INTERMEDIATE

ACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

Prepared by
Gabriela H. Schneider, CMA; Grant MacEwan College
 CHAPTER

23
Statement of Cash Flows
 Learning Objectives
1. Describe the purpose and uses of the statement
of cash flows.
2. Define cash and cash equivalents.
3. Identify the major classifications of cash flows
and explain the significance of each.
4. Contrast the direct and indirect methods of
calculating net cash flow from operating
activities.
 Learning Objectives
5. Differentiate between net income and net cash
flows from operating activities.
6. Prepare a statement of cash flows.
7. Read and interpret a statement of cash flows.
8. Identify the financial reporting and disclosure
requirements for the statement of cash flows.
9. Use a work sheet to prepare a statement of cash
flows.
 Statement of Cash Flows

Introduction Preparing a Reporting and Use of a

to the Statement of Disclosure Worksheet
Cash Flows Requirements
Statement Cash flow
Sources of Preparation
information and statements
Analysis of
Usefulness steps Cash flow per transactions
First illustration share Completing
What is cash? Financial
Second the
reporting worksheet
Classification illustration example
of cash flows Third illustration
Format of the Interpreting the
statement statement
 Usefulness of the
Statement of Cash Flows
• The information may help users assess the
following:
• The entity’s ability to generate future cash flows
• The entity’s ability to pay dividends and meet
obligations
• The reasons why net income and net cash flow
from operating activities differ
• Cash and non-cash investing and financing
activities during the year
 Cash and Cash Equivalents
Cash Cash Equivalents
• Cash on hand • Investments that are
• Demand deposits • Short term,
• Highly liquid, and
All references to Cash • Easily converted to a
include Cash Equivalents known amount of cash
when discussing the • Not subject to a
Statement of Cash Flows significant change in
value
 The Cash Flow Statement
• The cash flow statement provides
information about:
• the cash receipts (cash inflows), and
• uses of cash (cash outflows) during the
year
• Inflows and outflows are reported for:
• operating activities
• investing activities, and
• financing activities during the year
 Statement of Cash Flows:
Concept
Operating
activities
Inflows
Investing
activities

Financing
activities Cash
Pool Operating
activities
Investing
activities
Outflows
Financing
activities
 Preparing a
Statement of Cash Flows
• There are TWO methods of preparing
the statement of cash flows:
• Indirect method
• Direct method
• The indirect method derives cash flows
from accrual basis statements
• The direct method determines cash
flows directly for each source or use of
cash
 Statement of Cash Flows:
Indirect Method - Concept

Earned + Eliminate
Revenues non-cash revenues

Operating
Net Income cash flow

Expenses Eliminate
Incurred - non-cash charges
 The Statement of Cash Flows:
Indirect Method
Accrual Basis Statements Cash Flow Statement
Income Statement items Operating activities:
and changes in Current Adjust net income for accruals,
Assets and Current Liabilities non-cash charges and non-
operating gains/losses

Balance Sheet: Investing activities:

Changes in Inflows from sale of assets and
outflows from purchases of assets
Non-Current Assets
Financing activities:
Balance Sheet:
Inflows and outflows from loan
Changes in Non-Current
and equity transactions
Liabilities and Equity
Direct Method (Operating Activities)
Inflows Outflows
• From sales of goods • To suppliers for
or services inventory
• To employees for
• From returns on services
loans (interest) and • To government for
returns on equity taxes
securities • To lenders for
(dividends) interest
• To others for
expenses
 Investing and
Financing Activities
• For the direct and indirect methods:
the sections reporting investing and
financing activities are the same
• The net inflows or outflows for each
section (under the two methods) are
identical
• The operating activities are reported
differently
 Format of the Statement of
Cash Flows: Indirect Method
Cash flows from operating activities:
Net Income (Loss) $ XXX
Adjustments (List individual inflows and outflows) $ XX
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX

Cash flows from financing activities:

(List individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
 Format of the Statement of Cash
Flows: Direct Method
Cash flows from operating activities:
Cash receipts (individually): Inflows $ XXX
Cash payments to suppliers (separately): outflows ($ XXX)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
 Indirect Method: Example
Intelmarkets begins operations on January 1, 2000.
The income statement and balance sheet for year 2000 follow.

Income Statement
Revenues: $ 200,000
Less: Cost of goods sold 110,000
Gross Margin 90,000
Less: Operating expenses 40,000
Net Income before Tax: 50,000
less: Income Tax 15,000
Net Income after Tax $ 35,000

Operating expenses do not contain any non-cash charges

 Indirect Method: Example
Balance Sheet
Dec 31, 2000 Jan 1, 2000
Assets:
Cash $ 25,000 $-0-
Accounts Receivable 32,000 -0-
Inventory 29,000 -0-
Land 110,000 -0-
Total $196,000 $-0-

Liabilities and Equity:

Accounts Payable $ 24,000 $-0-
Common Stock 147,000 -0-
Retained Earnings 25,000 -0-
Total $196,000 $-0-
 Operating Activities
Accrual Basis Cash Flow
Net Income after Tax $35,000 Net Income after Tax $35,000

Accounts Receivable +$ 32,000 Less: Increase in A/R $ 32,000

Inventory +$ 29,000 Less: Increase in Inv. $ 29,000
Accounts Payable +$ 24,000 Add: Increase in A/P $ 24,000

