Week 4 - Chapter 4

Week 4 –
Chapter 4
ACCT 6301
FALL 2019
9/9/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1

Chapter 4 Lecture
Tonight’s
Topics SUA Part 2 Walkthrough
SUA Part 1 Grading

Chapter 4 –
Reporting and
Analyzing Cash
Flows
ACCT 6301 – FINANCIAL ACCOUNTING – FALL 2019
9/9/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1-3

Explain the purpose
of the statement of
cash
Learning Objective flows and
LEARNING classify cash
OBJECTIVE 1
transactions by type
of business activity:
operating, investing,
or financing.
COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS

Provides information about how a
company generates cash and how it
uses cash
Enables investors and creditors
Purpose of the ◦ To better assess a firm’s ability to settle its
Statement of liabilities and pay dividends
Cash Flows ◦ To determine a company’s need for outside
financing
Permits users to observe and assess

management’s investing and financing
policies
COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 5

Short-term, highly liquid investments
that are
◦ Easily convertible into a known amount of
cash, and
◦ Close enough to maturity that their market
Cash and Cash value is not sensitive to interest rate changes
Equivalents ◦ Generally investments with maturities of three
months or less
Examples of cash equivalents

◦ Money market accounts
◦ Treasury bills
◦ Commercial paper

Cash and Cash Equivalents
On the statement of cash flows
◦ Cash equivalents are added to cash, as is any cash balance with restrictions to its use.
◦ Treated as a single sum
◦ Why? The purchase and sale of investments in cash equivalents are considered to be part of a firm’s overall
management of cash rather than a source or use of cash
Managers refer to cash and cash equivalents as ‘cash’
Same
Same label
label used
used in
in
the
the textbook
textbook

Target’s Statement of Cash Flows
Operating Activities Section
Target Corporation
Consolidated Statement of Cash Flows
(millions) Fiscal Year
Operating activities 2018
Net (loss)/earnings $2,937
Earnings from discontinued operations, net of tax 7
Net earnings from continuing operations 2,930
Adjustments to reconcile net earnings to cash provided by
operations: Target generated
Depreciation and amortization 2,474 $5,970 million of cash
Share-based compensation expense 132 from continuing
Deferred income taxes 322
operations during its
Noncash (gains)/losses and other, net 95
Changes in operating accounts:
year ending February 2,
Inventory (300 ) 2019.
Other assets (299 )
Accounts payable 1,127
Accrued and other liabilities 89
Cash provided by operating activities - continuing operations 5,970
Cash provided by operating activities - discontinued operations 3
Cash provided by operations $5,973

Target’s Statement of Cash
Flows
Investing and Financing Sections
Target Corporation
Consolidated Statement of Cash Flows
(millions) Fiscal Year
Investing activities 2018
Expenditures for property and equipment ($3,516 )
Proceeds from disposal of property and equipment 85
Other investments 15 Target used cash
Cash required for investing activities (3,416 ) from operations for
Financing activities financing activities
Reductions of long-term debt (281 ) during its year
Dividends paid (1,335 )
ending February 2,
Repurchase of stock (2,124 )
2019.
Stock option exercises 96
Cash required for financing activities (3,644 )
Net (decrease)/increase in cash and cash equivalents (1,087 )
Cash and cash equivalents at beginning of period 2,643
Cash and cash equivalents at end of period $1,556

Framework for the
Statement of Cash Flows
Cash receipts and payments are classified into one of three categories:
Operating Investing Financing

Activities Activities Activities
Change in cash and cash equivalents
10
Operating Activities
The focus is on selling goods or rendering services
Defined broadly enough to include any cash receipts or payments that are not classified as
investing or financing activities
Where are operating activities reported?

Income Statement—Accrual Basis
Statement of Cash Flows—Cash Basis
11
Examples of Operating Activities
Operating activities include cash received and paid related to selling goods and rendering
services and are directly related to the company’s primary day-to-day business activities.
12
Investing Activities
Cash Flows involving
1. Acquiring and disposing of property, plant, and equipment and intangible
assets
2. Purchasing and selling government securities including other company’s stocks,
bonds, and other non cash-equivalent securities
3. Lending and subsequent collection of money

13
Financing Activities
Cash Flows involving
1. Receiving cash from shareholders
2. Returning cash to shareholders
3. Borrowing from creditors
4. Repaying amounts borrowed from creditors

14
Usefulness of Classifications
Three competitors generated $100,000 of cash:
Summary Information for Three Competitors
A likely recurring source that can Repayment

sustain the company. required
Not likely to recur.

Will replacement assets be needed?
15
Construct the
operating activities
section of the
Learning Objective
LEARNING
OBJECTIVE 2 statement of cash
flows using the
direct method.

Preparing the
Statement of Cash Flows—
Option 1: Direct Method

Examine all cash transactions that occur during the period.
Group them according to the type of activity.

