4/10/2025

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 23
Statement of Cash Flows

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Copyright ©2020 John Wiley & Sons, Inc.

Learning Objectives
After studying this chapter, you should be able to:
L O 1 Describe the usefulness and format of the statement of cash flows.
L O 2 Prepare a statement of cash flows.
L O 3 Contrast the direct and indirect methods of calculating net cash
flow from operating activities (read by yourself)
L O 4 Discuss special problems in preparing a statement of cash flows.
(disclosure only)
L O 5 Explain the use of a worksheet in preparing a statement of cash
flows.

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Learning Objective 1
Describe the usefulness and format of
the statement of cash flows.

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Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet obligations.
3. Reasons for the difference between net income and net cash
flow from operating activities.
4. Cash and non-cash investing and financing transactions during
the period.

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Cash Inflows and Outflows

ILLUSTRATION 5.19

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Typical Classification of direct Cash flows

Mainly involve

(under direct
method)

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Classification of Indirect Cash flows

Mainly involve:

Non-cash items on income

current assets, current liabilities items

And cash payment for:

• Interest
• Income taxes

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Cash and Cash Equivalents

The basis recommended by the IASB for the statement of cash
flows is actually “cash and cash equivalents.” Cash equivalents are
short-term, highly liquid investments that are both:
• Readily convertible to known amounts of cash, and
• So near their maturity that they present insignificant risk of
changes value in (e.g., due to changes in interest rates).
Generally, only investments with original maturities of three
months or less qualify under this definition.
Examples of cash equivalents: Treasury bills, commercial paper, and
money market funds purchased with cash that is in excess of
immediate needs.

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Example: Statement of Cash Flows

Direct method Indirect method

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Cash flows meaning: Product Life Cycle

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Learning Objective 2
Prepare a statement of cash flows.

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Preparing the Statement of Cash Flows

Three Sources of Information:
1. Comparative statements of financial position.
2. Current income statement data.
3. Selected transaction data.
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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Illustrations—Tax Consultants Inc.

Illustration: Tax Consultants Inc. started on January 1, 2022, when it
issued 60,000 shares of $1 par value common stock for $60,000 cash.
The company rented its office space, furniture, and equipment, and
performed tax consulting services throughout the first year.
The comparative statements of financial position at the beginning and
end of the year 2022 appear in Illustration 23.3. Illustration 23.4
shows the income statement and additional information for Tax
Consultants.

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Comparative Statements of Financial

Position, Tax Consultants Inc., Year 1

ILLUSTRATION 23.3

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Income Statement, Tax Consultants Inc.,

Year 1

ILLUSTRATION 23.4

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Step 1: Determine the Change in Cash

ILLUSTRATION 23.3

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Step 2: Determine the Net Cash Flow from

Operating Activities
• Company must determine revenues and expenses on a cash
basis.
• Eliminate the effects of income statement transactions that do
not result in an increase or decrease in cash.
• Convert net income to net cash flow from operating activities
through either a direct method or an indirect method.

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Net Income versus Net Cash Flow from

Operating Activities

ILLUSTRATION 23.5

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Increase in Accounts Receivable—Indirect Method

Accounts receivable increased by $36,000 (from $0 to $36,000)

during the year.

ILLUSTRATION 23.6

When the Accounts Receivable balance increases, cash receipts

are lower than revenue earned under the accrual basis.

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Increase in Accounts Payable—Indirect Method

Accounts payable increased by $5,000 during the year.

When accounts payable increase during the year, expenses on an
accrual basis exceed those on a cash basis.

ILLUSTRATION 23.7

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Step 3: Determine Net Cash Flows from Investing

and Financing Activities
After Tax Consultants has computed the net cash provided by operating
activities, the next step is to determine whether any other changes in the
statement of financial position accounts caused an increase or decrease
in cash.
An examination of the remaining statement of financial position accounts
for Tax Consultants shows increases in both ordinary shares and retained
earnings. The Share Capital—Ordinary increase of $60,000 resulted from
the issuance of ordinary shares for cash. The issuance of ordinary shares
is reported in the statement of cash flows as a receipt of cash from a
financing activity
Two items caused the retained earnings increase of 20,000:
1. Net income of $34,000 increased retained earnings.
2. Declaration of $14,000 of dividends decreased retained earnings.

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Statement of Cash Flows, Tax Consultants Inc.,

Year 1

ILLUSTRATION 23.8

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Comparative Statements of Financial Position,

Tax Consultants Inc., Year 2

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Income Statement, Tax Consultants Inc.,

Year 2

ILLUSTRATION 23.10

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Step 1: Determine the Change in Cash, Year 2

ILLUSTRATION 23.9
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Decrease in Accounts Receivable, Year 2

ILLUSTRATION 23.9
Accounts receivable decreased during the period because cash receipts (cash-
basis revenues) are higher than revenues reported on an accrual basis.
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Increase in Prepaid Expenses, Year 2

ILLUSTRATION 23.9

When prepaid expenses (assets) increase during a period, expenses on an accrual-

basis income statement are lower than they are on a cash-basis income statement.
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Increase in Accounts Payable, Year 2

