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Statement of Cash Flows

Chapter 22

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Understanding the purpose of a statement of cash

flows.

Learning Objective 1

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Learning Unit 22-1

What are the required financial statements?1 Income statement2 Statement of retained earnings3 Balance sheets4 Statement of cash flows

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The statement of cash flows summarizesthe sources and uses of cash by a company

during an accounting period.

The statement of cash flows summarizesthe sources and uses of cash by a company

during an accounting period.

Learning Unit 22-1

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Learning Unit 22-1

The statement of cash flows consists of three main sections:

1 Operating activities2 Investing activities3 Financing activities A fourth classification is called “non-cash

investing and financing activities.”

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Prepare the Operating Activities

section of the statement of cashflows using the indirect method.

Learning Objective 2

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Learning Unit 22-1

The indirect method begins with the bottom line of the income statement and works backward to compute net cash flow from operating activities.

Accrual net income from operating activities is adjusted to cash net income.

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Statement of Cash Flows (Indirect Method)Year Ended December 31, 200x

Cash Flows from Operating Activities:Net Income from Operations $ 9,960Add (deduct) items to Convert Net Incomefrom Accrual Basis to Cash Basis:Depreciation expense 11,000Increase in Accounts Receivable (4,940)Decrease in Merchandise Inventory 2,000Increase in prepaid insurance (200)Increase in Notes Payable (Short-Term) 2,600Decrease in Accounts Payable (100)Net Cash Provided by Operating Activities $20,420

Cash Flows from Operating Activities:Net Income from Operations $ 9,960Add (deduct) items to Convert Net Incomefrom Accrual Basis to Cash Basis:Depreciation expense 11,000Increase in Accounts Receivable (4,940)Decrease in Merchandise Inventory 2,000Increase in prepaid insurance (200)Increase in Notes Payable (Short-Term) 2,600Decrease in Accounts Payable (100)Net Cash Provided by Operating Activities $20,420

Learning Unit 22-1

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CurrentAssetsCurrentAssets

Add toNet Income

if this account has:

CurrentLiabilities

CurrentLiabilities

DecreasedDecreased

IncreasedIncreased

IncreasedIncreased

DecreasedDecreased

Learning Unit 22-1

Deduct fromNet Income

if this account has:

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Learning Unit 22-1

How is net cash flows from investing activities determined?

Add sale of stocks and bonds, and deduct the purchase of stocks and bonds.

Add disposals (sale) of plant assets, and deduct purchase of plant assets.

Add loan collections, and deduct loans of cash to borrowers.

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Learning Unit 22-1

How is net cash flows from financing activities determined?

Add cash proceeds from issuance of notes. Deduct payment of dividends.

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Learning Unit 22-1

Add cash proceeds from issuance of common stocks.

Deduct amounts used to retire bonds payable.

Deduct amounts to repurchase treasury stock.

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Transactions with customers, vendors,and employees are Operating Activities.

Transactions with customers, vendors,and employees are Operating Activities.

Transactions involving the purchase orsale of plant assets are Investing Activities.

Transactions involving the purchase orsale of plant assets are Investing Activities.

Transactions involving creditors orstockholders are Financing Activities.

Transactions involving creditors orstockholders are Financing Activities.

Learning Unit 22-1

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Prepare the Operating Activities

section of the statement of cashflows using the direct method.

Learning Objective 3

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Learning Unit 22-2

The direct method determines the amount of cash inflows and cash outflows.

It identifies the activities that increase or decrease cash.

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Statement of Cash Flows (Direct Method)Year Ended December 31, 200x

Cash Flows from Operating Activities:Cash Received from Customers $185,160Cash Paid for Merchandise Inventory ($101,500)Cash Paid for Salaries (51,040)Cash Paid for Insurance (7,400)Cash Paid for Rent (3,600)Cash Paid for Miscellaneous Expenses (1,200)Total Cash Paid for Operating Activities (164,740)Net Cash Flows from Operating Activities $ 20,420

Cash Flows from Operating Activities:Cash Received from Customers $185,160Cash Paid for Merchandise Inventory ($101,500)Cash Paid for Salaries (51,040)Cash Paid for Insurance (7,400)Cash Paid for Rent (3,600)Cash Paid for Miscellaneous Expenses (1,200)Total Cash Paid for Operating Activities (164,740)Net Cash Flows from Operating Activities $ 20,420

Learning Unit 22-2

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Prepare a statement

of cash flows.

Learning Objective 4

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The statement of cash flows...The statement of cash flows...

– summarizes the changes in thesources and uses of cash.

– summarizes the changes in thesources and uses of cash.

– proves net increase (or decrease) in cash.– proves net increase (or decrease) in cash.

Learning Unit 22-2

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Statement of Cash Flows(Investing Activities)

Year Ended December 31, 200x

Purchase of Plant Asset ($30,000)Net Cash Used by Investing Activities (30,000)Purchase of Plant Asset ($30,000)Net Cash Used by Investing Activities (30,000)

Learning Unit 22-2

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Statement of Cash Flows(Financing Activities)

Year Ended December 31, 200x

Issuance of Long-Term Note $ 8,000Issuance of Common Stock 10,000Payment of Dividends (8,000)Net Cash Provided by Financing Activities $10,000

Issuance of Long-Term Note $ 8,000Issuance of Common Stock 10,000Payment of Dividends (8,000)Net Cash Provided by Financing Activities $10,000

Learning Unit 22-2

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Statement of Cash FlowsYear Ended December 31, 200x

Net Cash Flows from Operating Activities $20,420Net Cash Used by Investing Activities (30,000)Net Cash Provided by Financing Activities $10,000Net increase in Cash $ 420

Net Cash Flows from Operating Activities $20,420Net Cash Used by Investing Activities (30,000)Net Cash Provided by Financing Activities $10,000Net increase in Cash $ 420

Learning Unit 22-2

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End of Chapter 22