12

Statement of Cash Flows

Kimmel ● Weygandt ● Kieso

Accounting, Sixth Edition
12-1
 CHAPTER OUTLINE

LEARNING OBJECTIVES

Discuss the usefulness and format of the

1 statement of cash flows.

Prepare a statement of cash flows using the

2 indirect method.

Use the statement of cash flows to evaluate a

3 company.

12-2
 Discuss the usefulness and format of
LEARNING
OBJECTIVE 1 the statement of cash flows.

USEFULNESS OF THE STATEMENT OF CASH

FLOWS
Provides information to help assess:
1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and meet obligations.

3. Reasons for difference between net income and net cash

provided (used) by operating activities.

4. Cash investing and financing transactions during the

period.
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 CLASSIFICATION OF CASH FLOWS

Operating Investing Financing

Activities Activities Activities

Income Changes in Changes in

Statement Items Investments Long-Term
and Long-Term Liabilities and
Assets Stockholders’
Equity

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 CLASSIFICATION OF CASH FLOWS

Operating activities—Income statement items

Cash inflows: ILLUSTRATION 12-1
Typical receipt and payment
classifications
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.

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 CLASSIFICATION OF CASH FLOWS

Investing activities—Changes in investments and long-

term assets ILLUSTRATION 12-1
Typical receipt and payment
Cash inflows: classifications

From sale of property, plant, and equipment.

From sale of investments in debt or equity securities of other
entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other
entities.
To make loans to other entities.
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 CLASSIFICATION OF CASH FLOWS

Financing activities—Changes in long-term liabilities

and stockholders’ equity ILLUSTRATION 12-1
Typical receipt and payment
Cash inflows: classifications

From sale of common stock.

From issuance of debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire
capital stock (treasury stock).

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 A useful way to think of it…
The Balance Sheet

Current Assets Current Liabilities

Long-Term Assets Long-Term Liabilities

Owners' Equity

8
 A useful way to think of it…
The Balance Sheet

Current Assets Current Liabilities

Operating* Operating*

Long-Term Assets Long-Term Liabilities

Investing Financing

Owners' Equity
Financing

9
*See exceptions on next slide
 Exceptions are noted in red:
Exceptions are noted in red:

Investing Activities include:

Lending money to others (even short-term loans!)
Being repaid in cash the principal on amounts lent
(even short-term loans!)

Financing Activities include:

Borrowing money (even short-term!)
10
 Useful to keep in mind:
Cash Flow: Type of Cash Flow:

Interest Received Operating

Interest Paid Operating
Dividends Received Operating
Dividends Paid Financing
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 DO IT! 1 Cash Flow Activities

Illustration: Classify each of these transactions by type of cash

flow activity.
1. Issued 100,000 shares of $5 par value
Financing
common stock for $800,000 cash.
2. Borrowed $200,000 from Castle Bank, signing
a 5-year note bearing 8% interest.
Financing
3. Purchased two semi-trailer trucks for $170,000
Investing
cash.
4. Paid employees $12,000 for salaries and
Operating
wages.
5. Collected $20,000 cash for services performed. Operating
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 SIGNIFICANT NONCASH ACTIVITIES

1. Direct issuance of common stock to purchase assets.

2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Companies report noncash activities in either a

 separate schedule (bottom of the statement) or
 separate note to the financial statements.

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 ACCOUNTING ACROSS THE ORGANIZATION
Net What?

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 ILLUSTRATION 12-2
Format of statement of cash flows

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 The Format of the
Statement of Cash Flows

Cash provided by (used in):

Operating activities $XXX
Investing activities XXX
Financing activities XXX
Net increase (decrease) in cash $XXX
Cash—beginning of year XXX
Cash—end of year $XXX

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 FORMAT OF THE STATEMENT OF CASH
FLOWS

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.

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 Different Methods for Reporting
CFs from Operating Activities
• Direct method
– Lists cash flows from operating activities by
type (e.g., cash received from customers,
cash paid to suppliers, etc.)
• Indirect method
– Starts with accrual-basis net income, and
adjusts that number to arrive at total cash
flows from operating activities.

18
 Direct vs. Indirect
Direct Method
Operating activities:
Cash received from customers. . . . . . . . . . . . . . . $1,800
Cash paid to suppliers………. . . . . . . . . . . . . . . . $1,000
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . 50 (1,050)
Cash flows from operating activities. . . . . . . . . . . 750
Indirect Method You get
Operating activities: the same
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,325 answer
+ Decrease in Accounts Receivable . . . . . . . . . . $ 500 with
either
- Decrease in Accounts Payable . . . . . . . . . . . . . (1,000)
method!
- Gain on Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . (75) (575)
Cash flows from operating activities. . . . . . . . . . . 750
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 Indirect Method - Example
Indirect Method*
Operating activities:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
+ Depreciation Expense . . . . . . . . . .. . . . . . . . . $ 600
+ Loss on sale of equipment . . . . . . . . . . . . . . . . 1,200
- Gain on Sale of Land . . . . . . . . . . . . . . . . . . . . . (100) 1,700
Cash flows from operating activities. . . . . . . . . . . 11,700

*of preparing the statement of cash flows (of calculating cash flows from operating
activities)
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 Usefulness
Usefulness and
and Format
Format

Indirect and Direct Methods

Companies favor the indirect
method for two reasons:
1. Easier and less costly to
prepare.

2. Focuses on differences
between net income and net
cash flow from operating
activities.

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 Prepare a statement of cash flows using
LEARNING
OBJECTIVE 2 the indirect method.