Jana Juice
May 1—Transactions 1-4
Balance Sheet Income Statement
Transaction Cash Asset + Noncash = Liabilities + Contrib. + Earned Revenues – Expenses = Net
Asset Capital Capital Income
Issued stock +10,000 ‒ =
for $10,000 cash +10,000 =
Cash Common
Stock
Signed a note +4,000 ‒ =
and received +4,000
= Note
$4,000 cash Cash Payable
Signed a rental ‒ =
agreement and +1,800
paid an $1,800 –1,800
Security =
deposit Cash
Deposit
Purchase ‒ =
Inventory on +2,000
account for +2,000 Accounts
$2,000 Inventory = Payable
Operating Financing

Jana Juice
May—Transactions 5-8
Cash Noncash Contrib. Earned Net
Transaction + = Liabilities + + Revenues – Expenses =
Asset Asset Capital Capital Income
Pay $900 cash for –900 +900
May advertising. –900
Cash = Retained ‒ Advertising = ‒900
Earnings Expense
Paid $1,500
cash as partial –1,500
payment to –1,500
Cash = Accounts ‒ =
suppliers Payable
Sold drinks for +2,400 Operating +2,400 +2,400 +2,400

$2,400 cash Cash = Retained Sales ‒ =
Earnings Revenue
Record $600 –600 = –600 ‒ +600 = –600
for cost of Inventory Cost of
Retained
merchandise. Earnings Goods Sold
Sold drinks +2,900 +2,900 +2,900 +2,900

for $2,900 Accounts Retained Sales ‒ =
on account. Receivable = Earnings Revenue
‒ +700 = –700
–700
Record $700 –700 = Retained Cost of
for cost of Inventory Goods Sold
merchandise. Earnings

Jana Juice
Transaction Cash Asset + Noncash = Liabilities + Contrib. + Earned Revenues – Expenses = Net
Asset Capital Capital Income
Paid wages –1,300 –1,300 +1,300 –1,300
totaling $1,300 Cash = Operating Retained – Wages =
Earnings Expense
Sold $300 +300 +300
three-month Cash = Unearned ‒ =
memberships to Revenue
online program
Collected $1,200 +1,200 –1,200

as partial Cash Accounts = ‒ =
payment from Receivable
customers
Paid $40 for –4,040 –4,000 –40 +40 –40

interest and paid Cash = Note Retained – Interest =
the $4,000 loan Payable Earnings Expense
Financing: $4,000
Operating: $40
Jana Juice
Transaction Cash + Noncash = Liabilities + Contrib. + Earned Revenues – Expenses = Net
Paid $800 for –800 + 800

a four-month Prepaid
insurance policy. Cash Insurance = ― =
Paid $700 for

rent for the –700 –700 +700
current month, Cash = Retained ― Rent = –700
Earnings Expense
May.
Paid $400 for –400 –400

Retained
dividends. Cash = ‒ =
Earnings
Operating
Financing

Jana Juice
Statement of Operating Cash
Flows
May 2019
Cash receipts from customers $ 3,900
Less:
Cash payments to suppliers 1,500
Cash payments to employees 1,300
Cash payments for occupancy 2,500
Cash payments for advertising 900
Cash payments for insurance 800
Cash payments for interest 40
Net cash provided by (used in) operations ($ 3,140)

Preparing the
Statement of Cash Flows—
Option 1: Direct Method Often

Often not
not practical
practical
Examine all cash transactions that occur during the period.

Commonly
Commonly used
used approach
Option 2: Indirect Method approach
Reconcile the income statement and balance sheet information

◦ Changes in balance sheet accounts are explained on the income statement and
statement of cash flows

Reconcile cash
flows from
operations to net
Learning Objective
LEARNING
OBJECETIVE 3 income and use the
indirect method to
compute operating
cash flows.

Option 2
Preparing the Operating Section of the
Income Statement Cash Flow Statement
Revenues Cash Receipts
Expenses Cash Expenditures
The difference between a revenue or an expense reported in the income

statement and a related cash receipt or expenditure reported in the statement of
cash flows will be reflected as a change in one or more balance sheet accounts.
Net Income + Adjustments = Cash flow operations

or, more specifically…

Preparing the Operating Section
of the Statement of Cash Flows
Start with the income statement and balance sheet. Convert
revenue and expenses to cash flows from operating activities with
the following adjustments:
1. Convert sales revenues to cash receipts from customers
2. Convert cost of goods sold to cash paid for merchandise purchased
3. Convert wages expense to cash paid to employees
4. Convert rent expense and advertising expense to cash paid amounts
5. Convert other adjusting entries to cash flows
6. Eliminate depreciation expense and other noncash operating expenses

