“How Well Am I Doing?

”
Statement of Cash Flows
Chapter 15

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Purpose of the Statement of Cash Flows

Are Why
Whyisisthere
thereaa
Arecash
cashflows
flows
sufficient difference
sufficienttoto difference
support between
betweennet
supportongoing
ongoing Can
net
operations? Canwe
wemeet
meet income
incomeandandnet
net
operations? our
ourobligations
obligations cash
cashflow?
flow?
to
tocreditors?
creditors?

Will
Will the
thecompany
company
have
haveto toborrow
borrow Can
money Canwe wepay
pay
moneyto tomake
make dividends?
dividends?
needed
needed
investments?
investments?

15-2
 Cash
The term cash on the statement of cash flows refers
broadly to both currency and cash equivalents.

Currency and
Bank Accounts
Treasury
Bills

Cash
Money Market Commercial
Funds Paper
15-3
Constructing the Statement of Cash Flows Using Changes
in Noncash Balance Sheet Accounts

15-4
Constructing the Statement of Cash Flows Using Changes
in Noncash Balance Sheet Accounts

Increases in noncash asset

accounts imply uses of cash.

Example: Inventory is
purchased on credit from
a supplier.

It is implied that cash

was used to acquire the
inventory.

15-5
Constructing the Statement of Cash Flows Using Changes
in Noncash Balance Sheet Accounts

Increases in liability accounts imply

sources of cash.
Example: Inventory is
purchased on credit from
a supplier.

It is implied that an increase

in a payable has the effect
of increasing cash available
for other uses.

15-6
Constructing the Statement of Cash Flows Using Changes
in Noncash Balance Sheet Accounts

Decreases in noncash assets

accounts imply sources of cash.

Example: Accounts receivable

decreases when a customer
pays their bill.

When the customer pays the

bill, the company’s cash
increases.

15-7
Constructing the Statement of Cash Flows Using Changes
in Noncash Balance Sheet Accounts

Decreases in liability accounts

imply uses of cash.

Example:
Example: A A company
company
pays
pays aa note
note payable
payable held
held
by
by aa creditor.
creditor.

When the payment is made,

cash decreases.

15-8
The Full-Fledged Statement of Cash Flows:
Operating Activities

Operating activities are

those activities that enter
into the determination of
net income.
3. Changes in
noncurrent
1. Transactions
balance sheet
affecting current
accounts that
assets
2. Transactions directly affect net
affecting current income
liabilities

15-9
The Full-Fledged Statement of Cash Flows:
Investing Activities

Investing activities relate to

transactions involving the
acquiring or disposing of
noncurrent assets.

3. Lending money
1. Acquiring or
to another entity
selling property,
and subsequently
plant and
collecting on the
equipment
2. Acquiring or loan
selling securities

15-10
The Full-Fledged Statement of Cash Flows:
Financing Activities

Financing activities relate to

transactions involving borrowing
from creditors or repaying
creditors and engaging in
transactions with the
company’s owners.
3. Payment of
dividends (note
1. Issuing stock
that interest on
and purchasing
debt is classified
treasury stock
2. Issuing long- as an operating
term debt and activity)
repayment of debt.

15-11
 The Full-Fledged Statement of Cash Flows:
An Overview
Operating Activities:
Net income
Changes in current assets
Changes in noncurrent assets that affect net income (e.g., depreciation)
Changes in current liabilities (except for debts to lenders and dividends
payable)
Changes in noncurrent liabilities that affect net income
Investing Activities:
Changes in noncurrent assets that are not included in net income
Financing Activities:
Changes in the current liabilities that are debts to lenders rather than
obligations to suppliers, employees, or the government
Changes in noncurrent liabilities that are not included in net income
Changes in capital stock accounts
Dividends

15-12
The Full-Fledged Statement of Cash Flows: An
Overview

Operating Activities

Investing Activities
Reconciliation of the
beginning cash balance
Financing Activities with the ending cash
balance
Noncash Investing
and Financing
Activities
15-13
Operating Activities

Sources of cash are added to net

income and uses of cash are
deducted from net income.

