intermediate financial accounting

by Professor Hsieh

Intermediate Financial Accounting

Statement of Cash Flows

Statement of Cash Flows 2

Objectives of this Chapter

I. Identify business activities which can generate or use cash and differentiate between income flows and cash flows from operating activities.

II. Introduce the content and the usefulness of the statement of cash flows.


Objectives of this Chapter (contd.)

III. Understand cash flows of operating, investing and financing activities.

IV. Learn how to prepare the statement of cash flows.

V. Learn the two alternatives (direct and indirect methods) in preparing net cash flows from operating activities.


I. Activities which can either generate cash or use cash for a business entity

A. Operating activities.

B. Investing activities.

C. Financing activities.


A. Operating Activities (i.e., sales revenue, expenses)

All these activities are reported in the I/S (income statement). However, I/S only provides the net income amount which very often is not the change in cash.

Therefore, we need to adjust from net income flows to cash flows in order to report the net cash provided by (or used in) operating activities.


A. Operating Activities (contd.)

There are two approaches to reconcile net income to net cash provided by (or used in) operating activities:

1. Indirect Method ==> Lump-Sum Adjustment

2. Direct Method ==> Individual Account Adjustment


1. Indirect Method

Adjust net income (the lump sum amount of all revenues and expenses) for all differences between income flows and cash flows.


2. Direct Method

Adjust each revenue account 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.


Activities which can either generate cash or use cash for a business entity





B. Investing Activities

In addition to generate cash from or use cash in the operating activities, companies can also generate cash from (or use cash in) investing activities.

i.e., Acquiring (cash outflow) or selling (cash inflow): PPE Investments (current or noncurrent) N/R (current or noncurrent)


Activities which can either generate cash or use cash for a business entity





C. Financing Activities

Companies can also generate cash or use cash through financing activities:


Financing Activities

1. Cash Inflows Issue B/P. Issue common stock. Issue N/P.


Financing Activities

2. Cash Outflows Retirement of B/P. Retirement of common stock. Retirement of N/P. Payments of dividends.


II. 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 activities should be reported. In doing so, investors can also obtain all the information of operating, investing, and financing activities of a company. Moreover, the following questions can also be answered:


The Content and the Usefulness of the Statement of Cash Flows (contd.)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?


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?

All of these cannot be answered from either the income statement or the balance sheet statement.


APB Opinion No. 19

In 1971 APB Opinion No. 19, “Reporting Changes in Financial Position”, requires a statement of changes in financial position be presented in a company’s set of financial statements.


APB Opinion No. 19 (contd.)

APB No. 19 allowed flexibility in defining the financial position(i.e., Working capital or cash).

Disadvantage: lose the comparability among firms when firms adopted different financial position in preparing the statement.


SFAS No. 95

To improve the comparability, SFAS No. 95, “Statement of Cash Flows,” requires companies present the statement of cash flows using a specific format.


SFAS No. 95 (contd.)

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.


III. Understand Cash Flows from Operating, Investing, and Financing Activities

Cash flows from 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).


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).


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).


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)


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).


Cash Flows from Financing Activities (contd.) Cash Outflows:

Retirement of bonds.

Retirement of stock.

Payments of N/P.

Payments of dividends.


IV. Procedures for Preparation of the Statement of Cash Flows

1. Operating Cash Flows (indirect method).

2. Investing Cash Flows.

3. Financing Cash Flows.


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)


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


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.


Adjustments to Convert Net Income to Net Cash Flow from Operating Activities

+ Depreciation, depletion and amortization expense, B/D expense

+ Amortization of discount on B/P+ Amortization of premium on investment

in bonds+ Increase in deferred income tax liability+ Loss on disposal of assets or liabilities+ Investment loss under the equity method

Net Income

Adjustments


Adjustments to Convert Net Income to Net Cash Flow from Operating Activities (contd.)

+ Increases in current liabilities other than N/P (i.e., A/P, salaries payable, interest payable, I/T payable, deferred I/T, and any other current liabilities related to operations)

+ Decreases in current assets other than cash and N/R (i.e., A/R, interest receivable, inventory, prepaids, and any other current assets related to operations)


Adjustments to Convert Net Income to Net Cash Flow from Operating Activities (contd.)

- Amortization of premium on B/P- Amortization of discount on investment in

bonds- Gain on disposal of assets or liabilities- Investment income under the equity

method- Decrease in deferred income tax liability- Decreases in current liabilities- Increases in current assets

| |Net Cash Flows from Operating Activities

Adjustments


Adjustments:+ Amortization of Discount on B/P

Example: Issue a 2-year bond, market int. rate = 12%, bond int. rate = 10%

P.V. of Bond = $10,000 x 0.797 + 1,000 x 1.690 = 9,600

1. 1/1/x1 Cash 9,660Discount on B/P 340

B/P 10,000


Adjustments:+ Amortization of Dis. on B/P (contd.)

