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23 Statement of Cash Flows

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Primary purpose:

To provide information about a company’s cash receipts

and cash payments during a period.

Secondary objective:

To provide cash-basis information about the company’s

operating, investing, and financing activities.

Preparation of the Preparation of the Statement of Cash FlowsStatement of Cash Flows

Preparation of the Preparation of the Statement of Cash FlowsStatement of Cash Flows

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Income

Statement

Transactions

Operating Activities

Changes in Investments and

Long-Term Asset Items

Investing Activities

Changes in Long-Term

Liabilities and Stockholders’

Equity

Financing Activities

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

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Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

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Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

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Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

Direct Method

Indirect Method

Report inflows and outflows from investing and financing

activities separately.

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Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

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Three Sources of Information:

1. Comparative balance sheets.

2. Current income statement.

3. Selected transaction data.

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Three Major Steps:

Step 1. Determine change in cash.

Step 2. Determine net cash flow from

operating activities.

Step 3. Determine net cash flows from

investing and financing activities.

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Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Indirect Method

Common adjustments to Net Income (Loss):

Depreciation and amortization expense.

Gain or loss on disposition of long-term assets.

Change in current assets and current liabilities.

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Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Adjustments Needed to Determine Net Cash Flow from Operating Activities.

Indirect Method

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Deducts operating cash disbursements from operating cash receipts.

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Direct Method

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Direct Method

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Accounts ReceivableAccounts Receivable

1/1/09 Balance

0Revenues

125,000

Receipts from customers

89,00012/31/09 Balance

36,000

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Direct Method

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Accounts PayableAccounts Payable

1/1/09 Balance

0Operating expenses

85,00012/31/09 Balance

5,000

Payments for expenses

80,000

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Direct Method

Steps in PreparationSteps in PreparationSteps in PreparationSteps in Preparation

Income Tax Payable

1/1/09 Balance

0Tax expense

6,00012/31/09 Balance

0

Payments for taxes

6,000

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In Favor of the Direct Method

Shows operating cash receipts and payments.

Information about cash receipts and payments is more

revealing of a company’s ability

1. to generate sufficient cash from operating activities to pay

its debts,

2. to reinvest in its operations, and

3. to make distributions to its owners.

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Direct Versus Indirect Controversy

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Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Net Cash Flow from Operating Activities—Net Cash Flow from Operating Activities—Indirect Versus Direct MethodIndirect Versus Direct Method

Direct Versus Indirect Controversy

In Favor of the Indirect Method

Focuses on the differences between net income and net

cash flow from operating activities.

Provides link between the statement of cash flows and the

income statement and statement of financial position.

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Significant Non-Cash TransactionsSignificant Non-Cash TransactionsSignificant Non-Cash TransactionsSignificant Non-Cash Transactions

Common non-cash transactions that a company should disclose:

1. Acquisition of assets by assuming liabilities or by issuing equity

securities.

2. Exchanges of non-monetary assets.

3. Conversion of debt or preference shares to ordinary shares.

4. Issuance of equity securities to retire debt.