ACCT100
Chapter 13
Statement of Cash Flows
Statement of Cash Flows 2
Objectives of this Chapter
I. Identify business activities which can generate or use cash.
2.Differentiate income flows from cash flows of operating activities.
3. Introduce the content and the usefulness of the statement of cash flows.
4. Learn how to prepare the statement of cash flows.
Statement of Cash Flows 3
1. Activities which can either generate cash or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.
Statement of Cash Flows 4
I. Activities which can either generate cash or use cash for a business entity
Operating activities: Cash Inflows:
1. Collections from customers including cash received from sales (or services) and collections of A/R.
2. Cash receipts of interests or dividends.
3. Collections of other operating receipts (i.e., unearned revenue, rent revenue).
Statement of Cash Flows 5
Cash Flows from Operating Activities (contd.) Cash Outflows:
1. Payments to suppliers.2. Payments to employees.3. Payments for interest expense.4. Payments for income taxes.5. Payments for other expenses(i.e.,
Prepaid expenses; rent expenses).
Statement of Cash Flows 6
Activities which can either generate cash or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.
Statement of Cash Flows 7
Cash Flows from Investing Activities Transactions involving acquiring
(Investing (Cash outflows)) and selling (Disinvesting (Cash inflows)) :
a. Property, Plant and Equipment.
b. Investments (current and non-current).
c. Notes Receivable (current and non-current).
Statement of Cash Flows 8
Notes Receivable
Notes Receivable (current and non-current), including:
Lending money (N/R , cash outflow);
Collecting of loan (N/R , cash inflow);
Selling of N/R (N/R, discounting N/R, cash inflow)
Statement of Cash Flows 9
Activities which can either generate cash or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.
Statement of Cash Flows 10
Cash Flows from Financing Activities Obtaining resources from owners and
creditors (cash inflows) and repaying the amount borrowed (cash outflows).
Cash inflows: Cash received from issuance of
common stock. Cash received from issuance of bonds. Cash received from issuance of N/P
(short-term or long term).
Statement of Cash Flows 11
Cash Flows from Financing Activities (contd.) Cash Outflows:
Retirement of bonds.
Retirement of stock.
Payments of N/P.
Payments of dividends.
Statement of Cash Flows 12
2. Differentiate income flows from cash flows of operating activities
The operating activities are also reported in the income statement (I/S).
Differences between operating activities reported in I/S and cash flow statement:
I/S is prepared on an accrual basis.
Statement of cash flows is prepared on a cash basis.
Therefore, net income ǂ cash flows from operating activities in most cases.
Net Income vs. Net Cash Provided by Operating Activities (Source: Annual Reports)
Company Net Income (accrual basis)
Net Cash Provided by Operating Activities
Change in Cash and Cash Equivalents
General Electric (12/2007)
$22,208 million $45,967 million $1,755 million
Coca-Cola Co. (12/2007)
$ 5,981 million $ 7,150 million $1,653 million
Microsoft (6/2007) $14,065 million $17,796 million $(603) million
TSM (12/2007) $2,219 million $5,361.9 million $(704.6) million
Merck (12/2007) $3,275.4 million $6,999.2 million $(578,6) million
13
Net Cash from Operating, Investing and Financing ( $ in millions)
Company Net Cash Provided by Operating Activities
Net Cash Provided by Investing Activities
Net Cash Provided by Financing Activities
Change in Cash and Cash Equivalents
GE (12/2007) $45,967 $(72,424) $28,212 $1,755 million
Coca-Cola Co. (12/2007)
$ 7,150 (6719) 973 $1,653
Microsoft (6/2007)
$17,796 $6,089 $(25,544) $(603)
TSM (12/2007) $5,361.9 $ (2,073) $(3,977) $(704.6)
Merck (12/2007) $6,999.2 $(2,810) $(4,866) $(578,6)
Statement of Cash Flows 15
Operating Activities (contd.)
Two approaches can be used to reconcile net income to net cash flows of operating activities:
1. Indirect Method ==> Lump-Sum Adjustment
2. Direct Method ==> Individual Account Adjustment
Statement of Cash Flows 16
Reconciliation: Indirect Method
Adjust net income for all differences between income flows (on an accrual basis) and cash flows (on a cash basis).
Statement of Cash Flows 17
Reconciliation: Direct Method
Adjust each revenue account on I/S to cash collection and adjust each expense account to cash payment.
Subtract total cash payments from total cash collections to derive net cash flows of the operation activities.
Statement of Cash Flows 18
3. The Content and the Usefulness of the Statement of Cash Flows
In order to show cash flows of a company, cash flows of all three types activities occurred during the reporting period should be reported in one statement.
SFAS No. 95, “Statement of Cash Flows,” requires companies present the statement of cash flows using a specific format.