2. Payment of Interest on 12/31/x1

Interest Expense (12% x 9660) 1159.2

Cash 1,000.0

Dis. On B/Pa 159.2

a. Amortization of bond discount increase interest expense but does not use cash.


Adjustments:+ Amortization of Dis. on B/P (contd.)3. Payable of Interest on 12/31/x2

Interest Expense (9660 +159.2) 0.12 1,174.4

Cash 1,000.0Discount On B/P 174.4

Dis340 159.2

174.4


Adjustments:+ Amortization of Premium on Investment in Bonds

Example: GEO Corp. purchased $100,000, 10% 5-year bonds on 1/1/x2, with interest payable on 7/1 and 1/1. The bonds sell for $108,111 which results in bond premium of $8,111 and an effective interest rate of 8%.


+ Amortization of Premium on Investment in Bonds (contd.)

Example (contd.)Record the purchase on 1/1/x2:

Investments 108,111Cash 108,111

Record the interest revenue on 7/1/x2:Cash 5,000

Interest Revenue 4,324a

Investments 676 a. Interest revenue = $108,111 x 4% = $4,324


Adjustments:+ Loss on Disposal of PPE or Investments

Example: Sale a piece of land with a cost of $7,000 for $9,000

Cash 9,000

Land7,000

Gain on Sale of Landa 2,000a. This transaction results in a cash increase of

$7,000 reported in the investing activity section, not the operating activity section.


Adjustments: + Investment Loss under equity method Equity method must be used to account

for return on investment in stock when gaining ownership of 20% ~ 50% with significant influence.

Example:

Obtain 30% of ownership with significant influence on investment in stock of Green Corp. for $40,000


+ Investment Loss under equity method (contd.)

2/4/x2Investment in Stock 40,000

Cash 40,000

12/31/x2Green’s Loss of Year x2 = 100,000Loss in Investment 30,000

Investment in Stock 30,000


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).


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.


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.


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


Example 1 (contd.)Layton Company Retained Earnings (19x2)

Beginning Retained Earnings $11,300Add: Net Income 7,000

$18,300Less: Dividends (3,500)

Ending Retained Earnings $14,800


Layton CompanyStatement of Cash Flows

For the Year Ended December 31, 19x2

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


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


Layton CompanyStatement of Cash Flows (contd.)

Net increase in cash$2,600

Cash, Jan 1, 19x2$4,000

Cash, Dec 31, 19x2$6,600


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


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


Income Statement For the Year Ended 12/31/19x2

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 .

53


Retained Earnings (19x2)

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


Supplemental Information for 19x2

(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.


GREEN CompanyStatement of Cash Flows


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


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

57

GREEN Company Statement of Cash Flows (contd.)


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

58

GREEN Company Statement of Cash Flows (contd.)


Special Topics

1. Direct exchange.

2. Partial cash investing and financing activities.

3. Cash dividends declared.


1. 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).


2. Partial Cash Investing and Financing Activities

Example: acquiring land costing $10,000 by paying $1,000 down and signing a $9,000 notes payable.


2. 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)


3. Cash Dividends Declared

(Stock dividends not reported on statement of cash flows.)

a. Cash dividends declared and paid in the same year:

Reported as a cash outflow of financing activities


3. Cash Dividends Declared (contd.)

b. Cash dividends declared in the current year but paid in the next year:

(1)No impact on cash of the current year; only increase dividends payable (D/P).

(2)When D/P decrease next year, reported as a cash outflow of financing activity.


Example 3: Jones Company Balance Sheet

Balance Change 1/1/x2 12/31/x2

Cash $3,200 $5,900A/R 5,600 7,600 2,000 Inventory 7,300 7,000 300 Prepaid Expense 1,200 1,400 200 Investments 6,000 6,000Land 10,000 18,200 8,200b,c Equipment 29,000 29,000


Jones Company Balance Sheet (contd.)

