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Copyright 2010 by The McGraw-Hill Companies, Inc. AllMcGraw-Hill/Irwin

Statement of Cash FlowsStatement of Cash FlowsChapter 13

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Provides information about the cash

receipts and cash payments of a business

entity during the accounting period.

Purpose of the StatementPurpose of the Statement

Helps investors with questions about the companysHelps investors with questions about the companys

Ability to generate positive cash flows.Ability to generate positive cash flows.

Ability to meet its obligations and to pay dividends.Ability to meet its obligations and to pay dividends.

Need for external financing.Need for external financing.

Investing and financing transactions for the period.Investing and financing transactions for the period.

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The Statement of Cash Flows must

include the following three sections:

Cash Flows from OperatingActivities

Cash Flows from InvestingActivities

Cash Flows from FinancingActivities

Classification of Cash FlowsClassification of Cash Flows

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+

_

Inflows from: Interest and dividends

received

Sales to customers CashFlows fromOperating

Activities

Operating ActivitiesOperating Activities

Outflowsto: Suppliers of merchandise and

services Employees Lenders for interest Governments for taxes

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CashFlows from

Investing

Activities

+

_

Investing ActivitiesInvesting Activities

Inflows from:Sale of investments

and plant assets

Collection of principal

on loans

Outflows to: Purchase investments and

plant assets Purchase debt or equity

investments

Make loans

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+

_

Financing ActivitiesFinancing Activities

Inflows from: Short-term and long-term

borrowing

Owners (for example, fromissuing stock)

Inflows from: Short-term and long-term

borrowing

Owners (for example, fromissuing stock)

Outflows to:

Make payments on borrowedfunds

Owners for dividends Purchase treasury stock

Outflows to:

Make payments on borrowedfunds

Owners for dividends Purchase treasury stock

CashFlows from

Financing

Activities

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Cash Equivalents

CashCash

Currency

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected

by interest rate changes.

Cash and Cash EquivalentsCash and Cash Equivalents

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Direct Method: CashDirect Method: Cash

Received from CustomersReceived from CustomersAccrual basis revenue includes sales

that did not result in cash inflows.

Can be computed as:

CashReceived from

Customers

Decrease inreceivables

Increase inreceivables

Increase inreceivables

+

=

=

Net Sales

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Direct Method: Interest andDirect Method: Interest and

Dividends ReceivedDividends Received

Di t M th d C h P idDi t M th d C h P id

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Direct Method: Cash PaidDirect Method: Cash Paidfor Purchases offor Purchases of

MerchandiseMerchandiseStep 1

Step 2

R ili N t IR ili N t I

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Reconciling Net IncomeReconciling Net Incomewithwith

Net Cash FlowsNet Cash Flows There are two major categories ofreconciling items. They include

adjusting for:

1. Noncash Expenses.

2. Timing Differences.

Accounts receivableAccounts receivableDepreciation ExpenseDepreciation Expense

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NetIncome

Cash Flows from

OperatingActivities

Reporting Operating CashReporting Operating Cash

Flows by the Indirect MethodFlows by the Indirect Method

Changes in current assets and current

liabilities as shown on the following table

+ Losses and

- Gains

+ Noncash

expenses such asdepreciation and

amortization

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Use this table when adjusting NetIncome to Operating Cash Flows.

Reconciling Net Income withReconciling Net Income with

Net Cash FlowsNet Cash Flows

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Supplemental InformationSupplemental Information

Supple

We are required to disclose information concerning

major investing and financing activities that do not

involve cash.

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End of Chapter 13End of Chapter 13