1. Chapter 18 The Cash Flow Statement
Financial Accounting
Chapter 18
The Cash Flow Statement

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

3. 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

4. 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

5. Statement of Cash Flows Sections
Financial Accounting
Statement of Cash Flows
Sections

6. 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.

7. 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.

8. 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 income provided by operating activities $XXX

9. The Indirect Operating Section
Financial Accounting
The Indirect Operating Section

10. Operating Activities Indirect Method
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation/amortization 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
Investing Activities

11. Depreciation, Depletion, Amortization
Depreciation, Depletion and Amortization are not Cash transactions, thus
Are ADDED back to Net Income.

12. Gain or Loss from Long-Term Assets
Changes to Long-term Assets
Purchase or Sale
Effect Cash (What’s the journal entry?)
They appear in the Investing Section
But... When Sold Are Reported on the Income Statement
Thus, we need to reverse their effect
Add back the Loss
Subtract out the Gain

13. Long-Term Assets

14. Operating Activities from Indirect Method
Changes in current assets and current liability accounts
Increase in another current asset decreases cash
Purchase of Inventory for cash
Decrease in another current asset increases cash
Collections of Accounts Receivable
Decrease in a current liability decreases cash
Payment of Accounts Payable
Increase in a current liability increases cash
Non-Cash Expense (Accrued Expense)

15. Increase in Current Assets Decreases Cash
So $2,500 in Sales are NOT cash
Any increase in Current Assets either uses cash
Increase Inventory
Decrease Cash
Or is increased by a non-cash transaction
Accounts Receivable

16. Decrease in Current Assets Increases Cash
If A/R decreases that means we collected Cash
That cash needs to be added back to Net Income
If Inventory, Supplies or other current assets decrease that means we debited an expense but did not credit Cash
So we add back those decreases to Net Income

17. Decrease in Current Liabilities Decreases Cash
How is Accounts Payable decreased?
Debit Accounts Payable $1,000
Credit Cash $1,000
Same for all other Payables

18. Increase in Current Liabilities Increases Cash
When Payables Increase
They create an Expense
But the expense is a non-cash expense
So, Add back to Net Income

19. 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

20. 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

21. 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

22. Cash Flow Statement An Example
Financial Accounting
Cash Flow Statement
An Example

23. 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

24. 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

25. 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

26. 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

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

28. 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)

29. 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

30. 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.

31. 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)

32. 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)

33. 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)

34. 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

35. 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