ILLUSTRATION 23.9

Like the increase in 2022, Tax Consultants must add the 2023 increase of $35,000 in accounts
payable to net income, to convert to net cash flow from operating activities. The company
incurred a greater amount of expense than the amount of cash it disbursed.
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Increase in Accumulated Depreciation, Year 2

ILLUSTRATION 23.9

Tax Consultants’ depreciation expense of $21,000 (also represented by the increase in

accumulated depreciation) is a non-cash charge; the company adds it back to net income,
to arrive at net cash flow from operating activities. The $21,000 is the sum of the $11,000
depreciation on the building and $10,000 depreciation on the equipment.
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Computation of Net Cash Flow from Operating

Activities, Year 2—Indirect Method

ILLUSTRATION 23.11

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Step 3: Determine Net Cash Flow from

Investing and Financing Activities, Year 2
After you have determined the items affecting net cash provided by
operating activities, the next step involves analyzing the remaining
changes in the statement of financial position accounts.

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Increase in Land

ILLUSTRATION 23.9

The company purchased land for $70,000 during the period. The transaction is
a cash outflow, reported as an investing activity.
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Increase in Building

ILLUSTRATION 23.9

The company acquired an office building for $200,000 cash. This transaction is
a cash outflow, reported in the investing section.

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Increase in Equipment

ILLUSTRATION 23.9

An increase in equipment of $68,000 resulted because the company used cash to

purchase equipment. This transaction is a cash outflow, reported in the investing section.
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Increase in Bonds Payable

ILLUSTRATION 23.9
The Bonds Payable account increased $150,000. Cash received from the issuance of
these bonds represents an inflow of cash from a financing activity.
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Increase in Retained Earnings, Year 2

ILLUSTRATION 23.9

Retained earnings increased $116,000 during the year. Two factors explain this
increase: (1) net income of $134,000 increased retained earnings, and (2) dividends of
LO 2 18,000 decreased retained Copyright
earnings.
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Statement of Cash Flows, Tax Consultants Inc.,

Year 2

ILLUSTRATION 23.12

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Sources of Information for the Statement of Cash

Flows
1. Comparative statements of financial position.
2. An analysis of the Retained Earnings account.
3. All changes that have passed through cash or have resulted in
an increase or decrease in cash.
4. Write-downs, amortization charges, and similar “book” entries,
such as depreciation, because they have no effect on cash.

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Indirect Method—Additional Adjustments

ILLUSTRATION 23.17

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Learning Objective 3
Contrast the direct and indirect
methods of calculating net cash flow
from operating activities.

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Major Classes of Cash Receipts and Payments

Operating activities

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Direct Method—An Example

Drogba SA, which began business on January 1, 2022, has the
following selected statement of financial position information.

ILLUSTRATION 23.19

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Direct Method—An Example (continued)

Drogba’s December 31, 2022, income statement and additional
information are as follows.

ILLUSTRATION 23.20

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Operating Activities—Direct Method

Cash Receipts from Customers
Accounts receivable increased €15,000. Thus, cash receipts from
customers are computed as follows.

ILLUSTRATION 23.22

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Operating Activities—Direct Method

Cash Payments to Suppliers
Drogba SA reported cost of goods sold of €450,000 on its income
statement. In 2022, Drogba’s inventory increased €160,000. The
company computes purchases as follows.

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Operating Activities—Direct Method

Cash Payments to Suppliers (continued)
Drogba determines cash payments to suppliers by adjusting
purchases for the change in accounts payable.

ILLUSTRATION 23.23

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Operating Activities—Direct Method

Cash Payments for Operating Expenses
Drogba reported operating expenses of €160,000 on its income
statement. To determine the cash paid for operating expenses, it
must adjust this amount for any changes in
• prepaid expenses and
• accrued expenses payable.

ILLUSTRATION 23.24

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Operating Activities—Direct Method

Cash Payments for Income Taxes
The income statement for Drogba shows income tax expense of
€48,000. This amount equals the cash paid. How do we know that?
Because the comparative statement of financial position indicated
no income taxes payable at either the beginning or end of the year.
Cash paid for income taxes is computed by taking the expense and
adjusting by the change in the payable.

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Summary of Net Cash Flow from Operating Activities—

Direct Method

ILLUSTRATION 23.25

ILLUSTRATION 23.26

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Reconciliation of Net Income to Net Cash Provided

by Operating Activities, 2022
When companies use the direct method they are required to provide in a
separate schedule the reconciliation of net income to net cash provided
by operating activities.

ILLUSTRATION 23.27

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Learning Objective 4
Discuss special problems in preparing a
statement of cash flows.
1. Adjustments to net income.
2. Accounts receivable (net).
3. Other working capital changes.
4. Net loss.
5. Disclosures.

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Disclosures
Significant Non-Cash Transactions
Common noncash transactions that a company should report or
disclose:
1. Acquisition of assets by assuming liabilities (including finance
lease obligations) or by issuing equity securities.
2. Exchanges of non-monetary assets.
3. Refinancing of long-term debt.
4. Conversion of debt or preference shares to ordinary shares.
5. Issuance of equity securities to retire debt.

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