flow Statement

7. LO 1 - Purpose of Cash Flow Statement
What information may users find/derive from the statement?
Past
Why net income differs from cash flows
Identifies specific increases and decreases in a firm’s productive assets
Evaluates how management generated/used cash
Present - determines a company’s ability to pay interest, dividends, and debts when they are due
Future – helps predict future cash flows

8. LO 2 - Cash Flow Activities

9. LO 3 - Financing Cash Flows
From two successive balance sheets, observe:
Short/long term debt (related to borrowing)
Increase
Decrease
Capital stock accounts
Treasury Stock (Chapter 10)
Meaning
Cash inflow
Cash outflow

10. LO 3 - Financing Cash Flows
From this year’s retained earning statement, observe:
Dividends Declared
From two successive balance sheets, observe Dividends Payable
Increased
Decreased
Meaning
Cash outflow<dividends declared
Cash outflow>dividends declared
Sometimes some changes are related to noncash events such as purchasing a
building by issuing new stock to the seller. In those cases the noncash amount
would be reported in a separate schedule if the buying company felt it was “significant.”

11. LO 4 - Investing Cash Flows
From two successive balance sheets, observe:
Intangible Assets
Increase
Decrease
Long-term Investments
Loans to others
Meaning
Cash outflow
Cash inflow

12. LO 4 - Investing Cash Flows
From two successive balance sheets, observe:
Plant, Property, Equipment
Increase
Decrease
Meaning
Cash outflow
Cash inflow
Depreciation
complicates this
Balance Sheet
Income Statement
Cash
Equipment
Accumulated
Depreciation
Depreciation
Expense
Loss on sale of
Equipment
110
900
970 90 95 15 5
Your firm bought $110 of equipment, paying cash. How much cash was received from
the sale of equipment? (Figures are taken from last and this years’ financial statements.

13. LO 4 - Investing Cash Flows
From two successive balance sheets, observe:
Plant, Property, Equipment
Increase
Decrease
Meaning
Cash outflow
Cash inflow
Depreciation
complicates this
Balance Sheet
Income Statement
Cash
Equipment
Accumulated
Depreciation
Depreciation
Expense
Loss on sale of
Equipment 25
110
900
110
970 40 10 90 15 95 15 5
Your firm bought $110 of equipment, paying cash. How much cash was received from
the sale of equipment? (Figures are taken from last and this years’ financial statements.)

14. LO 5 - Operating Cash Flows
All cash flows other than investing and financing
Cash flows with the normal operations of the business

15. LO 5 - Operating Cash Flows
Cash can precede an income statement event
Buy supplies before using them
Receive cash before earning it
An income statement event can precede a cash flow
Sell goods on credit with collection next month
Consume utilities before paying for them
Cash/income statement event occur simultaneously
Cash sale to customer
Pay for advertising used this reporting period

16. LO 5 - Operating Cash Flows
Operating Cash Flows – Two methods
Direct method
Operating cash inflows less operating cash outflows = operating cash flows
Preferred method because it is easily understood
If use this method, must also show indirect method
Indirect
Explains why net income is different from net operating cash flows
Do not have to show the direct method
Most commonly used method

17. LO 5 - Operating Cash Flows - Direct
If have access to all cash flow information, just select and list operating cash flows
Payments for inventory $(865,000) (next page)
Collections from customers $1,
Payments for interest $(15,000)
Tax refund $20,000
Etc ________
Operating Cash Flow $640,000

18. LO 5 - Operating Cash Flows - Direct
Access only to statements other than cash flow
Balance Sheet (000)
Income
Statement (000)
Cash
Inventory
Accounts
Payable
Cost of
Goods Sold
59.2
25.2
100
Payments for inventory $(865,000)

19. LO 5 - Operating Cash Flows - Direct
Access only to statements other than cash flow
Balance Sheet (000)
Income
Statement (000)
Cash
Inventory
Accounts
Payable
Cost of
Goods Sold
134
159.2
59.2
100
134
159.2
25.2
100
Payments for inventory $(134,000)