Acc. Depr: Equip. (12,000) (14,820)Building 144,000 149,000 5,000

Acc. Depr: Bldg. (39,300) (39,600)Leased Equip. 0 5,300 5,300c

Paten (Net) 5,000 4,400 600

Total Assets $160,000 $179,380



A/P $8,600 $7,300 1,300 I/T Payable 1,500 2,130 630 Interest Payable 0 500 500 Notes Payable 0 2,600 2,600a Obligation under

Capital Lease 0 5,300 5,300f B/P, 10% 0 10,000 10,000g Dis. On B/P (1,000) (900) 100g



Convertible B/P 7,000 0 7,000h,g Deferred I/T 1, 920 2,100 180i Common Stock, $10 par 34,000 37,400 3,400j,h Additional Paid-in

Capital -- C.S. 67,000 73,700 6,700hj Retained Earnings 39,980 39,250Total Liabilities &Stockholder’s Equity $160,000 $179,380


Jones Company Income Statement

For the Year Ended 12/31/20x2Sales

$88,020Less: CGS $(52,200)

Operating Expenses (15,800)Depr. Expense: Equip. (2,820)Depr. Expense: Bldg. (5,100)Amortization Expense: Patent (600)Interest Expense (Bond) (1,100)I/T Expense (3,630)

Plus: Gain on Sale of Equipment 1,700(79,550)

Income Before Extraordinary items$8,470

Extraordinary Loss (Net of I/T)(2,100)

Net Income$6,370

69


Retained Earnings (20x2)Beginning balance of retained earnings $39,980

Add: Net Income 6,37046,350

Less: Stock Dividends $3,100

Cash Dividends $4,000 (7,100)

Ending balance of retained earning $39,250


Supplemental Information for 20x2

F (a) On 12/31/x2, Jones borrowed $2,600 by issuing a 12%, 90-day notes payable.

I (b) During 20x2, additional land was acquired at a cost of $10,400.

I & A (c) During 20x2, land costing $2,200 was sold for $3,900, resulting in a gain of $1,700.

I (d) In 20x2, a building was acquired at a price of $15,000.


Supplemental Information for 20x2 (contd.)I & A (e) In 20x2, an earthquake destroyed

a building that costs $10,000 with a book value of $5,200. Settlement with the insurance company resulted in after-tax cash proceeds of $3,100 and an extraordinary loss (net of I/T) of $2,100.

D.E. F&I (f) On 12/31/20x2, Jones leased equipment, under a long-term capital lease of $5,300.


Supplemental Information for 20x2 (contd.)

F&A (g) On 1/1/x2, Jones issued $10,000 of long-term bond at 90. Bond discount amortization was $100 for the year.

D.E. F&F (h) On 1/1/x2, convertible bonds with a face value of $7,000 were converted into 240 shares of common stock. The book value method was used to record the conversion.


Supplemental Information for 20x2 (contd.)A (i) Taxable income was less than pretax

accounting income for the year resulting in an increase in deferred income taxes payable of $180.

J.E.I/T Expense 3,630

I/T Payable 3,450Deferred I/T payable 180

I/T Payable 2,820Cash 2,820


Supplemental Information for 20x2 (contd.)N (j) During 20x2, stock dividend was

declared and issued. Involved were 100 shares of $10 par common stock. The market value of the stock on the declaration date was $31 per share.

J.E.R/E 3,100

C.S 1,000Paid-in capital in excess of par

2,100


Jones CompanyStatement of Cash Flows


Cash flows from operating activities:Net Income $6,370Adjustments to reconcile net income to net cash provided by operating activities:Add: Depr. Expense: Equip. 2,820

Depr. Expense: Bldg. 5,100Amortization Expense: Patent 600Decrease in Inventories 300Increase in I/T payable 630Increase in int. payable 500


Jones CompanyStatement of Cash Flows (contd.)

Extraordinary loss from earth quake 2,100Increase in Deferred I/T payable 180Amortization of Discount on B/P 100

Less: Increase in A/R (2,000)Increase in prepaid expense (200)Decrease in A/P (1,300)Gain on sale of land (1,700)

Net cash provided by operating activities:

13,500



Cash flows from investing activities:Payments for purchase of land (10,400)Proceeds from sale of land 3,900Payments for purchase of building (15,000)Proceeds from building destroyed by earthquake 3,100

Net cash used by investing activities:

(18,400)



Cash flows from financing activities:Proceeds from issuance of N/P 2,600Proceeds from issuance of bond 9,000Payments of Cash Dividends (4,000)

Net cash provided by financing activities: 7,600Net increase in cash (see schedule 1) $2,700Cash, 1/1/x2 3,200Cash, 12/31/x2 $5,900



Schedule 1: investing and financing activities not affecting cash

Investing activitiesAcquisition of equipment under capital lease $(5,300)

Financing ActivitiesIssuance of capital lease for equip. $5,300Conversion of bonds to C.S. $(7,000)Issuance of common stock to convert bonds $7,000


Cash flows for a Leasee – at the Signing of the Lease on 1/1/x5

A capital lease is reported as an investing and a financing activity at the signing of the lease with no cash impact.

If MLP is paid in advance (i.e., on 1/1/x5, 1/1/x6, etc.), the cash outflow paid on 1/1/x5 is reported as a financing activity.

