the statement of cash flows chapter 12. the statement of cash flows reports the entity’s cash...

The Statement of Cash Flows

Chapter 12

The statement of cash flowsreports the entity’s cash flows

(cash receipts and cash payments)during the period.

Used to be called Sources and Uses of Cash

Basic Concepts

Timing of the Financial Statements

December 31, 20x1(a point in time)

BalanceSheet

December 31, 20x2(a point in time)

BalanceSheet

For the Year Ended December 31, 20x1(a period of time)

IncomeStatement

Statement ofStockholders’

Equity

Statement ofCash Flows

Purposes of the Statementof Cash Flows

The statement of cash flows serves the following purposes:

1. Predict future cash flows

2. Evaluate management decisions

3. Determine the ability to pay dividends to stockholders’ and payments to creditors

4. Show the relationship of net incometo the business’s cash flows

Operating, Investing, and Financing Activities

A business engages in threetypes of business activities:

Operating activities

Investing activities

Financing activities

Operating, Investing, and Financing Activities

Operating activities create revenues,expenses, gains, and losses.

Investing activities increaseand decrease long-term assets.

Financing activities obtain cashfrom investors and creditors.

Two Formats forOperating Activities

Indirect method reconciles from net incometo net cash provided by operating activities.

Direct method reports all cash receipts andcash payments from operating activities.

The two methods have no effect oninvesting or financing activities.

Two Formats forOperating Activities

Indirect MethodNet income $XXXAdjustments:Depreciation, etc. XXXNet CASH provided by operating activities $XXX

Direct MethodCollection from customers $XXXDeductions:Payment to suppliers, etc. XXXNet CASH provided by operating activities $XXX

Prepare a statement of cashflows by the indirect method.

The Indirect Method:Operating Activities

Positive ItemsNet incomeDepreciation/amortizationLoss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilities (ex: AP)

Negative ItemsNet lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities

Investing Activities

Positive ItemsSale of plant assetsSale of investments that are not cash equivalentsCollections of loans receivable

Negative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others

Financing Activities

Positive ItemsIssuing stockSelling treasury stockBorrowing money

Negative ItemsPayment of dividendsPurchase of treasury stockPayment of principal amounts of debts

Comparative Balance Sheets

AssetsCurrent: Cash Accounts receivable Interest receivable Inventory Prepaid expensesLong-term receivablePlant assets, net Total

$ 22 93 3 135 8 11 453$725

$ 42 80 1 138 7 – 219$487

$ (20) 13 2 (3) 1 11 234$238

(In thousands) 20x2 20x1 (Change)Anchor Corporation – December 31

Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)

Cash flows from operating activities:Net Income $41Adjustments to reconcile net income tonet cash provided by operating activities:

A Depreciation 18B Gain on sale of plant (8)

Statement of Cash Flows:Operating Activities

C Increase in accounts receivable (13)C Increase in interest receivable (2)C Decrease in inventory 3C Increase in prepaid expenses (1)C Increase in accounts payable 34C Decrease is salary payable (2)C Decrease in accrued liabilities (2) 27Net cash provided by operating activities $68

Statement of Cash Flows: Operating Activities


Depreciation, Depletion,and Amortization – A

Depreciation expense has no effect on cash.

However, it is deducted from revenuesin order to compute net income.

The addback cancels the earlier noncash deduction.

Gains and Losses on theSale of Assets – B

Gains are subtracted from net income andexcluded from cash flows from operations.

Changes in the Current Asset and Current Liability Accounts – C

1. An increase in a current asset other than cash indicates a decrease in cash.

2. A decrease in a current asset other than cash indicates an increase in cash.

3. A decrease in a current liability indicates a decrease in cash.

4. An increase in a current liability indicates an increase in cash.

Statement of Cash Flows

Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $ (20)Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22


Compute the cash effects

of a wide variety of

business transactions.

Computing Acquisition andSales of Plant Assets

Anchor had plant assets, net of depreciation,of $219,000 at the beginning of the year

and $453,000 at year end.The acquisition of plant assets amounted

to $306,000 during the year.

The income statement shows depreciation expenseof $18,000 and an $8,000 gain on sale of plant assets.

What is the book value of the assets sold?


Plant Assets (Net)Beginning balance 219,000Acquisitions 306,000

Ending balance 453,000

Acc Depreciation 18,000Book value of assets sold 54,000


How much are the CASH proceedsfrom the sale of plant assets?

Book value + Gain – Loss = Sale proceeds

Sale proceeds = $54,000 + $8,000 – 0 = $62,000

Computing Acquisition andSales of Investments

Beginning balance + Purchases– Book value of investment sold

= Ending balance

(Amounts assumed)$100,000 + $50,000 – X = $140,000

X = $10,000

Computing Loans andTheir Collections

Beginning balance + New loans made– Collections

= Ending balance

(Amounts assumed)$90,000 + $10,000 – X = $30,000

X = $70,000

Computing Issuances and Payments of Long-Term Debt

Beginning balance was $77,000.

New debt amounting to $94,000was incurred during the year.

The ending balance for the Long-TermDebt account was $160,000.

How much was the payment?

Computing Issuances and Payments of Long-Term Debt

Long-Term DebtBeginning balance 77,000Issuance of new debt 94,000Payments 11,000

Ending balance 160,000

Computing Dividend Payments

Retained earnings beginning balance +Net income – Dividends declared = Ending balance

$86,000 + $41,000 – X = $110,000

X = $17,000

(if div’s declared were paid in the CY, $17000 is the div payment)

Computing Cash Collectionsfrom Customers

Beginning accounts receivable balance+ Sales on account – Collections

= Ending accounts receivable balance

$80,000 + $284,000 – X = $93,000

X = $271,000

Computing Paymentsto Suppliers

Accounts Payable

Payments 113,000Beg. balance 57,000Purchases 147,000

End. balance 91,000

Noncash Investing andFinancing Activities

Suppose Anchor Corporation issued commonstock valued at $320,000 to acquire a warehouse.

Warehouse Building 320,000Common Stock 320,000

Noncash Investing andFinancing Activities

Noncash Investing and Financing Activities: (000)Acquisition of building by issuing common stock $320Acquisition of land by issuing note payable 72Payment of long-term debt by transferring investments to the creditor 104Acquisition of equipment by issuing short-term note payable 37Total noncash investing and financing activities $533

Prepare a statement of cash

flows by the direct method.

Cash flows from operating activities:Receipts:Collections from customers $271Interest received on notes receivable 10Dividends received on investments in stock 9Total cash receipts $290

Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)

The Direct Method

Payments:To suppliers $133To employees 58For interest 16For income tax 15Total payments 222Net cash provided by operating activities $ 68

The Direct Method


Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $(20)Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22

The Direct Method


End of Chapter 12

the statement of cash flows chapter 12. the statement of cash flows reports the entity’s cash...

Documents