The Statement of Cash Flows pdf

The Statement of Cash
Flows
Chapter
17

The statement of cash flows
reports the entity’s cash flows
(cash receipts and cash payments)
during the period.
Purpose of The Statement of
Cash Flows: Basic Concepts

Identify the Purposes of
the Statement of Cash Flows.
Objective 1

Purposes of the Statement
of Cash Flows
Statement
of Retained
Earnings
12/31/x1 For the Year Ended 12/31/x2 12/31/x2
(a point in time) (a period of time) (a point in
time)
Statement
of Cash
Flows
Income
Statement
Balance

Sheet
Balance
Sheet

Purposes of the Statement
of Cash Flows
•
The statement of cash flows is designed to
fulfill the following:
–
predict future cash flows
–
evaluate management decisions
–
determine the ability to pay dividends plus
interest and principal
–
show the relationship of net income to
changes in the firm’s cash

Cash Balance Includes
–
cash on hand.
–
cash in the bank.
–
cash equivalents.

Cash Equivalents Are
…short-term, highly liquid investments

convertible into cash with little delay.
–
money market accounts.
–
U.S. Government Treasury bills.

Distinguish Among Operating,
Investing, and Financing Cash
Flows.
Objective 2

Basic Organization of the
Statement of Cash Flows
•
A business may be evaluated in terms of
three types of business activities:
1
Operating activities
2
Investing activities
3
Financing activities

Operating Activities
Operating activities are related to the
transactions that make up net income.
Operating activities also affect current assets
and current liabilities on the balance sheet.

Investing activities increase and decrease

the assets that are available to the business.
Investing Activities
Investing activities are related to the
Long-Term Asset accounts.

These are transactions involving obtaining
resources from the owners or returning
resources to them.
Financing Activities
It also involves obtaining resources
from creditors and repaying the
amount borrowed.

Format of the Statement
of Cash Flows
•
FASB Statement 95 approved two methods
for reporting cash flows from operating
activities.
1
Indirect method
2
Direct method

Prepare a Statement of Cash
Flows
by the Indirect Method.
Objective 3

Preparing the Statement

•
Follow the template provided in the text
•
Use comparative balance sheets to
determine the change in cash, current
assets and current liabilities
•
Use the income statement to gather net
income, depreciation, amortization, gains
or losses on asset sales
•
Complete the statement of cash flows

Current Assets
Add to Net Income if this account has dec re ased
The Indirect Method
Deduct from Net Income if this account has increased

Current Liabilities
Add to Net Income if this account has increa s ed
The Indirect Method
Deduct from Net Income if this account has decrea se d

Revenues and gains:
Sales revenue $284
Interest revenue 12
Dividend revenue 9
Gain on sale of plant assets 8
Total revenues and gains $313
Computing Individual Amounts

for the Statement of Cash Flows
Income Statement
Year Ended December 31, 2005 (Thousands)

Expenses:
Cost of goods sold $150
Salary expense 56
Depreciation expense 18
Other operating expense 17
Interest expense 16
Income tax expense 15
Total expenses $272
Computing Individual Amounts
for the Statement of Cash Flows

Total revenues and gains $313
Total expenses 272
Net income $ 41
Computing Individual Amounts
for the Statement of Cash Flows
Income Statement
Year Ended December 31, 2005 (Thousands)

Assets 2005 2004 Inc./
(Dec.)
Current:
Cash $ 22 $ 42 $ (20)
Accounts receivable 96 81 15
Inventory 143 145 (2)
Plant assets, net 464 219 245

Total assets $725 $487 $238
Comparative Balance Sheets

Liabilities 2005 2004 Inc./
(Dec.)
Current:
Accounts payable $ 91 $ 57 $ 34
Accrued liabilities 5 9 (4)
Long-term notes payable 160 77 83
Stockholders’ equity:
Common stock 359 258 101
Retained earnings 110 86 24
Total liabilities and
shareholders’ equity $725 $487 $238
Comparative Balance Sheets

Statement of Cash Flows (Indirect Method)
Year Ended December 31, 2005 (Thousands)
Cash flows from operating activities:
Net Income $41
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18
Gain on sale of plant 8
Increase in accounts receivable (15)
Decrease in inventory 2
The Indirect Method

Adjustments to reconcile net income to net cash
provided by operating activities:

Increase in accounts payable 34
Decrease in accrued liabilities (4)
Net cash provided by operating activities $68
The Indirect Method
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 2005 (Thousands)

Cash flows from investing activities:
Acquisition of plant assets $(317)
Proceeds from sale of plant assets 62
Net cash used for investing activities $(255)
The Indirect Method
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 2005
(Thousands)