Three sources of information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

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 Preparing the Statement of Cash Flows

Three Major Steps:

ILLUSTRATION 12-3
Three major steps in preparing
the statement of cash flows

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 Preparing the Statement of Cash Flows

Three Major Steps:

ILLUSTRATION 12-3
Three major steps in preparing
the statement of cash flows

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 Preparing the Statement of Cash Flows

Three Major Steps:

ILLUSTRATION 12-3
Three major steps in preparing
the statement of cash flows

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 APPENDIX 12A: Prepare a statement of
LEARNING
OBJECTIVE 4 cash flows using the direct method.

1. Compute net cash provided by operating activities by

adjusting each item in the income statement from the
accrual basis to the cash basis.

2. Companies report only major classes of operating

cash receipts and cash payments.

3. For these major classes, the difference between

cash receipts and cash payments is the net cash
provided by operating activities.

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 STEP 1: OPERATING ACTIVITIES

Illustration 12A-2
Major classes of cash
12-27 receipts and payments LO 4
 DIRECT METHOD

ILLUSTRATION 12A-1
Comparative balance sheets, income statement, and
additional information for Computer Services Company

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ILLUSTRATION 12A-1
Comparative balance sheets, income statement, and
additional information for Computer Services Company

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 Change in
2017 2016 Account Balance

ILLUSTRATION 12A-1
Additional information for 2017:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for
equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less
accumulated depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000
was also purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
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 STEP 1: OPERATING ACTIVITIES

CASH RECEIPTS FROM CUSTOMERS

For Computer Services, accounts receivable decreased
$10,000. ILLUSTRATION 12A-4
Analysis of accounts receivable
Accounts Receivable
1/1/017 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000

12/31/17 Balance 20,000

ILLUSTRATION 12A-5
Formula to compute cash receipts from customers—direct method

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 STEP 1: OPERATING ACTIVITIES

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
$5,000 and cash payments to suppliers were $139,000.
Inventory
1/1/17 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000

12/31/17 Balance 15,000

Accounts Payable
Payment to suppliers 139,000 1/1/17 Balance 12,000
Purchases 155,000

12/31/17 Balance 28,000

ILLUSTRATION 12A-8
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 STEP 1: OPERATING ACTIVITIES

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
$5,000 and cash payments to suppliers were $139,000.

Illustration 12A-9
Formula to compute cash payments
to suppliers—direct method

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 STEP 1: OPERATING ACTIVITIES

CASH PAYMENTS FOR OPERATING EXPENSES

Cash payments for operating expenses were $115,000.

ILLUSTRATION 12A-10
Computation of cash payments for operating expenses

ILLUSTRATION 12A-11
Formula to compute cash payments for operating expenses—direct method
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 STEP 1: OPERATING ACTIVITIES

CASH PAYMENTS FOR INTEREST

In 2017, Computer Services’ had interest expense of $42,000.

Interest Payable
Cash paid for interest 42,000 1/1/17 Balance
0
Interest expense
42,000
12/31/17 Balance
0

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 STEP 1: OPERATING ACTIVITIES

CASH PAYMENTS FOR INCOME TAXES

Cash payments for income taxes were $49,000.

Income Tax Payable

Cash paid for taxes 49,000 1/1/17 Balance
8,000
Income tax expense
47,000
12/31/17 Balance
6,000

ILLUSTRATION 12A-13
Formula to compute cash payments for income taxes—direct method

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 STEP 1: OPERATING ACTIVITIES

Illustration 12A-14
Operating activities section of the statement of cash flows

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 STEP 2: INVESTING AND FINANCING ACTIVITIES

Increase in Equipment. (1) Equipment purchased for $25,000,

and (2) equipment sold for $4,000, cost $8,000, book value
$7,000. Illustration 12A-15
Analysis of equipment
Equipment
1/1/17 Balance 10,000 Cost of equipment sold 8,000
Purchases 25,000
12/31/17 Balance 27,000

Accumulated Depreciation
Equipment sold 1,000 1/1/17 Balance
1,000
Depreciation expense
3,000
12/31/17 Balance
3,000

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 STEP 2: INVESTING AND FINANCING ACTIVITIES

Increase in Equipment. (1) Equipment purchased for $25,000,

and (2) equipment sold for $4,000, cost $8,000, book value
$7,000.
Cash 4,000
Accumulated Depreciation—Equipment 1,000
Loss on Disposal of Plant Assets 3,000
Equipment 8,000

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 STEP 2: INVESTING AND FINANCING ACTIVITIES

Increase in Land. Land increased Significant noncash

$110,000. The company purchased investing and financing
land of $110,000 by issuing bonds. transaction.

Increase in Building. Acquired Investing

building for $120,000 cash. transaction.

Increase in Bonds Payable. Bonds

Significant noncash
Payable increased $110,000. The
investing and financing
company acquired land by
transaction.
exchanging bonds for land.

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 STEP 2: INVESTING AND FINANCING ACTIVITIES

Increase in Common Stock.

Financing
Increase in Common Stock of
transaction.
$20,000. Increase resulted from the
issuance of new shares of stock.

Increase in Retained Earnings. The

$116,000 net increase in Retained
Financing
Earnings resulted from net income of
transaction
$145,000 and the declaration and (cash dividend)
payment of a cash dividend
of $29,000.

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 Illustration 12A-16
Statement of cash flows,
2017—direct method

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 STEP 3: NET CHANGE IN CASH

Compare the net change in cash on the Statement of Cash

Flows with the change in the cash account reported on the
Balance Sheet to make sure the amounts agree.

ILLUSTRATION 12A-1
Comparative balance sheets (partial) for Computer Services Company
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