Statement of Cash Flows 19
SFAS No. 95
Following SFAS No. 95, the statement of cash flows should have three sections:
1. Cash flows from operating activities.
2. Cash flows from investing activities.
3. Cash flows from financing activities. See p33-35 and 41-43 for examples of
Statement of Cash Flows.
Statement of Cash Flows 20
The Usefulness of the Statement of Cash Flows The following questions can be answered from the cash flow statement:
1. What is the relationship between net income and cash provided by operations?
2. Why did cash decreased when net income increased?
3. What expansion (investment) activities took place and how were they financed?
Statement of Cash Flows 21
The Content and the Usefulness of the Statement of Cash Flows (contd.)
4. How much is the cash provided by operating activities?
5. What happened to the proceeds received from issuance of bonds or common stock?
Statement of Cash Flows 22
4. Procedures for Preparation of the Statement of Cash Flows
1. Operating Cash Flows (indirect method).
2. Investing Cash Flows.
3. Financing Cash Flows.
Statement of Cash Flows 23
4.1 Operating Cash Flows (Indirect Method; Reconciliation Method)
Net Income
Adjustments
+ Any increase in current Liabilities (except for N/P)
+ Any decrease in current assets (except for cash and N/R)
- Any decrease in current liabilities (except for N/P)
- Any increase in current assets (except for cash and N/R)
Statement of Cash Flows 24
Adjustments to Convert Net Income to Net Cash Flow from Operating Activities
+ Depreciation expense, Bad Debt expense
+ Loss on disposal of assets or liabilities
- Gain on disposal of assets or liabilities
Net Income
Adjustments
Statement of Cash Flows 25
4.2 Investing Cash Flows
Inflows: decrease in noncurrent assets (i.e., long-term investments, P.P.E.) and certain current assets (i.e., trading securities, N/R).
Outflows: increases in noncurrent assets and certain current assets
Statement of Cash Flows 26
4.3 Financing Cash Flows
Inflows: increases in noncurrent liabilities (i.e., B/P, N/P), stockholders’ equity and certain current liability (i.e., N/P).
Outflows: decreases in noncurrent liabilities, stockholders’ equity, certain current liability and dividend payment.
Statement of Cash Flows 27
Adjustments:+ Loss on Disposal of Assets or Liability Example: Sale a piece of land with a cost
of $9,000 for $7,000
Cash 7,000
Loss on Sale of Landa 2,000
Land 9,000
a. This transaction results in a cash increase of $7,000.
Statement of Cash Flows 28
Data needed to prepare statement of cash flows
1. Comparative balance sheet statements.
2. The income statement.
3. The retained earnings statement.
4. Other supplemental information concerning the reasons for the changes in the B/S accounts (other than cash).
Statement of Cash Flows 29
Example 1Layton Company Balance Sheet (12/31/x2)
Balance Balance ChangeAccounts 1/1/x2 12/31/x2Cash 4,000 6,600A/R 6,300 9,000 2,700
Land 9,000 6,000 3000a
Buildings & Equipment 48,000 60,000 12,000b
Accummulated Depreciation (12,500) (14,800)
Total Assets 54,800$ 66,800$ a. Land was sold at cost for cash during the year.b. A building was purchased for cash during the year
and no building or equipment was sold during the year.
Statement of Cash Flows 30
Example 1 (contd.) Layton Company Balance Sheet (12/31/x2)
Balance Balance ChangeAccounts 1/1/x2 12/31/x2A/P 7,500 9,000 1,500
B/P 14,000 21,000 7000a
Common Stock, $10 22,000 22,000 0Retained Earnings 11,300 14,800Total Liabilities & Stockholdrs' Equity $54,800 $66,800
a. Bonds were issued at the end of year.
Statement of Cash Flows 31
Example 1 (contd.) Income Statement (for the year ended 12/31x2)
Sales Revenue $31,800Opeating ExpensesDepreciation Expense 2,300Interest Expense 1,400Other Expenses 18,100 (21,800)
Income before Income Tax 10,000Income Tax Expense (3,000)
Net Income $7,000
Statement of Cash Flows 32
Example 1 (contd.)Layton Company Retained Earnings (20x2)
Beginning Retained Earnings $11,300Add: Net Income 7,000
$18,300Less: Dividends (3,500)
Ending Retained Earnings $14,800
Statement of Cash Flows 33
Layton CompanyStatement of Cash Flows
For the Year Ended December 31, 20x2
Net cash flow from operating activities:Net Income $7,000 Adjustments to reconcile net income to net cash provided by operating activities:Add: Depreciation expense 2,300
Increase in A/P 1,500 Less: Increase in A/R (2,700)Net cash provided by operating activities
$8,100
Statement of Cash Flows 34
Layton CompanyStatement of Cash Flows (contd.)
