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Chapter 23: Statement of Cash Flows

The document provides an overview of statements of cash flows, including: - Statements of cash flows show cash generated and used by a company over a period and are calculated by adding non-cash charges to net income. - They report cash flows from operating, investing, and financing activities and can be prepared using either the direct or indirect method. - The indirect method derives cash flows from accrual-based financial statements by adjusting for non-cash revenues and expenses, while the direct method directly reports cash inflows and outflows for operating activities.

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148 views18 pages

Chapter 23: Statement of Cash Flows

The document provides an overview of statements of cash flows, including: - Statements of cash flows show cash generated and used by a company over a period and are calculated by adding non-cash charges to net income. - They report cash flows from operating, investing, and financing activities and can be prepared using either the direct or indirect method. - The indirect method derives cash flows from accrual-based financial statements by adjusting for non-cash revenues and expenses, while the direct method directly reports cash inflows and outflows for operating activities.

Uploaded by

Md Sharif Hassan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 23: Statement of

Cash Flows

The Cash Flow


Statement
An accounting statement called the
"statement of cash flows", which shows the
amount of cash generated and used by a
company in a given period.
It is calculated by adding noncash charges
(such as depreciation) to net income after
taxes. Cash flow can be attributed to a
specific project, or to a business as a whole.
Cash flow can be used as an indication of a
company's financial strength.

The Cash Flow Statement


The cash flow statement provides
information about:

the cash receipts (cash inflows), and


uses of cash (cash outflows) during the period

Inflows and outflows are reported for:


operating activities,
investing activities, and
financing activities during the period

Usefulness of the
Statement of Cash Flows
The information may help users assess
the following aspects:
The entitys ability to generate future cash
flows
The entitys ability to pay dividends and
meet obligations
The reasons as to why net income and net
cash flow from operating activities differ
Cash and non-cash investing and financing
activities during the year

Statement of Cash Flows:


Concept
Operating
activities
Investing
activities
Financing
activities

inflows

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:
1. the indirect method and
2. the 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
Revenues

Eliminate
Non-cash revenues

Net Income
Expenses
Incurred

Operating
cash flow

Eliminate
Non-cash charges

The Statement of Cash


Flows: Indirect Method
Accrual Basis Statements

Cash Flow Statement

Income Statement
items & Changes in
Current Assets and
Current Liabilities

Operating activities:
Adjust net income for accruals
and non-cash charges to get
cash flows

Balance Sheet: Changes


In Non-Current Assets

Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets

Balance Sheet: Changes in


Non-Current Liabilities
and Equity

Financing activities:
Inflows and outflows
from loan and equity
transactions

Direct Method: Operating


Activities
Inflows
From sales of goods
or services
From returns on loans
(interest) and returns
on equity securities
(dividends)

Outflows
To suppliers for
inventory
To employees for
services
To government for
taxes
To lenders for 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
Adjustments (to arrive at cash flow from operations)
(List of individual inflows and outflows)
Net cash flow from operating activities

$ XXX
$ XX
$ XXX

Cash flows from investing activities:


(List of individual inflows and outflows)
Net cash flow from investing activities

$ XX
$ XXX

Cash flows from financing activities:


(List of individual inflows and outflows)
Net cash flow from financing activities

$ XX
$ XXX

Indirect Method: Special


Items
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

Format of the Statement


of Cash Flows: Direct
Method

Cash flows from operating activities:


Cash receipts (individually): Inflows
Cash payments to suppliers (separately): outflows
Net cash flow from operating activities

$ XXX
($ XXX)
$ XXX

Cash flows from investing activities:


(List of individual inflows and outflows)
Net cash flow from investing activities

$ XX
$ XXX

Cash flows from financing activities:


(List of individual inflows and outflows)
Net cash flow from financing activities

$ XX
$ XXX

Direct Method: Concept


Cash Receipts

Cash Payments

From sale of
goods and
services to
customers

To suppliers

From receipts
of interest and
dividends

To employees
less

For operating exp equals


For interest
For taxes

Cash
flow
from
operations

Cash Flow Statement:


Direct Method
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/Rec balances
- Increase in A/Rec balances

Cash Flow Statement:


Direct Method
Cash payments to suppliers:
= Cost of goods sold + Increase in inventory
- Decrease in inventory
+ Decrease in accounts payable
- Increase in accounts payable

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

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
purchase of land.

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