PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cnthia J. !oone, Ph.D., CPA
Winston "wok, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc !ll rights reser"e#
Statement of Cash Flows
Cha#ter $%
16 - 2
How does a
company obtain its
cash?
How does a
company obtain its
cash?
Where does a
company spend its
cash?
Where does a
company spend its
cash?
What explains the
change in the cash
balance?
What explains the
change in the cash
balance?
Pur#ose o& the Statement
o& Cash 'lows
16 - 3
How did the
business fund its
operations?
How did the
business fund its
operations?
Did the business
borrow any funds or
repay any loans?
Did the business
borrow any funds or
repay any loans?
Does the business
have sufficient cash
to pay its debts as
they mature?
Does the business
have sufficient cash
to pay its debts as
they mature?
Did the business
make any dividend
payments?
Did the business
make any dividend
payments?
Im#ortan(e o& Cash 'lows
16 - 4
Cash
Cash
Currency
Cash
!uivalents

Short"term# highly li!uid investments$

%eadily convertible into cash$

Sufficiently close to maturity so that market value is

unaffected by interest rate changes$

Short"term# highly li!uid investments$

%eadily convertible into cash$

Sufficiently close to maturity so that market value is

unaffected by interest rate changes$
Measurement o& Cash 'lows
16 - 5
Classi&i(ation o& Cash 'lows
&he Statement of Cash Flows
includes the following three
sections'

(perating )ctivities

*nvesting )ctivities

Financing )ctivities
C1
16 - 6
(utflows

Salaries and wa)es

Paments to su##liers

*a+es and &ines

(utflows

Salaries and wa)es

Paments to su##liers

*a+es and &ines

*nflows

!e(ei#ts &rom (ustomers

*nflows

!e(ei#ts &rom (ustomers

,#eratin) A(ti-ities
C1
16 - 7
(utflows

Pur(hasin) lon).term
#rodu(ti-e assets

Pur(hasin) e/uit
in-estments

Pur(hasin) debt in-estments

(utflows

Pur(hasin) lon).term
#rodu(ti-e assets

Pur(hasin) e/uit
in-estments

Pur(hasin) debt in-estments

*nflows

Sellin) lon).term #rodu(ti-e

assets

Sellin) e/uit in-estments

Colle(tin) #rin(i#al on loans

*nflows

Sellin) lon).term #rodu(ti-e

assets

Sellin) e/uit in-estments

Colle(tin) #rin(i#al on loans

In-estin) A(ti-ities
C1
16 - 8
(utflows

Pur(hasin) treasur shares

!e#ain) (ash loans

(utflows

Pur(hasin) treasur shares

!e#ain) (ash loans

*nflows

Issuin) its own e/uit

se(urities

Issuin) bonds and notes

Issuin) short. and lon).term

liabilities

Contributions b owners
*nflows

Issuin) its own e/uit

se(urities

Issuin) bonds and notes

Issuin) short. and lon).term

liabilities

Contributions b owners
'inan(in) A(ti-ities
C1
16 - 9
Classifcation of Cash Flow Items
(perating *nvesting Financing
*nterest received +es +es
Dividends received +es +es
*nterest paid +es +es
Dividends paid +es +es
%eporting entities have choices in classifying interest and
dividends
C1
16 - 10
0on(ash In-estin) and 'inan(in)
*tems re!uiring separate disclosure
include'

%etirement of debt by issuing e!uity

securities$

Conversion of preference shares to

ordinary shares$
*tems re!uiring separate disclosure
include'

