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C H A P T E R 14 Statement of Cash Flows
C H A P T E R 14
Statement of Cash Flows
Learning Objective 1
Understand the purpose of a statement of cash flows.
What Does The Statement ofCash Flows Do?
Learning Objective 2
Recognize the different types of information reported in the statement of cash flows.
What Are Cash Equivalents?
The Flow of Cash
Cash paidfor operating
activities
Cash paidfor investing
activities
Cash paidfor financing
activities
outflows
Cash receivedfrom operating
activities
Cash receivedfrom investing
activities
Cash receivedfrom financing
activities
Cash andcash
equivalents
inflows
Match Classifications of Cash Flows
1.Transactions and events that enter into the determination of net income.2.Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.3.Transactions and events whereby resources are obtained from, or repaid to, owners and creditors.
Operating
Activities
Financing Activities
Investing Activities
Statement of Cash Flows
Cash
Cash Inflows
Operating Activities
Investing ActivitiesFinancing Activities
CashCash Outflows
Statement of Cash Flows
Operating Activities
Investing ActivitiesFinancing Activities
Cash Inflow Cash Outflow
What Items Are Classified as Operating Activities?
What Items Are Classified as Investing Activities?
Cash Inflow Cash Outflow
Cash Inflow Cash Outflow
What Items Are Classified as
Financing Activities?
Define Noncash Items
Learning Objective 3
Prepare a simple statement of cash flows.
You Can Do It!
What is the Format ofthe Statement of Cash Flows?
A Simple ExampleRed Bull CorporationTrial Balance, 1/1/03
Debit CreditCash $ 500Accounts Receivable 1,300Property, Plant &Equipment
500
Accumulated Depreciation $ 350Accounts Payable 1,100Long-Term Debt 250Common Stock 300Retained Earnings 300Totals $2,300 $2,300
A Simple Example
1. Sales on account, $1,3002. Collections on account, $1,8003. Paid accounts payable, $1,0004. Paid long-term debt, $1005. Issued stock at par value, $2006. Paid interest on debt, $507. Sold equipment, $100 (original
cost, $250, accumulated depreciation, 225)
The following transactions were conducted by Red Bull Corp during 2003:
Record the appropriate journal entries.
A Simple Example
A Simple ExampleRed Bull Corporation
Trial Balance, 12/31/03Debit Credit
Cash $1,450Accounts Receivable 800Property, Plant &Equipment 250Accumulated Depreciation $ 125Accounts Payable 100Long-Term Debt 150Common Stock 500Retained Earnings 300
Totals $2,550 $2,550
Sales 1,300
Interest Expense 50Gain on Sale 75
STATEMENT OF CASH FLOWSOperating activities:
Collections on account. . . . . . . . . . . . . $ 1,800 Payment of accounts payable . . . . . . . $1,000
Payment for interest . . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . $ 750
Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100
Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100) Cash flows from financing activities . . . 100
A Simple Example
A Simple Example
Statement of Cash Flows (continued)
Net increase in cash. . . . . . . . . . . . . . . . $ 950Beginning cash balance. . . . . . . . . . . . . 500Ending cash balance . . . . . . . . . . . . . . . $1,450
Learning Objective 4
Analyze financialstatements to prepare astatement of cash flows.
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Example: Change in Cash
Red Bull Corporation
Beginning cash balance. . . . . . . . . . . . . $ 500Ending cash balance . . . . . . . . . . . . . . . 1,450Net increase in cash. . . . . . . . . . . . . . . . $ 950
Cash Flow Statements—Match
A method of reporting net cash flows from operations that shows the major classes of cash receipts and payments for a period of time.
A method of reporting net cash flows from operations that involves converting accrual-basis net income to a cash basis.
Indirect Method
Direct Method
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Income Statement Conversion
Income Statement Adjustments
Cash Flows from
Operations
Sales $1,300 +500 $1,800
Accounts payable -1,000 (1,000)
Interest expense (50) No change (50)
$1,250 -500 net adjustment $ 750
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
PP&E500 250250
Acc. Dep. 350 ? 125
Acc. Dep. 350225 125
Investing ActivitiesRed Bull Corporation sells a piece of equipment for $100 during the year. The T-accounts relating to the equipment and the associated depreciation are given as follows.
PP&E500
?250
Investing ActivitiesFrom the preceding T-Accounts make Red Bull Corporation’s journal entries relating to Property, Plant, & Equipment for the year:
Investing ActivitiesRecord the investing activities section of Red Bull Corporation’s statement of cash flows:
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Investing Activities
Red Bull Corporation’s financing activities section of its statement of cash flows is as follows:
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
STATEMENT OF CASH FLOWSOperating activities:
Collections on account. . . . . . . . . . . . . $1,800 Payment of accounts payable . . . . . . . $1,000
Payment for interest. . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . 750
Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100
Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . 100 Net increase in cash. . . . . . . . . . . . . . . . . $950 Beginning cash balance. . . . . . . . . . . . . . 500 Ending cash balance . . . . . . . . . . . . . . . . $1,450
A Simple Example
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Define Noncash Transactions
Learning Objective 5
Use information from thestatement of cash flowsto make decisions.
Cash Flows from
Operating
Cash Flows from
Investing
Cash Flows from
Financing
General Explanation
1. + + + Building up pile of cash. Possibly looking for acquisition.
2. + – – Operating cash flow being used to buy fixed assets and pay down debt.
3. + + – Operating cash flow and sale of fixed assets being used to pay down debt.
4. + – + Operating cash flow and borrowed money being used to expand.
Analysis of Statement of Cash Flows
continued
Analysis of Statement of Cash Flows
Flowsfrom
Operating
Flowsfrom
Investing
Flowsfrom
FinancingGeneral
Explanation
5. – + +Operating cash flowproblems covered by saleof fixed assets, borrowing,and contributions.
6. – – +Rapid growth, short falls inoperating cash flow, andpurchase of fixed assets.
7. – + –Sale of fixed assets isfinancing operating cashflow shortages.
8. – – –Company is using cashreserves to finance cashflow short falls and paycreditors.
Cash Cash Cash
Chapter 14 is Complete