J.E.a Leased Equip. 112,000

(1/1/x5) Lease Liability 112,000

Lease Liability 32,923.45

Cash 32,923.45 a. see Example A2 of Statement of Cash Flows


Cash flows for A Leasee – Subsequent Lease Payments

1/1/x6 (second lease payment) Interest Payable 9,489.19 Lease Liability 23,434.26 Cash 32,923.45Reporting of Cash Flows (Direct Method): $23,436.26---reported as cash outflow-

financing activity $9,489.19--- reported as cash outflow,

operating activity, payment for interest expense.


V. Cash Flows from the Operating Activities

Activities can be presented using:a. Indirect Method (as used in examples

1,2,and 3):

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.


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 reconcile of net income and cash using the indirect method must also be provided in the supplementary statement.


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.


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.


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.; or Inflows-Inc. in Int. Rec. from

OperatingInterest +Amort. Of Interest Activities

Premium on = CollectedRevenue Invest in Bonds;

or -Amort. Of Discount on Invest in Bonds


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-Gain on Disposal of Other Activities

Revenue Assets & Liabilities = Operating Receipts

-Investment Income* (Equity Method)

+Dec. (-Inc.) in Other Receivable Accounts

* Unless listed as separate items on Income Statement (I/S).88

Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)



+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

89




+Dec. in Int. Payable Interest -Inc. in Int. Payable = Payments Expense +Amort. of Prem. on B/P of Interest

or Cash-Amort. of Dis. on B/P Outflowsfrom+Inc. in Prepaids Operating-Dec. in Prepaids Activities-Depre., Depletion exp.

Other Amort. Exp.*, B/D exp. Other -Losses on disposal of = Operating

Expense Assets and Liabilities Payments-Investment lossa (Equity method) a. Unless listed as

+Dec. (-Inc.) in Other separate items on the Payable Accounts Income Statement90




+Dec. in I/T Payable; or

Income -Inc. in I/T Payable Payments Cash Tax +Dec. in Deferred I/T = of Income OutflowsExpense Liability; or Tax from

-Inc. in Deferred I/T OperatingLiability Activities

91



Green CompanyStatement of Cash Flows

(Using the direct method in preparing the operating activities section of a cash flow statement.Information as provided in 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.


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)

1. 48,600 + 1600 + 1900 = 52,100.2. 15,900 - 400 = 15,500.


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.


Information as provided in Example 3 (direct method)

Statement of Cash Flows Cash flows from Operating Activities:Cash inflows:

Collections from customers $86,0201

Cash inflows from operating activities $86,020

Cash outflows:Payments to suppliers (53,200)2

1. 88,020 - 2,000 = 86,020.2. 52,200 - 300 + 1300 = 53,200.


Statement of Cash Flows (contd.)Payments of other expenses (16,000)1

Payments of interest expense (500)2

Payments if Income Tax (2,820)3

Cash outflows from operating activities (72,520)

Net cash inflows from operating activities $13,500

1. 15,800 + 200 = 16,000.2. 1100 - 500 - 100 = 500.3 3,630 - 630 -180 = 2,820.


Other Special Topics1. Gain from sale of cash equivalents.

2. Accounts Receivable.

3. Issues related to adjustment of income tax expense to cash payment for income tax.

(see P21-11 for example)


1. Gain from Sale of Cash Equivalent

Gain from sale of cash equivalents results in a net cash inflow equal the amount of the gain.

Cash & Cash Equi. 7,000 Gain from sale of cash equi. 2,000 Cash & Cash Equi. 5,000 or

Cash & Cash Equi. 2,000

Gain from Sale of Cash Equi. 2,000

Gain from Sale of Cash Equivalent (Contd.) Using the indirect method, this gain

should not be subtracted from net income.

This is because the cash inflow from this sale is reported in the operating, not investing, activity section.

Using the direct method, this gain should be reported as a cash inflow in the operating activities section.



2. Accounts Receivable

The balance used to compute the changes in accounts receivable should be the gross amount, not the balance net of allowance for bad debts.

Also, this gross amount should be adjusted to prior to the any bad debt write- offs occurred during the year.

Allowance for bad debts does not affect cash flows and should not be considered.


3. Issues Related to Adjustments of Income Tax Expense to Cash Payment for Income Tax Expense In adjusting income tax expense to cash

payment for income tax, the expense used should be the income tax expense for all existing components of the income statement for that yeara.

a. Income tax expense for continuing operations, discontinued operations, extraordinary items and the cumulative effect.


3. Issues Related to Adjustments of Income Tax Expense to Cash Payment for Income Tax Expense (contd.) When income tax expense given is for

the continuing operations only, any income tax savings (liabilities) from components other than continuing operations should be subtracted (added) prior to the adjustment.

intermediate financial accounting

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