Jana Juice’s Information Jana Juice
Balance Sheet
For Month Ended June 30, 2019
Jana Juice
Assets June 30, 2019 Income Statement
May 31, 2019 For Month Ended June 30, 2019
Cash $10,460 $ 6,460 Revenues
Accounts receivable 4,100 1,700 Sales revenue $7,600.
Interest receivable 60 0 Expenses
Inventory 1,600 700 Cost of goods sold $1,700
Prepaid insurance 600 800 Wages expense 1,950
Security deposit 1,800 1,800 Rent expense 700
Current assets 18,620 11,460 Advertising expense 800
Fixtures and equipment 10,200 0 Insurance expense 200
Less: Accumulated depreciation – Depreciation expense 170
Fixtures/equipment (170) 0
Operating expense $5,520.
Equipment, net 10,030 0
Income from operations 2,080.
Total assets $28,650 $11,460
Interest expense (120)
Liabilities
Interest income 60.
Accounts payable $2,600 $500
Income before taxes 2,020.
Unearned revenue 800 300
Income tax expense 606.
Wages payable 550 0
Net income $1,414.
Interest payable 120 0
Income tax payable 606 0
Current liabilities 4,676 800
Notes payable 12,000 0
Total liabilities 16,676 800
Equity
We will use Jana Juice’s June
Common stock 10,000 10,000 information to prepare the
Retained earnings 1,974 660
Total liabilities & equity $28,650 $11,460 statement of cash flows.

1.Convert Sales Revenues
to Cash Received
from Customers
Cash flow Net income Change in Change in
= – +
(Collections) (Revenue) accounts receivable unearned revenue
(6a) Sold $3,100 of +3,100 = +3,100 +3,100 – = +3,100
products for cash Cash Retained Sales Revenue
Earnings
(7a) Sold $4,400 of +4,400 = +4,400 +4,400 – = +4,400
energy drinks on Accounts Retained Sales Revenue
account Receivable Earnings
(8) Sold $600 of three +600 = +600 – =
month online Cash Unearned
memberships Revenue
(10) Received $2,000 +2,000 -2,000 = + – =
cash from customers Cash Accounts
Receivable
(a) Adjust to recognize = ‒100 +100 +100 – = +100
earned revenue from Unearned Retained Sales Revenue
online membership Revenue Earnings
+5,700 +2,400 +500 +7,600 +7,600 +7,600
Accounts Unearned Retained
Total Changes Cash + Receivable = Revenue + + Earnings Sales Revenue - = Net Income

1.Convert Sales Revenues
to Cash Received from
Customers
Using the FSET totals from the prior slide:
+5,700 +2,400 +500 +7,600 +7,600 +7,600
Accounts Unearned Retained
Total Changes Cash + Receivable = Revenue + + Earnings Sales Revenue - = Net Income
The relationship can be rewritten as follows:

Change in Change in
Cash flow Net income accounts unearned
(Collections) = (Sales revenue) - receivable + revenue
$5,700 = $7,600 - $2,400 + $500
Therefore, cash received from customers is $5,700.

2.Convert Cost of Goods Sold to
Cash Paid for Merchandise
Purchased
Cash flow Net income Change in Change in
= – +
(Payments) (COGS expense) inventory accounts payable

(4) Paid $500 cash -500 = -500 – =
for accounts payable Cash Accounts
Payable
(5) Purchased +2,600 = +2,600 – =
$2,600 of inventory Inventory Accounts
on account Payable
(6b) Record $600 for -600 = -600 – +600 = -600
cost of inventory Inventory Retained Cost of Goods
sold Earnings Sold
(7b) Record $1,100 -1,100 = -1,100 – +1,100 = -1,100
for cost of inventory Inventory Retained Cost of Goods
sold Earnings Sold
-500 +900 +2,100 -1,700 +1,700 -1,700

Accounts Retained Cost of Goods
Total Changes Cash + Inventory = Payable + + Earnings - Sold = Net Income

2.Convert Cost of Goods Sold to
Cash Paid for Merchandise
Purchased
Using the FSET totals from the prior slide:
-500 +900 +2,100 -1,700 +1,700 -1,700

Accounts Retained Cost of Goods
Total Changes Cash + Inventory = Payable + + Earnings - Sold = Net Income

Change in
Cash flow Net income Change in accounts
(payments) = (COGS) - inventory + payable
($500) = ($1,700) - $900 + $2,100
Therefore, cash paid for inventory is $500.

3.Convert Wages Expense
to Cash Paid to
Employees
(9) Paid $1,400 for wages -1,400 = -1,400 – +1,400 = -1,400
Cash Retained Wages
Earnings Expense
(e) Adjust for accrued = +550 ‒550 – +550 = ‒550
wages expense Wages Retained Wages
Payable Earnings Expense
-1,400 +550 -1,950 +1,950 -1,950
Wages Retained Wages
Total Changes Cash + = Payable + + Earnings - Expense = Net Income

Cash flow Net income Change in
(Payments) = (Wage expense) + wages payable
($1,400) = ($1,950) + $550
Therefore, cash paid for wages is $1,400.