Changes between beginning

Operations: Net Outflow 2,000
and ending balances

See explanations next slide

 Operating Activities
Accounts Receivable
Increased by $32,000

Cash collections are

less than revenue
recognized

Reduce net income

by $32,000 to derive
cash flows from
operations
 Operating Activities
Inventory increased
by $29,000
Reduce net income
Cost of goods sold by $29,000 to derive
for the year decreases cash flows from
by $29,000 operations

Net income for the year

increases by $29,000
 Investing and
Financing Activities
Accrual Basis Cash Flow
Investing Activities:
Land + $110,000 Purchase of Land: ($110,000)
Outflow ($110,000)

Financing Activities:
Common Stock +$147,000 Issue of Common Stock: $147,000
Retained Earnings+$ 25,000 Dividends paid: ( 10,000)
Inflow 137,000
Beg Bal: $ 0
Net Income: 35,000
less: Dividends( 10,000)
End Balance: $25,000
 Cash Flow Statement:
(Indirect Method) - Summary
• Cash used by operating activities:($ 2,000)
• Cash used by investing activities:($110,000)
• Cash from financing activities:
$137,000
• Net inflow for the year $ 25,000
• Beginning cash balance: $ -0-
• Ending cash balance $ 25,000
 Indirect Method:
Special Items - Summary
• Note the following adjustments to net
income in deriving operating cash flow:
• Loss on sale of assets is added to net income
• Gain on sale of assets is deducted from net
income
• Discount on bonds payable (as amortized) is
added to net income
• Premium on bonds payable (as amortized) is
deducted from net income
 Direct Method: Concept

Cash Receipts Cash Payments

From sale of To suppliers

goods and
services to To employees Cash
customers flow
less For operating exp equals from
From receipts operations
For interest
of interest and
dividends For taxes
Cash Flow Statement: Direct Method
Refer to the data for the indirect method.
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/R balances
- Increase in A/R balances
= $200,000 - $32,000 = $168,000

Cash payments to suppliers:

= cost of goods sold + increase in inventory
- decrease in inventory
+ decrease in accounts payable
- increase in accounts payable

= $110,000 + $29,000 - $24,000 = $115,000

 Cash Flow Statement: Direct Method
Cash payments for operating and other expenses:

= Operating expenses + increase in prepaid expenses

- decrease in prepaid expenses

+ decrease in accrued expenses payable

- increase in accrued expenses payable

$40,000 operating + $15,000 tax = $55,000

Note: There are no accruals in the balance sheet for these
accounts. So, these are deemed cash payments.
 Direct Method:
Operating Activities
Operating Activities:
Cash receipts from sales $ 168,000
Cash paid to suppliers for merchandise
(115,000)
Cash paid for income taxes (55,000)
Net cash outflow $ 2,000
 Special Items: Depreciation
Given:
2002 2001
Property, plant, and equipment $277,000 $247,000
Accumulated depreciation (178,000) ( 167,000)

Other information:
Depreciation expense $ 33,000
Gain on sale of equipment $ 14,500
During 2002, equipment costing $45,000 was sold for cash

Present relevant T- accounts and cash flow information.

 Special Items:
Depreciation - Steps
• Prepare the T-Account for accumulated
depreciation and determine the accumulated
depreciation on asset sold
• Determine the cash flow from sale of
equipment
• Determine any purchases of plant and
equipment (at cost)
• Identify the inflows and outflows affecting the
operating and investing sections
 Special Items: Depreciation
1 Accumulated Depreciation 2 Equipment Sold
Accum. deprec. (beg) : $167,000 Equipment sold (cost): $45,000
Plus: depreciation expense $ 33,000 less:Accu depr on equipment 22,000
less: depreciation on equip Book value of equipment sold 23,000
sold (?) $ 22,000
Add: Gain on sale 14,500
Accum. deprec. (ending): $178,000
Cash from sale of equipment $37,500

4 Cash Flow Statement

Operating Activities:
3 Prop, Plant, & Equipment
Depreciation - Inflow $33,000
Beginning balance: $247,000 Gain on sale ($14,500)
Add: Purchases (?) $ 75,000 Investing Activities:
Less: Equipment Sold$ 45,000 Sale of equipment - inflow $37,500
Ending balance: $277,000 Asset purchases - outflow ($75,000)
 Reporting Significant
Non-Cash Transactions
• Transactions not involving cash inflows or
cash outflows are non-cash transactions
• They are not reported in the body of the
cash flow statement
• If material, they are reported as notes to
the statement or in a supplementary
schedule to the financial statements
• Example: issue of bonds (payable) for the
purchase of land
 Using a Worksheet
• Aid in statement preparation
• Guidelines for using the worksheet
1. Balance Sheet section – list debit balances separately
from credit balances, regardless of the type of account
2. Bottom half of the worksheet is for Statement data –
cash outflows and inflows
3. Amounts entered on the worksheet are not journal
entries, or entirely debits and credits
• Top half of the worksheet may be considered debts and
credits
• Bottom half of the worksheet may be considered cash
inflows and outflows
 Worksheet Format
Reconciling Items
Balance Sheet Accounts End of Last Debits Credits End of Current
Year Balances Year Balances
Debit balance accounts XX XX XX XX
XX XX XX XX
Totals XX XX XX XX
Credit balance accounts XX XX XX XX
XX XX XX XX
Totals XX XX
Cash Flows
Operating Activities
Net income XX
Net loss XX
Adjustments XX XX
Investing Activities
Receipts (dr.) XX
Payments (cr.) XX
Financing Activities
Receipts (dr.) XX
Payments (cr.) XX
Totals XX XX
Increase (decrease) in cash (XX) XX
Totals XX XX
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