Statement of Cash FlowsStatement of Cash Flows

The Statement of Cash Flows provides relevant information about the cash receipts and cash payments of an enterprise during a period. It provides answers to questions:

1. Where did the cash come from during the period?2. What was the cash used for during the period?3. What was the change in the cash balance during the

period?

Three different activities:

Operating,

Content and Format

The Statement of Cash FlowsThe Statement of Cash Flows

LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.

Investing, Financing

Illustration 5-24Illustration 5-24

Statement of Cash Flows Statement of Cash FlowsStatement of Cash Flows

Cash flow from Operating Activities

Net income (loss) (50,000)$

Adjustment to reconcile net income to cash:

Depreciation expense 22,000

Decreased in Accounts Receivable 2,700

I ncrease in I nventory (12,000)

I ncrease in Accounts Payable 3,000

Cash from Operations (34,300)

Cash flow from I nvesting Activities

Purchase of Equipment (10,000)

Sale of plant assets 5,400

Sale of land 46,000

Cash from I nvesting Activities 41,400

Cash flow from Financing Activities

Sale of common stock 430,000

Purchase of company stock (47,000)

Cash from Financing Activities 383,000

Net Change in Cash 390,100$

OperatingOperating

InvestingInvesting

FinancingFinancing

Statement of Cash FlowsStatement of Cash Flows

Cash Flows from Operating Activities

Reports the cash effects of transactions that enter into the determination of net income.

The direct method and indirect method are two different approaches to report cash flows from operations. Each has its advantages and disadvantages, but each reconciles to the same number for total cash flows from operating activities.

Preparation – Indirect ApproachStatement of Cash Flow (in thousands)

Operating activities

Net income 50,000$

Depreciation expense 40,000

I ncrease in Accts Receivable (10,000)

I ncrease in Accts Payable 5,000

Cash fl ow f rom operations 85,000

Investing activities

Purchase of equipment (8,000)

Financing activities

Proceeds f rom notes payable 20,000

Dividends paid (5,000)

Cash fl ow f rom financing 15,000

Increase in cash 92,000$

The Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Noncash credit to revenues.

Noncash charge to expenses.

Statement of Cash FlowsStatement of Cash Flows

Cash Flows from Investing Activities

Reports cash effects of transactions that result in a change in long-term assets or investment portfolios.

For example:Buying or selling property, plant, or equipmentBuying or selling financial investment instruments

Statement of Cash FlowsStatement of Cash Flows

Cash Flows from Financing Activities

Reports cash effects of transactions that result in a change in long-term liabilities and stockholder’s equity.

For example:Acquiring or paying down borrowingsIssuing capital stockPaying dividends to stockholders

Cash flows from Operating Activities: $$

Cash flows from Investing Activities: $$

Cash flows from Financing Activities: $$

Net increase in cash $$Cash at beginning of year $$Cash at end of year $$

Basic Format for theStatement of Cash Flows

Involve the purchase and sale of products or services

Involve the acquisition and saleof long-term assets

Involve the issuance and paymentof long-term liabilities and stock

Statement of Cash Flows Statement of Cash FlowsStatement of Cash Flows

Cash flow from Operating Activities

Net income (loss) (50,000)$

Adjustment to reconcile net income to cash:

Depreciation expense 22,000

Decreased in Accounts Receivable 2,700

I ncrease in I nventory (12,000)

I ncrease in Accounts Payable 3,000

Cash from Operations (34,300)

Cash flow from I nvesting Activities

Purchase of Equipment (10,000)

Sale of plant assets 5,400

Sale of land 46,000

Cash from I nvesting Activities 41,400

Cash flow from Financing Activities

Sale of common stock 430,000

Purchase of company stock (47,000)

Cash from Financing Activities 383,000

Net Change in Cash 390,100$

OperatingOperating

InvestingInvesting

FinancingFinancing

ReviewIn preparing a statement of cash flows, which of the In preparing a statement of cash flows, which of the following transactions would be considered an following transactions would be considered an investing activity?investing activity?

a. a. Sale of equipment at book valueSale of equipment at book value

b. b. Sale of merchandise on creditSale of merchandise on credit

c. c. Declaration of a cash dividendDeclaration of a cash dividend

d. d. Issuance of bonds payable at a discountIssuance of bonds payable at a discountreceivable.receivable.

The Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

For each of the following transactions, indicate the direction of the cash flow adjustment [inflow or outflow, add or subtract] and the section in which each transaction should be reported on a Statement of Cash Flows [operating, investing, or financing]. Identify non-cash transactions as supplementary information to be found in the Footnotes of the Financial Statements.

1) The company purchases its own Common Stock in the open market

answer: Cash Outflow; Financing

2) The company issues Preferred Stock in exchange for Land

answer: Supplementary Information in Footnotes

3) The company borrowed cash from the bank by issuing a 90-day Note

answer: Cash Inflow; Financing

4) Twenty-Year Bonds are issued

answer: Cash Inflow; Financing

5) Accounts Receivable decreased during the year.

answer: Add back to Operating Section

6) Income Tax Payable decreased during the year.

answer: Subtract from Operating Section

7) Accounts Payable increased during the year.

answer: Add back to Operating Section

8) Cash Dividends are declared and paid to Common Stockholders.

answer: Cash Outflow; Financing

5) Common Stock is issued to a creditor to pay off a long term loan.

answer: Supplementary information in Footnotes

10) A new piece of Machinery is acquired with cash.

answer: Cash Outflow; Investing

11) Stock of another company is acquired as an Investment.

answer: Cash Outflow; Investing

12) Interest Payable decreased during the year.

answer: Subtract from Operating Section

13) Wages Payable decreased during the year.

answer: Subtract from Operating Section

10) Gain on Sale of Equipment was recognized in Income.

answer: Subtract from Operating Section

15) Purchased a new Copier by issuing a 90-day Note

answer: Supplementary information in Footnotes

16) Unearned Revenue increased during the year.

answer: Add back to Operating Section

17) Prepaid Insurance increased during the year.

answer: Subtract from Operating Section

18) Sold shares of a long-term investment in Nike Company.

answer: Cash Inflow; Investing

15) Depreciation for Operating Equipment was reported on the Income Statement

answer: Add back to Operating Section

20) Loss on Sale of Land was reported on the Income Statement.

answer: Add back to Operating Section

21) Net Income on the Income Statement

answer: Operating Section