4.Convert Rent and
Advertising Expenses to
Cash Paid Amounts
(3) Pay $800 for -800 = -800 – +800 = -800
advertising Cash Retained Advertising
Earnings Expense
(11) Paid $700 -700 = -700 – +700 = -700
rent for June Retained Rent Expense
Cash Earnings
For these items, the cash amount paid is exactly equal to the amount
recorded as an expense, so no adjustment is necessary.
Therefore, cash paid for rent is $700 and cash paid

for advertising is $800.

5.Other Adjustments:
Convert Insurance Expense to
Cash Paid for Insurance
Transaction + =Liabilities + + Revenues – Expenses =
(b )Adjust for expiration ‒200 = ‒200 – +200 = ‒200
of 1 month of insurance
Prepaid Retained Insurance
Insurance Earnings Expense

Change in
Cash flow Net income prepaid
(Payments) = (Ins expense) - insurance
$0 = ($200) - ($200)
Therefore, cash paid for insurance is $0.

Convert Interest Expense to
Cash Paid for Interest
(f) Adjusting entry to = +120 ‒120 – +120 = ‒120
record interest owed not Interest Retained Interest
yet paid Payable Earnings Expense

Cash flow Net income Change in int
(Payments) = (Int expense) + payable
$0 = ($120) + $120
Therefore, cash paid for interest is $0.

Convert Interest Income to
Cash Received for Interest
(d ) Adjust for interest +60 = +60 +60 – = +60
income earned
Interest Retained Interest
Receivable Earnings Income

Cash flow Net income Change in int
(Collections) = (Int income) - receivable
$0 = $60 - $60
Therefore, cash received for interest is $0.

Convert Income Tax Expense to
Cash Paid for Income Taxes
(g) Adjust for taxes owed = +606 ‒606 – +606 = ‒606
but not yet paid Income Tax Retained Income Tax
Payable Earnings Expense

Cash flow Net income Change in
(Payments) = (Tax expense) + taxpayable
$0 = ($606) + $606
Therefore, cash paid for taxes is $0.

Eliminate Depreciation and
Non-Cash Operating Expenses
(c) Adjust for depreciation on -170 = -170 – +170 = -170
fixtures & equipment Accumulated Retained Depreciation
Depreciation Earnings Expense

Cash flow Net income Depreciation
(Payments) = (Depr expense) + expense
$0 = ($170) + $170
Therefore, depreciation is a noncash item.

Cash paid for depreciation is always $0.

10. Other Adjustments:
Eliminate Non-Operating Gains
and Losses
Omit any gains and losses related to investing and financing
activities.
Removed because
◦ Not related to operating activities
◦ Not cash flow amounts
Examples
◦ Gains and losses due to sale of plant assets
◦ Gains and losses from the retirement of bonds payable
Jana Juice did not have any gains or losses related to investing
or financing activities in June 2019.

Jana Juice
Summary of Adjustments
Sales Cost of Wages Rent Advertising Insurance Depreciation Interest Interest Income tax
Net income = revenue - goods sold - expense - expense - expense - expense - expense - expense + income - expense
$1,414 = $7,600 - $1,700 - $1,950 - $700 - $800 - $200 - $170 - $120 + $60 - $606
Adjustments:
Add back 170
depreciation depreciation
expense expense
Subtract 2,400 (-200)
change in change in 900 change in 60 change
operating accounts change in prepaid in interest
assets receivable inventory insurance receivable
500 2,100 550 120 606
Add change change in change in change in change in change in
in operating unearned accounts wages interest income tax
liabilities revenue payable payable payable payable
$2,300 =
$5,700 - $500 - $1,400 - $700 - $800 - $0 - $0 - $0 + $0 - $0
Receipts Payments Payments Payments Payments Payments
Cash from from Payments to Payments for for for Receipts for income
operations = customers - to suppliers - employees - for rent - advertising - insurance - 0 - interest + from interest - tax

Summary of Adjustments to Convert
Income Statement Items to Cash from
Operations
Revenues expenses, gains, and losses in the income statement are
converted to cash receipts and payments.
Adjustments to Convert Income Statement Items to Cash Flows From Operating Activities
Sal e s Cost of goods Operating Depreci ati on Di v i de nd and Interest Income tax
Ne t i ncome = rev enue - sol d - e xpe nses - ex pense + intere st i ncome - e xpe nse + Gai ns - Losses - ex pense
A djustme nts:
Add back
depreci ati on Depreci ati on
e xpe nse ex pense
Subtract (add)
non- operati ng
gai ns ( l osses) Gai ns Losses
Change i n
Subtract change Change i n Change i n div i de nd and
i n ope rating accounts Change i n re lated prepaid i nte rest
assets re cei v abl e i nve ntory e xpe nses re ce i vable
Add change in Change i n Change in Change i n Change i n Change i n

