Reporting the Statement of

Cash Flows
Chapter 16

Wild and Shaw

Fundamental Accounting Principles
24th Edition

Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 16 Learning Objectives
CONCEPTUAL
C1 Distinguish between operating, investing, and financing activities, and describe how
noncash investing and financing activities are disclosed.

ANALYTICAL
A1 Analyze the statement of cash flows and apply the cash flow on total assets ratio.

PROCEDURAL
P1 Prepare a statement of cash flows.
P2 Compute cash flows from operating activities using the indirect method.
P3 Determine cash flows from both investing and financing activities.
P4 Appendix 16A—Illustrate use of a spreadsheet to prepare a statement of cash flows.
P5 Appendix 16B—Compute cash flows from operating activities using the direct method.

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Purpose of the Statement
of Cash Flows
How does a
company What explains
receive its the change in
cash? cash balance?

Why do Where does a

income and company
cash flows spend its
differ? cash?

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 Importance of Cash Flows
Cash flows helps:
• users decide if a company has cash to pay its
debts.
• users evaluate company’s ability to pursue
unexpected opportunities.
• managers plan day-to-day operations.
• managers make long-term investment
decisions.

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Measurement of Cash Flows
Cash equivalents are…
▪ short-term, highly liquid
investments.
▪ readily convertible into cash.
▪ sufficiently close to maturity
so that market value is
unaffected by interest rate
changes.

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 Learning Objective C1

Distinguish between operating,

investing, and financing
activities, and describe how
noncash investing and
financing activities are
disclosed.
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 Classification of Cash Flows
The Statement of Cash Flows includes the
following three sections:
– Operating Activities
– Investing Activities
– Financing Activities

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 7
and describe how noncash investing and financing activities are disclosed.
 Operating Activities Exhibit
16.1

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 8
and describe how noncash investing and financing activities are disclosed.
 Investing Activities
Exhibit
16.2

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 9
and describe how noncash investing and financing activities are disclosed.
 Financing Activities
Exhibit
16.3

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 10
and describe how noncash investing and financing activities are disclosed.
 Noncash Investing and Financing
Examples of Noncash Investing and Financing Activities

Learning Objective C1: Distinguish between operating, investing, and financing activities, © McGraw-Hill Education 11
and describe how noncash investing and financing activities are disclosed.
 Learning Objective P1

Prepare a statement of cash

flows.

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 Format of the Statement Exhibit
16.6
of Cash Flows

© McGraw-Hill Education 13
Learning Objective P1: Prepare a statement of cash flows.
 Preparing the Statement
Exhibit
of Cash Flows 16.7

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Learning Objective P1: Prepare a statement of cash flows.
 Analyzing the Cash Account
The Cash account is a natural place to look for
information about cash flows from operating, investing,
and financing activities.

Exhibit
16.8

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Learning Objective P1: Prepare a statement of cash flows.
 Analyzing Noncash Account
A second approach to preparing the statement
of cash flows is analyzing noncash accounts.

Exhibit
16.9

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Learning Objective P1: Prepare a statement of cash flows.
 Information to Prepare the
Statement
Information to prepare the statement of cash
flows comes from three sources:

Comparative Current
Balance Sheets Income Statement

Additional
Information

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Learning Objective P1: Prepare a statement of cash flows.
 Cash Flows from Operating
Indirect and Direct Methods of Reporting
Direct
Method

Indirect
Method

The net cash amount provided by operating activities is

identical under both the direct and indirect methods.
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Learning Objective P1: Prepare a statement of cash flows.
 Learning Objective P2

Compute cash flows from

operating activities using the
indirect method.

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Cash Flows: Indirect Method Illustration
Exhibit
16.10

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Applying the Indirect Method
Exhibit
16.11

From income statment

Competitive balance sheet

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Income Statement
Items Not Affecting Cash
• Expenses and losses with no cash outflows are
added back to net income.
• Revenues and gains with no cash inflows are
subtracted from net income.

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Changes in
Current Assets and Current Liabilities: Table

Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Use this table when adjusting Net Income

to Operating Cash Flows.
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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Adjustments for Changes in
Current Assets and Current Liabilities
• Decreases in current assets are added to net income.
• Increases in current assets are subtracted from net
income.
• Increases in current liabilities are added to net income.
• Decreases in current liabilities are subtracted from net
income.

