Week 4 - Chapter 13

Statement of Cash Flow

Copyright 2017 & 2018 John Wiley & Sons, Canada, Ltd.
Adapted from material prepared by:
Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley, Aly
Learning Objectives

L O 1: Describe the content and format of the statement of cash flows.

L O 2: Prepare the operating activities section of a statement of cash flows using the direct method.

L O 3: Prepare the investing and financing activities sections and complete the statement of cash flows.

L O 4: Use the statement of cash flows to evaluate a company.

L O 5: Prepare the operating activities section of a statement of cash flows using the direct method.
(Appendix 13A)
Purpose of the Statement of Cash Flows

Helps users assess:

• A company’s ability to generate cash
• What the company did with the cash
This is useful in determining:

Company’s ability to generate future cash flows

• Investing and financing transactions during the period, and
effect upon capital structure
• Making comparisons with other companies
Definition of Cash Classification of Cash Flows

Cash may include

cash equivalents Cash receipts
• Short-term, highly and payments
liquid held for trading are classified into
investments that
have insignificant three categories:
risk and are readily • Operating activities
converted to cash • Investing activities
within a short period
• Financing activities
of time (usually
within three months)
Operating Activities

Cash effects of
transactions that
Where the related
create revenues
account is an
and expenses that
income statement
enter into
account
determination of
profit

Includes relevant noncash

current assets and current
liabilities on the statement of
financial position
Investing Activities

Purchasing and disposing of:

• Long-term investments not held for trading

• Long-lived assets

Lending money and collecting the loans

Generally includes non-current asset items (e.g., long-

lived investments, property, plant, and equipment) on the
statement of financial position
Financing Activities

Obtaining cash from Obtaining cash from Generally includes

issuing debt and selling common and non-current liabilities,
repaying the preferred shares and and shareholders’
amounts borrowed paying dividends equity items
Significant Noncash Activities

If it does not affect cash, do Not report in statement of cash

flows

Report in separate note to the financial statements

Examples:
• Issue of shares to purchase assets or to reduce liabilities
• Conversion of debt into equity
• Exchange of property, plant, and equipment
Discussion Question

How would the following

transaction be reported
in the statement of cash “A company acquired a piece
flows? of equipment by issuing
common shares for part of
the cost and obtaining a bank
loan for the remainder”
Format of Cash Flow Statement
Preparation of the Statement of Cash Flows

Step 1: Step 2:
Prepare Prepare
operating investing
activities activities
section section

Step 3: Step 4:
Prepare Complete
financing the
activities statement of
section cash flows
Step 1: Operating Activities

• Determine the net cash provided (used) by operating activities by

converting net income from an accrual basis to a cash basis
• Conversion may be done by either the indirect method or the
direct method
Both methods arrive at the same amount of net cash provided
(used) by operating activities
• Most companies favour the indirect method for the following
reasons
o Easier to prepare
o Reveals less information to competitors
Prepare the Operating Activities Section Using
the Indirect Method

• Start with Net Income and add or deduct items not

affecting cash to arrive at net cash provided (used) by
operating activities
+ Noncash expenses such as depreciation and losses
− Noncash losses and gains
+ Decreases in current asset accounts and increases in
current liability accounts
− Increases in current asset accounts and decreases in
current liability accounts
Conversion to Net Cash Provided (Used) by
Operating Activities – Indirect Method:

Noncash expenses Depreciation expense (property and equipment ) Add

blank Amortization expense (intangible assets) Add
Losses and gains Losses including impairment losses Add
blank Gains and reversal of impairment losses Deduct
Changes in certain
Increase in current asset account Deduct
noncash current asset
Noncash current asset Decrease in current asset account Add
And current liability Increase in current liability account Add
accounts Decrease in current liability account Deduct
Net Cash Provided (Used) by Operating
Activities (1 of 2)
Step 2: Investing Activities

• Measure cash flows relating to non-current asset

accounts; long-term investments; property, plant and
equipment; intangible assets
• Reported the same under both direct and indirect
methods
• Asset acquisitions are uses of cash; disposals are
sources of cash (for the proceeds of disposition)
Depreciation expense is a noncash charge
Net Cash Provided (Used) by Investing Activities
 Step 3: Financing Activities

Determine the net cash

Changes to notes, loans, and
provided (used) by financing Analyze share capital and
bonds payable are analyzed
activities by analyzing retained earnings accounts
to determine cause of
changes in non-current for changes and their cause
change
liability and equity accounts

Amortization of
premium or Profit is reported in
discount (if any) are the operating
noncash charges activities section
and have no effect
Net Cash Provided (Used) by Financing Activities
Step 4: The Statement of Cash Flows

Complete the statement of cash flows

Determine increase (decrease) in cash

Ensure ending cash balance agrees to that reported on statement of financial position

Identify any noncash disclosures

Statement of Cash Flows Indirect Method (1 of 2)
Statement of Cash Flows Indirect Method (2 of 2)
 Using Cash Flows to Evaluate a Company

• Corporate Life Cycle and

Cash Flows
• four phases: introductory,
growth, maturity and
decline can help in the
understanding of a
company’s cash flow from
its operating, investing
and financing activities
Free Cash Flow

• Measures discretionary cash flow remaining from

operating activities available to use to expand
operations, reduce debt, go after new opportunities, or
pay additional dividends, among other alternatives

Net cash provided (used) by operating activities – net

capital expenditures – dividends paid

Higher is better
Prepare the Operating Activities Section Using
the Direct Method (Appendix 13A)

• Details cash receipts and payments

• Similar to indirect method:
Adjusts income statement from accrual basis to cash basis
in order to arrive at net cash provided (used) by operating
activities
However, whereas indirect method adjusts total net
income, direct method adjusts each individual revenue
and expense item in the income statement
Cash Receipts from Customers

If other cash receipts (such as interest), these must be

adjusted for any receivable amounts as was done above

The relationship among cash receipts from customers,

revenues from sales, and changes in accounts receivable is:
Cash Payments to Suppliers

The relationship among cash payments to suppliers, cost

of goods sold, changes in inventory, and changes in
accounts payable is:
Cash Payments for Operating Expenses

The relationship among cash payments for operating

expenses, changes in prepaid expenses, and changes in
accrued expenses payable is:
 Cash Payments for Income Tax

• The relationship among cash payments for income tax,

income tax expense, and changes in income tax payable
is:

• A similar calculation would be made for cash payments

for interest
Summary of Conversion of Net Cash Provided
(Used) by Operating Activities – Direct Method

Cash Receipts Cash Payments

blank
(Revenues) (Expenses)

Current assets blank Blank

Increase in account balance Deduct (−) Add (+)
Decrease in account balance Add (+) Deduct (−)
Current liabilities Blank Blank
Increase in account balance Add (+) Deduct (−)
Decrease in account balance Deduct (−) Add (+)
Net Cash Provided (Used) by Operating
Activities (2 of 2)

Direct Method
Comparing IFRS and ASPE

Comparing IFRS and ASPE Review

Key standard International Financial Accounting standards for
Differences Reporting standards IFRS private Enterprises (ASPE)
Classification of activities Interest and dividends Interest and dividends
received may be classified as received are classified as
operating or investing operating activities.
activities.
blank Interest and dividends paid Interest paid is classified as
may be classified as an operating activity.
operating or financing Dividends paid are classified
activities. as a financing activity.
blank Once the choice is made, it blank
must be applied consistently.
Using Cash Flows to Evaluate a Company

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