ope rating unearne d accounts re lated accrued interest income tax
l iabil i ti es rev enue payable l iabil i tie s payabl e payabl e
Recei pts Re cei pts f rom Payme nts
Cash from f rom P ayments f or Payments f or di v i de nds and Payments f or i ncome
ope rati ons = customers - me rchandi se - e xpe nses - 0 + i nte re st - f or i nte re st + 0 - 0 - tax
S a le s Co st of go od s O pe ra tin g D ep re ci a tion Di vi de nd an d I nt e re st In co me t a x
Ne t i ncom e = re ve nu e - s ol d - e xp en se s - ex pe ns e + i nt eres t i n co me - exp en se + Gai n s - Los se s - e x pe ns e
Ad ju s tme nt s :
A dd b ack
de preci ati on D ep re ci a tion
e xp en se ex pe ns e
S ub tract (a dd )
no n- op erati ng
ga i ns (l os s es ) Ga i ns Lo s se s
Ch an ge in
S ubt ract cha ng e Ch an ge i n Ch an ge in di vi de nd an d
i n op erati ng acco un ts Ch a nge in re la t ed p re pa i d i nt eres t
a ss et s re ce iv ab l e i nv en t ory e xp en se s re cei va bl e
A dd cha ng e i n Ch an ge i n C ha ng e i n Ch an ge in Ch an ge in C ha ng e i n
o pe ra tin g u ne arn ed a ccou nt s re la t ed a ccrue d i nt e re st in co me t a x
l i ab il i tie s re ve nu e p ay ab l e l ia bi l iti es pa ya bl e pa ya bl e
R ecei p ts Re ce i pt s f rom Pa yme nt s
C as h f rom f ro m Pa ym en ts fo r Pa ym en ts fo r di vi d en ds a nd Pa yme nt s fo r i ncom e
op erati on s = cu st o mers - m erch an di s e - e xp en se s - 0 + i nt eres t - fo r i nt ere st + 0 - 0 - tax
S al e s Cost of goods Ope rati ng De preci ati on Di v ide nd and Int e re st Income tax
N e t i ncome = rev e nue - sol d - e xpe nse s - ex pe nse + int e re st i ncome - e xpe nse + Gai ns - Losse s - e x pe nse
Adj ustme nt s:
Add back
de pre ci ati on De preci ati on
e x pense ex pe nse
Subtract (add)
non-ope rati ng
gai ns (l osse s) Gai ns Losses
Change i n
Subtract change Chang e i n Chang e i n div i de nd and
i n ope rati ng account s Chang e i n re l ate d prepai d i nt e re st
ass et s re ce i vable i nv e ntory e xpe nse s re ce i vabl e
Add change i n Chang e i n Change in Chang e i n Chang e i n Change i n

ope rati ng une arne d accounts re l ate d accrue d i nt e re st i ncome tax
li abi l iti e s rev e nue payabl e l i abi l i ti e s payabl e pay abl e
Re ce i pt s Re ce i pt s from P ay me nt s
Cash f rom f rom Payme nt s for Payme nts for di vi de nds and Payme nts f or i ncome
ope rati ons = cust ome rs - me rchandi se - e xpe nse s - 0 + i nte re st - for i nte re st + 0 - 0 - tax
S al e s C o st of g o od s Op er ati n g De pre c ia ti o n Di v i d en d a n d In te re st In co m e t ax
N e t i n co m e = re ve nu e - s o ld - e x p en se s - e xp e ns e + in te re st i n co m e - ex p en se + Gai n s - Lo sse s - e xp e n se
A d j u stm en ts :
A d d b ac k
d e pr ec i ati o n De pre c ia ti o n
e xp e ns e e xp e ns e
S u bt rac t ( a d d)
no n - o p er ati n g
g ai n s ( l o sse s) Gai n s L os se s
C h an g e i n
Su b tra ct ch an g e C h an ge i n C h an g e i n d i v id e n d a n d
i n o p e rati n g ac co u nts C h an ge i n re l ate d p re p ai d i n ter es t
as se ts r ec ei v ab l e i nv e nt or y e x p en se s r ec ei v ab l e
A d d ch an ge i n C h an ge i n C h an g e i n C h an g e i n C ha n ge i n C h an g e i n
o p e rati n g u n ea rn e d ac co u nt s re l ate d a cc rue d in te re st in co m e t ax
l i ab i l i ti es re ve nu e p ay ab l e l i ab i l i ti e s p ay a bl e pa ya b l e
Rec e i pts Re ce i pts f rom P a ym e nts
C as h from f rom P ay m en ts f o r P ay m en ts f o r di v i d en d s an d P ay me n ts f or i n co me
ope rati ons = cu sto m e rs - m e rch an d i se - e x p en se s - 0 + in te re st - f o r i nte re st + 0 - 0 - tax
Sal e s Cos t of goods Ope r ati ng De pr e ciati on Divi de nd and Int e re st Inc ome tax
N e t inc ome = re v e nue - sol d - e x pe ns e s - ex pe nse + in te re s t incom e - e x pe ns e + Gai ns - Loss e s - e x pe ns e
A dj ustm e nts:
A dd back
de pr e ciati o n De pr e ciati on
e x pe nse ex pe nse
Subtr act ( add)
non- ope rati ng
gai ns (l osse s ) Gai ns Losse s
Ch ange i n
Subtr act c hange Chang e i n Chang e i n divi de nd and
in ope rati ng account s Change in r e lat e d pr e paid i nte r e st
ass e ts re ce i vabl e i nve nto ry e x pe ns e s r e ce i vable
A dd c hange in Chang e i n Change in Chang e i n Cha nge i n Change in

