Financial accounting the impact on decision makers makers 9e chapter 12

Chapter 12
The Statement of Cash Flows


Cash Flows and Accrual Accounting
 Statement

of cash flows complements an
accrual-based income statement by providing
information on a company’s cash flows from
operating, investing, and financing activities
 External parties have an interest in a company’s
cash flows:
 Stockholders
 Creditors

LO 1


Exhibit 12.1—Cash Flows and Net Income for Four
Companies (all amounts in millions of dollars)


Purpose of the Statement of Cash
Flows
 Summarizes

an entity’s cash receipts and cash
payments during the period from operating,
investing activities, and financing activities
 Reports the changes in cash over a period of

time and explains those changes
 Assess company’s performance on a cash basis


Cash Equivalents
 Readily

convertible to a determinable amount

of cash
 Maturity date of three months or less
 Less degree of risk in terms of price changes
 Combined with cash on a statement of cash
flows
 Examples: Commercial paper, Money market
funds, and Treasury bills

LO 2


Operating Activities
 Activities

concerned with the acquisition and
sale of products and services
 Examples:
 Collection of

customer accounts
 Payment to suppliers for inventory

 Payment of wages
 Payment of taxes

LO 3


Investing Activities
 Activities

concerned with the acquisition and
disposal of long-term assets
 Examples:
 Capital expenditures
 Purchase

of another company
 Sale of plant and equipment
 Sale of another company


Financing Activities
Activities concerned with the raising and repaying
of funds in the form of debt and equity
 Examples:


Issuance of capital stock
 Issuance of bonds
 Issuance of bank note
 Repurchase of stock

 Retirement of bonds
 Repayment of notes
 Payment of dividends



Exhibit 12.2—Format for the Statement
of Cash Flows


Exhibit 12.3—Classification of Items on
the Statement of Cash Flows


Example 12.3—Determining Noncash
Investing and Financing Activities


Assume that at the end of the year, Wolk Corp. issues capital
stock to an inventor in return for the exclusive rights to a patent.
Although the patent has no ready market value, the stock could
have been sold on the open market for $25,000


Example 12-3 Determining Noncash Investing
and Financing Activities (continued)


Assume Wolk sells stock on the open market for $25,000 and
then pays this amount in cash to the inventor for the rights to

the patent


Example 12-3 Determining Noncash Investing
and Financing Activities (continued)


Next, the acquisition of the patent can be identified and
analyzed as follows:

Supplemental schedule of noncash investing and financing activities
Acquisition of patent in exchange for capital stock
$25,000


Two Methods of Reporting Cash Flow
from Operating Activities
 Direct method
 Reports

major classes of cash receipts and
cash payments

 Indirect method
 Net

income is adjusted for the effects of accruals
and deferrals

 Net

cash provided by Operating Activities is the
same under both methods
LO 4


Exhibit 12.4—Boulder Company’s
Income Statement


Exhibit 12.5—Boulder Company’s
Balance Sheet


Exhibit 12.6—Statement of Cash Flows
Using the Direct Method


Exhibit 12.7—Statement of Cash Flows
Using the Indirect Method


Accounting Equation and the
Statement of Cash Flows

LO 5


Summary of Various Possibilities for
Inflows (+) and Outflows (−) of Cash

An Approach to Preparing the Statement of
Cash Flows: Direct Method


Step1: set up three schedules with the following
headings:




a. Cash Flows from Operating Activities
b. Cash Flows from Investing Activities
c. Cash Flows from Financing Activities

Step 2: determine cash flows from operating activities
 Step 3: determine cash flows from investing activities
 Step 4: determine cash flows from financing activities



Exhibit 12.8—Julian Corp.’s Income
Statement


Exhibit 12.9—Julian Corp.’s
Comparative Balance Sheets

Exhibit 12.10—Schedule of Cash Flows
from Operating Activities


Exhibit 12.11—Conversion of Income
Statement Items to Cash Basis