15-14
Other Issues: Direct Method or Indirect Method?
Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the Starts with

cash effects of accrual net
each operating income and
activity converts to
cash basis
No matter which format is used, the same amount of net
cash provided by operating activities is generated.
15-15
 A Full-Fledged Statement of Cash Flows:
An Example

Ed's Pizza Hut

Comparative Balance Sheet Account Balances

3/31/2008 3/31/2007 Change

DR (CR) DR (CR) Incr. (Decr.)
Cash $ 71,000 $ 90,000 $ (19,000)
Accounts Receivable 23,000 40,000 (17,000) Let’s revisit the
Inventory 322,000 300,000 22,000 comparative
Land 68,000 100,000 (32,000)
balance sheet
Equipment 112,000 84,000 28,000
Accumulated Depr. (45,000) (39,000) 6,000 account balances
Accounts Payable (38,000) (27,000) 11,000 for Ed’s Pizza Hut.
Salaries Payable (9,000) (14,000) (5,000)
Note Payable - Joe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
Retained Earnings (4,000) (34,000) (30,000)
$ - $ -

15-16
A Full-Fledged Statement of Cash Flows:
An Example
Let’s also refresh our memory regarding the
following additional information.
There
There was
was aa net
net loss
loss for
for the
the year
year of
of $27,000.
$27,000.
Depreciation
Depreciation charges
charges forfor the
the year
year were
were $6,000.
$6,000.
During
During the
the year,
year, Ed
Ed sold
sold land
land originally
originally costing
costing
$32,000
$32,000 for
for $32,000.
$32,000.
During
During the
the year,
year, Ed
Ed purchased
purchased equipment
equipment for for
$28,000.
$28,000.
During
During the
the year,
year, Ed
Ed paid
paid dividends
dividends ofof $3,000
$3,000 toto
the
the stockholders.
stockholders.
Ed
Ed issued
issued $50,000
$50,000 of of common
common stockstock to
to settle
settle the
the
note
note due
due to
to Joe
Joe Doe.
Doe.
15-17
 Example – Indirect Method
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2008
Operating Activities In addition, on the
Net Loss $ (27,000) face of the
Add: Decrease in A/R 17,000
Increase in A/P 11,000 statement or in a
Increase in Depr. Charges 6,000 supplemental
Less: Increase in Inventory (22,000)
Decrease in Salaries Payable (5,000) schedule, disclose
Net Cash Provided by Operating Activities (20,000) the issuance of
Investing Activities
Proceeds from sale of Land 32,000 $50,000 of stock
Purchase of equipment (28,000) to a creditor, a
Net Cash Provided by Investing Activities 4,000
Financing Activities noncash financing
Dividends paid (3,000) activity.
Net change in cash (19,000)
Cash, beginning 90,000
Cash, ending 71,000

15-18
 Free Cash Flows

Free cash flow measures a company’s ability to

fund its capital expenditures and dividends from
its net cash provided by operating activities.

Net Cash Provided by Capital

Free Cash Flow =
Operating Activities
- Expenditures
- Dividends

15-19
Computing Net Cash Provided by Operating
Activities

The direct method computes

net cash provided by operating
activities by reconstructing the
income statement on a cash
basis from top to bottom.

Net cash provided by operating

activities under the direct method will
always agree with the amount
computed using the indirect method.

15-20
 Similarities and Differences in Handling Data
Add (+) or
Deduct (-) to
Adjust to a
Revenue or Expense Item Cash Basis
Sales revenue (as reported)
Adjustments to a cash basis:
Increases in accounts receivable - Adjustments for accounts
that affect revenue are the
Decreases in accounts receivable +

Cost of goods sold (as reported)

Adjustments to a cash basis:
Increase in merchandise inventory +
same in the direct and
Decrease in merchandise inventory
Increase in accounts payable
-
- indirect methods.
Decrease in accounts payable +

Operating expenses (as reported)

Adjustments to a cash basis:
Increase in prepaid expenses
Decrease in prepaid expenses
+
-
Adjustments for accounts
Increase in accrued liabilities
Decrease in accrued liabilities
-
+ that affect expenses are
Period's depreciation, depletion and -
amortization charges handled in opposite ways
Income tax expense (as reported)
Adjustments to a cash basis:
for the direct and indirect
Increase in accrued taxes payable
Decrease in accrued taxes payable
-
+ methods.
Increase in deferred income taxes -
Decrease in deferred income taxes +

15-21
 The Direct Method: An Example

Ed's Pizza Hut

Statement of Cash Flows
For the Period Ending 3/31/2008
Operating Activities Notice that the
Cash received from customers $ 1,017,000
Cash paid for purchases (761,000)
net cash
Cash paid for operating expenses (276,000) provided by
Net Cash Provided by Operating Activities (20,000)
Investing Activities operating
Proceeds from sale of land
Purchase of equipment
32,000
(28,000)
activities agrees
Net Cash Provided by Investing Activities 4,000 with that
Financing Activities
Dividends paid (3,000)
computed using
Net change in cash (19,000) the indirect
Cash, beginning 90,000
Cash, ending $ 71,000 method.

15-22
End of Chapter 15

15-23