Chapter 23: Statement of

Cash Flows
 Chapter 23: Statement of
Cash Flows
After studying this chapter, you should
be able to:
1. Describe the purpose of the statement of
cash flows.
2. Identify the major classifications of cash
flows.
3. Differentiate between net income and
net cash flows from operating activities.
4. Contrast the direct and the indirect
methods of calculating net cash flow
from operating activities.
 Chapter 23: Statement of
Cash Flows
1. Determine net cash flows from investing
and financing activities.
2. Prepare a statement of cash flows.
3. Identify sources of information for a
statement of cash flows.
4. Identify special problems in preparing a
statement of cash flows.
5. Explain the use of a work sheet in
preparing a statement of cash flows.
Usefulness of the Statement
of Cash Flows
The information may help users assess
the following aspects:
• The entity’s ability to generate future cash
flows
• The entity’s 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
 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
 Statement of Cash Flows:
Concept
Operating
activities
inflows
Investing
activities

Financing
activities 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:
• the indirect method and
• 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 Eliminate
Revenues + Non-cash revenues

Operating
Net Income cash flow

Expenses - Eliminate
Incurred Non-cash charges
 The Statement of Cash
Flows: Indirect Method
Accrual Basis Statements Cash Flow Statement
Income Statement Operating activities:
items & Changes in Adjust net income for accruals
Current Assets and and non-cash charges to get
Current Liabilities cash flows

Investing activities:
Balance Sheet: Changes Inflows from sale of assets and
In Non-Current Assets Outflows from purchases of
assets

Balance Sheet: Changes in Financing activities:

Inflows and outflows
Non-Current Liabilities
from loan and equity
and Equity transactions
 Direct Method: Operating
Activities
Inflows Outflows
• From sales of goods • To suppliers for
or services inventory
• To employees for
• From returns on loans
services
(interest) and returns
• To government for
on equity securities taxes
(dividends) • 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 $ XXX
Adjustments (to arrive at cash flow from operations) $ XX
(List of individual inflows and outflows)
Net cash flow from operating activities $ XXX

Cash flows from investing activities:

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

Cash flows from financing activities:

(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
 Major Classes of Cash
Receipts and Payments
Formula to Compute Cash
Receipts from Customers
Formula to Compute Cash
Payments for Operating
Expenses
 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 $ XXX
Cash payments to suppliers (separately): outflows ($ XXX)
Net cash flow from operating activities $ XXX

Cash flows from investing activities:

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

Cash flows from financing activities:

(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
 Direct Method: Concept

Cash Receipts Cash Payments

From sale of To suppliers

goods and
services to To employees Cash
customers flow
less For operating exp equals from
From receipts operations
For interest
of interest and
dividends For taxes
 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.
 Worksheet
• A work sheet may be useful when a
number of adjustments are needed.
• Involves three steps:
1. Enter beginning and ending balance sheet data.
2. Enter the data that explains the changes in
balance sheet accounts (other than cash).
3. Enter the increase or decrease in cash on cash
line and at the bottom of the work sheet. This
entry results in the totals of the reconciling
items to agree.