ope rati ng une ar ne d ac counts r e lat e d ac crue d int e re st inc ome tax
l iab il iti e s re v e nue paya ble li abil iti e s pa yabl e payabl e
Re ce ipt s Re ce i pts fr om P ay me nt s
Cash fr om from P a yme nt s f or P ayme nt s for di vi de nds and P ay me nt s for i ncom e
ope r ati ons = cus tom e rs - m e rcha ndise - e x pe ns e s - 0 + int e re st - for i nte r e st + 0 - 0 - tax

Operating Activities Section of
the Statement of Cash Flows
Cash Flows from Operating Activities
Cash received from customers $5,700
Cash paid for inventory ($500)
Cash paid for wages ($1,400)
Cash paid for rent ($700)
Cash paid for advertising ($800)
Net cash provided by operating activities $2,300
There was no cash received or paid for interest, insurance, or taxes,

and depreciation expense is never a cash flow, so these items are not
listed.
This presentation uses the direct method because it lists

all of the cash flows directly.

Cash Flows from Operating
Activities
Direct vs. Indirect Methods
Direct or Indirect Method?
 Differ only in the operating activities format
 Both report the same cash flows from operating activities
Why is the indirect method preferred?

1. Easier and less expensive
2. Companies that use the direct method are required to present a supplemental
disclosure showing the reconciliation of net income to cash from operations.

Operating Activities Section—
Indirect
Cash flows provided by operating activities
Net income $1,414
Adjustments:
Add back depreciation expense 170
Subtract:
Change in accounts receivable 2,400
Change in inventory 900 Net cash provided by operating
Change in prepaid insurance (200) activities is the same amount
Change in interest receivable 60 calculated using either the direct or
Add:
the indirect methods.
Change in accounts payable 2,100
Change in unearned revenue 500
Change in wages payable 550
Change in interest payable 120
Change in income tax payable 606
Total adjustments 886
Cash flow from operating activities 2,300
This is the indirect method because it begins with net income and converts the
accrual basis net income to cash flows.
Construct the
investing and
financing
Learning Objective
LEARNING
OBJECTIVE 4 activities
sections of the
statement of
cash flows.
Cash Flows from Investing Activities
Cause changes in noncash asset accounts, typically,
◦ Noncurrent operating assets—property, plant, and equipment
◦ Investing assets—marketable securities, long-term financial assets and acquisitions
Analyze changes in all noncash asset accounts not used in computing net cash flow from
operating activities
Cash flows decrease due to: An increase in assets

Cash flows increase due to: A decrease in assets

Cash Flows from Investing
Activities
Any changes in the Fixtures and Equipment account in the balance
sheet is usually the result of one or both of the following
transactions:
1. Buying assets, or
2. Selling assets
Jana Juice had only one investing transaction during June—the purchase of
fixtures and equipment.
Asset Asset Capital Capital income
(2) Pay $10,200 cash for ‒10,200 +10,200 = – =
fixtures and equipment Cash Fixtures and
Equip.
The resulting $10,200 cash outflow is listed in the statement of cash flows under cash
flow used for investing activities.
Cash Flows from Financing Activities
Cause changes financing liabilities and stockholders’ equity
accounts
◦ Long-term liabilities and some short-term notes payable
◦ Stockholders’ equity
Analyze changes in all liability and stockholders’ equity accounts not

used in computing net cash flow from operating activities
Cash flows increase due to: An increase in liabilities or
stockholders’ equity
Cash flows decrease due to: A decrease in liabilities or
stockholders’ equity

Jana had two financing activities during June:
(1) Sign note and received +12,000 = +12,000 – =
$12,000 cash Cash Notes Payable
(12) Paid $100 cash dividends -100 = -100 – =

to shareholders Retained
Cash Earnings
The $12,000 cash inflow from the loan is listed in the statement of cash flows under cash flow from financing
activities.
The dividend payment is a financing activity cash outflow and would be deducted from cash flow from
financing activity.