Cash flows from investing activities:Proceeds from sale of land $3,000Payments for purchase of building (12,000)Net cash used by investing activities (9,000)Cash flows from financing activities:Proceeds from issuance of bonds 7,000Payments of dividends (3,500)Net cash provided by financing activities 3,500
Statement of Cash Flows 35
Layton CompanyStatement of Cash Flows (contd.)
Net increase in cash$2,600
Cash, Jan 1, 19x2$4,000
Cash, Dec 31, 19x2$6,600
Statement of Cash Flows 36
Example 2: Green Company Balance Sheet
Accounts 1/1/x2 12/31/x2 DifferenceCash $3,500 $5,500A/R 4,400 3,600 800 Inventory 5,000 6,600 1,600 Land 8,200 12,200 4,000c Building & Equip 35,700 48,700 13,000a,d Acc. Depr. (6,000) (8,700)Total Assets $50,800 $67,900
Statement of Cash Flows 37
Green Company Balance Sheet (contd.)
A/P $5,100 $3,200 1,900Salary Payable 1,400 1,800 400B/P, 10% 7,000 15,000 8,000bCommon Stock, $10 par 8,000 9,000 1,000Paid-in Capital 16,000 19,000 3,000R/E 13,300 19,900Total Liabilities & Equity $50,800 $67,900
Statement of Cash Flows 38
Income Statement For the Year Ended 12/31/20x2
Sales Revenue$80,000
CGS(48,600)
Gross Profit$31,400
Operating Expenses:Deprecation Expense $3,400Other Expenses 15,900
(19,300)
$12,100 Other Revenues & Expenses
Gains on Sale of Equipment $600Interest Expense (700)
(100)Income Before Income Tax
$12,000 Income Tax Expense
(3,600)Net Income
$8,400 .
38
Statement of Cash Flows 39
Retained Earnings (20x2)
Beginning balance of retained earnings $13,300
Add: Net Income 8,400
21,700
Less: Dividends (1,800)
Ending balance of retained earning $19,900
Statement of Cash Flows 40
Supplemental Information for 20x2
(a) Equipment was purchased for cash at a cost of $15,200.
(b) Ten-year bonds payable with a face value of $8,000 were issued for $8,000 at the end of the year.
(c) Land was acquired through the issuance of 100 shares of $10 par common stock when the stock was selling at a market price of $40 per share.
(d) Equipment with a cost of $2,200 and a book value of $1,500 was sold for $2,100 cash.
Statement of Cash Flows 41
GREEN CompanyStatement of Cash Flows
For the Year Ended December 31, 20x2
Net cash flows from operating activities:Net Income $8,400Adj. To reconcile net income to net cash provided by operating activities:Add: Depreciation Expense 3,400
Decrease in A/R 800Increase in S/P 400
Less: Increase in Inventory (1,600) Decrease in A/P (1,900)
Gain on sale of Equipment (600)Net cash provided by operating activities
$8,900
Statement of Cash Flows 42
Cash flows from investing activities:Payments for purchase of equip. (15,200)Proceeds from sale of equipment 2,100
Net cash used by investing activities(13,100)
Cash flows from financing activities:Proceeds from issuance of bonds 8,000Payments of dividends (1,800)
Net cash provided by financing activities6,200
Net increase in cash (see Schedule 1)$2,000
Cash, Jan 1, 19x2$3,500
Cash, Dec 31, 19x2$5,500
42
GREEN Company Statement of Cash Flows (contd.)
Statement of Cash Flows 43
Schedule 1: Investing & financing activities not affecting cash flows:
Investing activities:
Acquisition of land by Issuance of common stock ($4,000)
Financing Activities:
Issuance of common stock for land $4,000
43
GREEN Company Statement of Cash Flows (contd.)
Statement of Cash Flows 44
Direct Exchange
Direct exchange: An example of a direct exchange is issuing bonds to acquire a building. This transaction should appear in the schedule of the cash flow statement as an investing activity (i.e., acquisition of building) and as a financing activity (i.e., issue bonds for building).
Statement of Cash Flows 45
Partial Cash Investing and Financing Activities
Example: acquiring land costing $10,000 by paying $1,000 down and signing a $9,000 notes payable.
Statement of Cash Flows 46
Partial Cash Investing and Financing Activities (contd.)
Presentation on Cash Flow Statement for Partial Investing & Financing Activities:
Cash Flows from Investing Activities:Purchase of land by issuance
of note and cash ($10,000)Less: issuance of note 9,000 Cash payment for purchase of land ($1,000)
Statement of Cash Flows 47
Cash Flows from the Operating Activities
Activities can be presented using:a. Indirect Method (as used in examples 1,2):
N/I Adjustments to reconcile net income to cash flows.
b. Direct Method: The operating cash outflows are deducted from the operating cash inflows to determine the net cash provided by (or used in) operating activities.