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Summary of Adjustments
for Indirect Method: Part 2
Common adjustments to net income when computing
net cash provided or used by operating activities
under the indirect method:
Exhibit
16.12

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Learning Objective P2: Compute cash flows from operating activities using the indirect method.
 Learning Objective P3

Determine cash flows from

both investing and financing
activities.

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 Cash Flows from Investing:
Three-step Analysis
A three-step process to determine cash
provided or used by investing activities:
Identify changes in Explain these changes
investing-related using T-accounts and
accounts reconstruction entries

Report their cash flow

effects

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Investing: First Step
Exhibit
16.10

This analysis reveals a

$40,000 increase in
plant assets from
$210,000 to $250,000
and a $12,000 increase
in accumulated
depreciation from
$48,000 to $60,000.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Investing: Second Step
Item b: Genesis purchased plant assets of $60,000 by issuing
$60,000 in notes payable to the seller.

Item c reports that Genesis sold plant assets costing $20,000 (with
$12,000 of accumulated depreciation) for $2,000 cash, resulting in a
$6,000 loss.

We also reconstruct the entry for Depreciation Expense using

information from the income statement.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Investing: Third Step
Reconstructed T-accounts show changes in long-term assets.

The identified cash flows are reported in the investing section:

The $60,000 purchase in item b paid using a note payable is a

noncash investing and financing activity.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Financing:
Three-step Analysis
A three-step process to determine cash
provided or used by financing activities:
Explain these changes
Identify changes in
using T-accounts and
financing-related
reconstruction
accounts
entries

Report the cash flow

effects

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Financing: First Step
Exhibit
16.10

This analysis reveals:

an increase in notes
payable from
$64,000 to $90,000.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
Cash Flows from Financing: Second Step
Step two explains the change in item e. Notes with a carrying value of
$34,000 are retired for $18,000 cash, resulting in a $16,000 gain.

Cash Flows from Financing: Third Step

Step three reports cash paid for the notes retirement in the financing
activities section.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Financing:
Common Stock Transactions
• Step one in analyzing stock reviews comparative balance sheets.
Show an increase in common stock from $80,000 to $95,000.
• Step two explains change of item d which reports 3,000 shares of
common stock are issued at par for $5 per share.
• Step three reports cash received from stock issuance in financing
activities section.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Cash Flows from Financing:
Retained Earnings Transactions
• Step one in analyzing Retained Earnings reviews comparative
balance sheets. Show an increase in retained earnings from $88,000
to $112,000.
• Step two explains change of item f which reports cash dividends of
$14,000 are paid.
• Step three reports cash paid for dividends in the financing activities
section.

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Proving Cash Balances
Exhibit
16.13

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Summary Using T-Accounts
Exhibit
16.14

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Learning Objective P3: Determine cash flows from both investing and financing activities.
 Learning Objective A1

Analyze the statement of cash

flows and apply the cash flow
on total assets ratio.

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 Analyzing Cash Sources and Uses
• Managers review cash flows for business decisions.
• Creditors evaluate a company’s ability to generate
enough cash to pay debt.
• Investors assess cash flows before buying and
selling stock.

Exhibit
16.15

Learning Objective A1: Analyze the statement of cash flows and apply the cash flow on © McGraw-Hill Education 39
total assets ratio.
 Cash Flow on Total Assets
Used, along with income-based ratios, to
assess company performance.

Cash flow on Operating cash flows

total assets = Average total assets

Learning Objective A1: Analyze the statement of cash flows and apply the cash flow on © McGraw-Hill Education 40
total assets ratio.
 Learning Objective P4

Appendix 16A
Illustrate use of a spreadsheet
to prepare a statement of cash
flows.

© McGraw-Hill Education 41
 Spreadsheet Preparation
Exhibit
16A.1

A spreadsheet, also
called work sheet or
working paper, can
help us organize the
information needed
to prepare a
statement of cash
flows.

Learning Objective P4: Illustrate use of a spreadsheet to prepare a statement of cash © McGraw-Hill Education 42
flows.
 Learning Objective P5

Appendix 16B
Compute cash flows from
operating activities using the
direct method.

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 Direct Method of Reporting Operating Cash
Flows: Operating Activities
Adjust income statement accounts related to operating activities
for changes in their related balance sheet accounts:

Exhibit
16B.1
Framework for
reporting cash
receipts and
cash payments

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Learning Objective P5: Compute cash flows from operating activities using the direct method.
 Direct Method of Reporting Operating
Cash Flows
Exhibit
16B.6

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Learning Objective P5: Compute cash flows from operating activities using the direct method.
End of Chapter 16

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