Retained earnings can be analyzed for increases and decreases:
Retained Earnings
660
1,414 Net
Net Income
Income
100
1,974
Cash decreased by $100 as a result of the

dividend payment.
Cash paid for dividends $100

Gains and Losses
FASB requires that financing and investing items be included at gross cash amounts in the
statement of cash flows
Gains
◦ Result when plant assets or financial assets are sold for more than their book value
◦ Are special revenue accounts
Losses
◦ Result when plant assets or financial assets are sold for less than their book value
◦ Are special expense accounts

Jana Juice
Jana Juice
Cash flows provided by operating activities
Net income $1,414
Adjustments:
Subtract:
The operating Change in inventory 900
activities section was Change in prepaid insurance (200)
prepared using the Add:

Change in interest receivable 60 1
indirect method. Change in unearned revenue 500
Cash Flows from Investing Activities
Cash paid for fixtures and equipment (10,200)
Net cash used by investing activities (10,200) 2
The statement of Cash Flows from Financing Activities
Cash received from loans 12,000
cash flows shows the Cash paid for dividends (100) 3
change in ‘cash’ Net cash provided by financing activities 11,900
Net change in cash 4,000
during June 2019. Cash balance, June 1, 2019 6,460
Cash balance, June 30, 2019 $10,460

Noncash Investing and Financing
Activities
Not all significant investing and financing events affect current cash flows
Examples
◦ Issue stock in exchange for land
◦ Purchase a building by borrowing
Noncash investing and financing transactions are supplemental to the

statement of cash flows.

Supplemental Disclosures
Three disclosures are required:
Cash paid for interest and for income taxes if the indirect method is used
A schedule of all noncash investing and financing activities
Policy for determining which highly liquid, short-term investments are treated as cash equivalents

Compute and
interpret ratios that
reflect
Learning Objective a company’s
LEARNING liquidity and
OBJECTIVE 5
solvency using
information reported
in the statement of
cash flows.
Operating Cash Flow
to Current Liabilities
A measure of the ability to liquidate current liabilities.
Applying the Operating Cash Flow to Current Liabilities Ratio to CVS Health:

Operating Cash Flow
Operating Cash Flow to Current Liabilities
CVS Health Corporation vs. Competitors
Over the past three years, CVS Health’ OCFCL ratio compares favorably to the two competitors that
are included in the graph. Walgreens Boots’ ratio is nearer the industry average, while Rite Aid’s OCFCL
is the lowest of the three.
Operating Cash Flow
Operating Cash Flow to Current Liabilities
CVS Health Company vs. Focus Companies

Operating Cash Flow to
Capital Expenditures & Free Cash
Flow Ratios
Helps assess if a firm is able to replace, and expand property, plant,
and equipment.
Applying the Operating Cash Flow to Capital Expenditures Ratio and

Free Cash Flow to CVS Health:

Operating Cash Flow
to Capital Expenditures
Operating Cash Flow to Capital Expenditures
CVS Health Company vs. Competitors
OCFCX shows an improving trend for CVS Health. Its ratio is higher than Rite Aid and lower then
Walgreens Boots, and in a healthy range well above 1.0.

Appendix 4A
Use a
Learning Objective
LEARNING
OBJECTIVE 6 spreadsheet to
construct the
statement of
cash flows.
Step 1: Classify the Balance
Sheet Accounts
We will use the information from Jana Juice to walk through the spreadsheet approach.
O, I, F 6/30/19 6/1/19
Cash $10,460 $6,460
Accounts receivable O 4,100 1,700
Interest receivable O 60 0
Inventory O 1,600 700 For each account other than cash, classify
Prepaid insurance O 600 800 as Operating (O),
Security deposit O 1,800 1,800 Investing (I), or Financing (F)
Equipment, net O,I 10,030 0
Accounts payable O 2,600 500
Unearned revenue O 800 300
Wages payable O 550 0 Two accounts have a double
Interest payable O 120 0 classification
Income tax payable O 606 0
Notes payable F 12,000 0
Common stock F 10,000 10,000
Retained earnings O,F 1,974 660

Step 2: Compute the Changes in
Balance Sheet Accounts
Amount of
O,I,F 6/30/19 6/1/19 Change
Cash $10,460 $6,460 $4,000
Accounts receivable O 4,100 1,700 2,400
Interest receivable O 60 0 60
Subtract the beginning
Inventory O 1,600 700 900
balances in each Prepaid insurance O 600 800 (200)
account from the ending Security deposit O 1,800 1,800 0
balances. Equipment, net O,I 10,030 0 10,030
Accounts payable O 2,600 500 2,100
Unearned revenue O 800 300 500
Wages payable O 550 0 550
Interest payable O 120 0 120
Income tax payable O 606 0 606
Notes payable F 12,000 0 12,000
Common stock F 10,000 10,000 0
Retained earnings O,F 1,974 660 1,314
∆Cash = ∆Liabilities + ∆Stockholders’ Equity ‒ ∆Noncash Assets

Step 3: Handle Accounts with
Single Classifications
Amount of
O,I,F 6/30/2019 6/1/2019 Change Operating Investing Financing
Cash $10,460 $6,460 $4,000
Accounts receivable O 4,100 1,700 2,400 (2,400)
Interest receivable O 60 0 60 (60)
Inventory O 1,600 700 900 (900)
Prepaid insurance O 600 800 (200) 200
Security deposit O 1,800 1,800 0 0
Equipment, net O,I 10,030 0 10,030
Accounts payable O 2,600 500 2,100 2,100
Unearned revenue O 800 300 500 500
Wages payable O 550 0 550 550
Interest payable O 120 0 120 120
Income tax payable O 606 0 606 606
Notes payable F 12,000 0 12,000 12,000
Common stock F 10,000 10,000 0 0