Statement of Cash Flows 48
Cash Flows from the Operating Activities (contd.) SFAS No. 95 allows the use of both
methods, but encourages the use of the direct method.
However, if the direct method is used, a reconciliation of net income and cash flows from operating activities using the indirect method must be provided in the supplementary statement.
Statement of Cash Flows 49
Using The Direct Method in Preparing The Operating Cash Flows
Cash inflows from operating activities:
1. Collections from customers.
2. Interest & dividends collected.
3. Other operating receipts.
Statement of Cash Flows 50
Using The Direct Method in Preparing The Operating Cash Flows (contd.)
Cash outflows from operating activities:
1. Payments to suppliers.
2. Payments to employees.
3. Payments of interest.
4. Other operating payments.
5. Payments of income taxes.
Statement of Cash Flows 51
Adjustments to Convert I/S Amount to Operating Cash Flows -- A Direct Approach
I/S Cash Flows fromAmounts Adjustments Operating Activities Net
CollectionsSales +Dec. in A/R; or = from Revenue -Inc. in A/R Customers
Cash+Dec. in Int. Rec.; Inflows-Inc. in Int. Rec. from
OperatingInterest Interest
Activities
Statement of Cash Flows 52
I/S Cash Flows fromAmounts Adjustments Operating Activities Net Dividend +Dec. in Dividend Rec. = Dividend Revenue -Inc. in Dividend Rec. Collected
Cash+Inc. in Unearned Rev.; Inflowsor from
Other -Dec. in Unearned Rev. Operating Other Activities
Revenue = Operating Receipts
+Dec. (-Inc.) in Other Receivable Accounts
* Ignore gain from sale of PPE because it does not have any cash inflows.52
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
Statement of Cash Flows 53
I/S Cash Flows fromAmounts Adjustments Operating Activities Net
+Inc. in Inventory; Cost of or Payments Goods -Dec. in Inventory = to Sold +Dec. in A/P; or Suppliers Cash
-Inc. in A/P Outflowsfrom
Salary +Dec. in Sal. Payable; Payments Operating or = to Activities
Expense -Inc. in Sal. Payable Employees
53
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
Statement of Cash Flows 54
I/S Cash Flows fromAmounts Adjustments Operating Activities Net
+Dec. in Int. Payable Interest -Inc. in Int. Payable = Payments Expense of Interest
Cash Outflows
from+Inc. in Prepaids Operating-Dec. in Prepaids Activities
Other Other = Operating
Expense Payments +Dec.
(-Inc.) in Other Payable Accounts
54
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
Statement of Cash Flows 55
I/S Cash Flows fromAmounts Adjustments Operating Activities Net
+Dec. in I/T Payable; or
Income -Inc. in I/T Payable Payments Cash Tax = of Income OutflowsExpense Tax from
OperatingActivities
Note: Ignore Bad Debt Expense, depreciation expense and loss from sale of PPE since those accounts do not have any cash outflows,
55
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
Statement of Cash Flows 56
Layton CompanyStatement of Cash Flows
(Using the direct method in preparing the operating activities section of a cash flow statement for Example 1)
Cash flows from Operating Activities:Cash inflows:
Collections from customers $29,1001
Cash inflows from operating activities $29,100
1. 31,800 -2,700 = 29,100
Statement of Cash Flows 57
Layton CompanyStatement of Cash Flows (contd.)
Cash outflows:Payments of interest (1,400)Other operating payments (16,600) 2
Payments of income tax (3,000)Cash outflows from operating activities
(21,000)Net Cash inflows from Operating $8,100Activities18,100 - 1,500 = 16,600 * A reconciliation of net income and cash flows using
indirect method must also be presented.
Statement of Cash Flows 58
Green CompanyStatement of Cash Flows
(Using the direct method in preparing the operating activities section of a cash flow statement of Example 2.)
Cash flows from Operating Activities:Cash inflows:
Collections from customers $80,8001
Cash inflows from operating activities $80,800
1. 80,000 + 800 = 80,800.
Statement of Cash Flows 59
Green CompanyStatement of Cash Flows (contd.)
Cash outflows:Payments to suppliers $(52,100) 1
Payments of interest (700)Other operating payments (15,500) 2
Payments of income tax (3,600)Cash outflows from operating activities (71,900)Net Cash Flows from Operating $8,900Activities1. 48,600 + 1600 + 1900 = 52,100.2. 15,900 - 400 = 15,500.
Statement of Cash Flows 60
Green CompanyStatement of Cash Flows (contd.)
Net cash inflow from operating activities $8,900Cash flows from investing activities
::
Cash flows from Financing Activities::
* A reconciliation of net income and cash flows using indirect method must also be presented.