Download - Chapter 23: Statement of Cash Flows Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield

Chapter 23: Statement of Chapter 23: Statement of Cash FlowsCash Flows

Intermediate Accounting, 11th ed.Kieso, Weygandt, and Warfield

1. Describe the purpose of the statement of cash flows.

2. Identify the major classifications of cash flows.

3. Differentiate between net income and net cash flows from operating activities.

4. Contrast the direct and the indirect methods of calculating net cash flow from operating activities.

After studying this chapter, you should be able to:


5. Determine net cash flows from investing and financing activities.

6. Prepare a statement of cash flows.7. Identify sources of information for a

statement of cash flows.8. Identify special problems in

preparing a statement of cash flows.9. Explain the use of a work sheet in

preparing a statement of cash flows.


The information may help users assess the following aspects:

• The entity’s ability to generate future cash flows

• The entity’s ability to pay dividends and meet obligations

• The reasons as to why net income and net cash flow from operating activities differ

• Cash and non-cash investing and financing activities during the year

Usefulness of the Usefulness of the Statement of Cash FlowsStatement of Cash Flows

The cash flow statement provides information about:

• the cash receipts (cash inflows), and• uses of cash (cash outflows) during the

period

Inflows and outflows are reported for:• operating activities, • investing activities, and • financing activities during the period

The Cash Flow StatementThe Cash Flow Statement

CashPool

Operatingactivities

Investingactivities

Financingactivities

inflows

Operatingactivities

Investingactivities

Financingactivities

outflows

Statement of Cash Flows: Statement of Cash Flows: ConceptConcept

There are two methods of preparing the statement of cash flows:1. the indirect method and2. the direct method

The indirect method derives cash flows from accrual basis statements.The direct method determines cash flows directly for each source or use of cash.

Preparing a Statement of Preparing a Statement of Cash FlowsCash Flows

Earned Revenues

ExpensesIncurred

Net Income

+

-

Operatingcash flow

EliminateNon-cash revenues

EliminateNon-cash charges

Statement of Cash Flows: Statement of Cash Flows: Indirect Method: ConceptIndirect Method: Concept

Accrual Basis Statements Cash Flow Statement

Income Statementitems & Changes inCurrent Assets andCurrent Liabilities

Operating activities:Adjust net income for accrualsand non-cash charges to get cash flows

Balance Sheet: Changes In Non-Current Assets

Investing activities:Inflows from sale of assets and Outflows from purchases of assets

Balance Sheet: Changes inNon-Current Liabilities

and Equity

Financing activities:Inflows and outflowsfrom loan and equitytransactions

The Statement of Cash The Statement of Cash Flows: Indirect MethodFlows: Indirect Method

• From sales of goods or services

• From returns on loans (interest) and returns on equity securities (dividends)

• To suppliers for inventory

• To employees for services

• To government for taxes

• To lenders for interest

• To others for expenses

Inflows Outflows

Direct Method: Operating Direct Method: Operating ActivitiesActivities

• For the direct and indirect methods the sections reporting investing andfinancing activities are the same.

• The net inflows or outflows for each section (under the two methods) are identical.

• The operating activities are reported differently.

Investing and Financing Investing and Financing ActivitiesActivities

Cash flows from operating activities: Net Income $ XXX Adjustments (to arrive at cash flow from operations) $ XX (List of individual inflows and outflows) Net cash flow from operating activities $ XXX

Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX

Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

Format of the Statement Format of the Statement of Cash Flows: Indirect of Cash Flows: Indirect

MethodMethod

Major Classes of Cash Major Classes of Cash Receipts and PaymentsReceipts and Payments

Formula to Compute Cash Formula to Compute Cash Receipts from CustomersReceipts from Customers

Formula to Compute Cash Formula to Compute Cash Payments for Operating Payments for Operating

ExpensesExpenses

Note the following adjustments to net income in deriving operating cash flow:

• Loss on sale of assets is added to net income• Gain on sale of assets is deducted from net

income• Discount on bonds payable (as amortized) is

added to net income• Premium on bonds payable (as amortized) is

deducted from net income

Indirect Method: Special Indirect Method: Special ItemsItems

Cash flows from operating activities: Cash receipts (individually): Inflows $ XXX Cash payments to suppliers (separately): outflows ($ XXX) Net cash flow from operating activities $ XXX

Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX

Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

Format of the Statement Format of the Statement of Cash Flows: Direct of Cash Flows: Direct

MethodMethod

less equals

Cash Receipts

From sale ofgoods andservices tocustomers

From receiptsof interest and

dividends

Cash Payments

To suppliers

To employees

For operating exp

For interest

For taxes

Cashflowfrom

operations

Direct Method: ConceptDirect Method: Concept

Cash receipts from customers:

= Revenue from credit sales + Decrease in A/Rec balances - Increase in A/Rec balances

Cash Flow Statement: Cash Flow Statement: Direct MethodDirect Method

Cash payments to suppliers:= Cost of goods sold + Increase in inventory

- Decrease in inventory

+ Decrease in accounts payable - Increase in accounts payable


Cash payments for operating and other expenses:

= Operating expenses + Increase in prepaid expenses - Decrease in prepaid expenses + Decrease in accrued expenses payable- Increase in accrued expenses payable


• Transactions not involving cash inflows or cash outflows are non-cash transactions.

• They are not reported in the body of the cash flow statement.

• If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements.

• Example: Issue of bonds (payable) for purchase of land.

Reporting Significant Reporting Significant Non-Cash TransactionsNon-Cash Transactions

• A work sheet may be useful when a number of adjustments are needed.

• Involves three steps:1. Enter beginning and ending balance sheet

data.2. Enter the data that explains the changes in

balance sheet accounts (other than cash).3. Enter the increase or decrease in cash on

cash line and at the bottom of the work sheet. This entry results in the totals of the reconciling items to agree.

WorksheetWorksheet

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Download - Chapter 23: Statement of Cash Flows Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield

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