Step 4: Enter the Effects of Investing
and Financing Transactions
that Do Not Involve Cash
An example of an investing/financing transaction would be the purchase of plant
assets with a note payable.
Amount of No Effect
O,I,F 6/30/2019 6/1/2019 Change Operating Investing Financing on Cash
Cash $10,460 $6,460 $4,000
Inventory O 1,600 700 900 (900)
Jana
Jana Juice
Juice had
had NO
NO
noncash
noncash
Equipment, net O,I 10,030 0 10,030 investing/financing
investing/financing
Accounts payable O 2,600 500 2,100 2,100 transactions.
transactions.
Notes payable F 12,000 0 12,000 12,000
Common stock F 10,000 10,000 0 0
Step 5: Analyze the Changes in
Retained Earnings
Accounts that involve two types of cash flows require special attention. The
change in retained earnings involves net income (O) and dividends (F).
Amount of No Effect
Cash $10,460 $6,460 $4,000
Inventory O 1,600 700 900 (900)
Notes payable F 12,000 0 12,000 12,000
Common stock F 10,000 10,000 0 0
Net income 1,414
Dividends ($100)

Step 6: Analyze the Change in Plant
Assets
Another account that involves two types of cash flows is equipment. The change in
the equipment, net account involves depreciation (O) and acquisition of plant
assets (I).
Amount of No Effect
Cash $10,460 $6,460 $4,000
Inventory O 1,600 700 900 (900)
Depreciation 170
Plant assets purchased (10,200)
Notes payable F 12,000 0 12,000 12,000
Common stock F 10,000 10,000 0 0
Net income 1,414
Dividends ($100)
Step 7: Total the Columns
Amount of No Effect
Cash $10,460 $6,460 $4,000
Interest receivable O 60 0 60 (60) The sum of the column
Inventory O 1,600 700 900 (900) totals must equal the
Prepaid insurance O 600 800 (200) 200 change in the cash
Security deposit O 1,800 1,800 0 0 account.
Depreciation 170
Plant assets purchased (10,200)
Notes payable F 12,000 0 12,000 12,000
Common stock F 10,000 10,000 0 0
Net income 1,414
Dividends ($100)
$2,300 ($10,200) $11,900 $0

Step 8: Prepare
the Cash Flow Statement
Jana Juice
Prepare operating first Cash flows provided by operating activities
Net income $1,414
Adjustments:
Subtract:
Change in inventory 900
Change in prepaid insurance (200)
Change in interest receivable 60
Add:
Change in unearned revenue 500
Prepare investing second Cash Flows from Investing Activities
Cash paid for fixtures and equipment (10,200)
Net cash used by investing activities (10,200)
Prepare financing third Cash Flows from Financing Activities
Cash received from loans 12,000
Cash paid for dividends (100)
Net cash provided by financing activities 11,900
Then reconcile the cash account Net change in cash 4,000
Cash balance, June 1, 2019 6,460
Cash balance, June 30, 2019 $10,460

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Week 4 –

9/9/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1

SUA Part 1 Grading

9/9/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 2

9/9/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1-3

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS

Permits users to observe and assess

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Examples of cash equivalents

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Managers refer to cash and cash equivalents as ‘cash’

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Operating Investing Financing

Change in cash and cash equivalents

Where are operating activities reported?

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A likely recurring source that can Repayment

Not likely to recur.

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Option 1: Direct Method

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Sold drinks for +2,400 Operating +2,400 +2,400 +2,400

Sold drinks +2,900 +2,900 +2,900 +2,900

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Collected $1,200 +1,200 –1,200

Paid $40 for –4,040 –4,000 –40 +40 –40

Paid $800 for –800 + 800

Paid $700 for

Paid $400 for –400 –400

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Cash receipts from customers $ 3,900

Cash payments to suppliers 1,500

Cash payments to employees 1,300

Cash payments for occupancy 2,500

Cash payments for advertising 900

Cash payments for insurance 800

Cash payments for interest 40

Net cash provided by (used in) operations ($ 3,140)

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Option 1: Direct Method Often

Examine all cash transactions that occur during the period.

Reconcile the income statement and balance sheet information

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The difference between a revenue or an expense reported in the income

Net Income + Adjustments = Cash flow operations

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The relationship can be rewritten as follows:

Therefore, cash received from customers is $5,700.

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Balance Sheet Income Statement

-500 +900 +2,100 -1,700 +1,700 -1,700

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-500 +900 +2,100 -1,700 +1,700 -1,700

The relationship can be rewritten as follows:

Therefore, cash paid for inventory is $500.