%etirement of debt by issuing e!uity

securities$

Conversion of preference shares to

ordinary shares$
C1
16 - 11
'ormat o& the Statement
o& Cash 'lows
16 - 12
Pre#arin) the Statement
o& Cash 'lows
P1
16 - 13
Anal1in) the Cash A((ount
P1
&he Cash account is a natural place to look for
information about cash flows from operating#
investing# and financing activities$
16 - 14
Anal1in) the Cash A((ount
P1
Cash &rom
,#eratin)
Cash &rom
In-estin)
Cash &rom
'inan(in)
Cash
Pro-ed
16 - 15
Anal1in) 0on(ash A((ount
P1
) second approach to preparing the statement
of cash flows is analy,ing noncash accounts$
16 - 16
In&ormation to Pre#are the Statement
P1
Comparative
-alance Sheets
Current
*ncome Statement
)dditional
*nformation
*nformation to prepare the statement of cash
flows usually comes from three sources'
16 - 17
Cash 'lows &rom ,#eratin)
Indire(t and Dire(t Methods o& !e#ortin)
&he net cash amount
provided by operating
activities is identical under
both the direct and indirect
methods$
Direct
.ethod
*ndirect
.ethod
16 - 18
A##li(ation o& the
Indire(t Method o& !e#ortin)
P2
16 - 19
A##li(ation o& the
Indire(t Method o& !e#ortin)
P2
)dditional information on /enesis *nc$0s 1233 transactions'
a2 *he a((ounts #aable balan(es result &rom mer(handise
in-entor #ur(hases.
b2 Pur(hased 345,555 in #ro#ert, #lant and e/ui#ment b
#ain) 3$5,555 (ash and issuin) 3%5,555 o& notes #aable.
(2 Sold #ro#ert, #lant and e/ui#ment with an ori)inal (ost o&
365,555 and a((umulated de#re(iation o& 3$7,555 &or 3$7,555
(ash, ieldin) a 3%,555 loss.
d2 !e(ei-ed 3$8,555 (ash &rom issuin) 6,555 shares o& no.#ar
ordinar shares.
e2 Paid 3$9,555 (ash to retire notes with a 36:,555 (arrin)
amount, ieldin) a 3$%,555 )ain.
&2 De(lared and #aid (ash di-idends o& 3$:,555.
16 - 20
*ncome
before
taxes
*ncome
before
taxes
Cash Flows
from (perating
)ctivities
Cash Flows
from (perating
)ctivities
Changes in noncash
current assets and current
liabilities
Changes in noncash
current assets and current
liabilities
4 5osses and
" /ains
4 5osses and
" /ains
4 6oncash
expenses such as
depreciation and
amorti,ation
4 6oncash
expenses such as
depreciation and
amorti,ation
A##li(ation o& the
Indire(t Method o& !e#ortin)
P2
3
1 7
16 - 21
Wh start with in(ome be&ore ta+es;

*nternational Financial %eporting Standards

8*F%S9

Cash flows arising from taxes on income

should be separately disclosed and should be
classified as cash flows from operating
activities$
P2
*ncome
before
taxes
*ncome
before
taxes
Cash Flows
from (perating
)ctivities
Cash Flows
from (perating
)ctivities
16 - 22
<se this table when ad=ustin) in(ome be&ore
ta+es to o#eratin) (ash &lows
Chan)e in A((ount Balan(e Durin) >ear
In(rease De(rease
6oncash
Current
)ssets
Subtra(t &rom in(ome Add to in(ome
Current
5iabilities
Add to in(ome
Subtra(t &rom in(ome
P2
Ad=ustments &or Chan)es in
0on(ash Current Assets and Current ?iabilities
16 - 23
P2
Ad=ustments &or Chan)es in
0onCAS@ Current Assets and
Current ?iabilities
16 - 24
P2
Ad=ustments &or ,#eratin) Items
0ot Pro-idin) or <sin) Cash
16 - 25
P2
Ad=ustments &or 0ono#eratin) Items
16 - 26
Interest !e-enues, Di-idend !e-enues,
Interest A+#enses and In(ome *a+es
:nder *F%S# interest and dividends received# interest paid and
income taxes must be separately shown$
Since interest and dividend revenues are added to
derive income amount# ad;ustments involve
deducting these amounts from income$
*nterest expenses are added to income to
cancel the earlier deduction$
P2
16 - 27
P2
C,MP?A*I0G *@A ,PA!A*I0G SAC*I,0
16 - 28
P2
Summar o& Ad=ustments
&or Indire(t Method
Common ad;ustments to income when computing net cash provided or
used by operating activities under the indirect method'
16 - 29
P3
Cash 'lows &rom In-estin)
*dentify changes in
investing"related
accounts
xplain these
changes using
reconstruction
analysis
%eport their cash
flow effects
A three-stage process to determine cash
provided or used by investing activities:
16 - 30
P3
Cash 'lows &rom In-estin)
*his analsis re-eals a 3:5,555
in(rease in #ro#ert, #lant and
e/ui#ment &rom 37$5,555 to
3785,555 and a 3$7,555
in(rease in a((umulated
de#re(iation &rom 3:9,555 to
3%5,555.
16 - 31
P3
Cash 'lows &rom In-estin)
Item b: Genesis #ur(hased #ro#ert, #lant and e/ui#ment o& 345,555
b issuin) 3%5,555 in notes #aable to the seller and #ain) 3$5,555
in (ash.
Item (: Genesis sold #ro#ert, #lant and e/ui#ment (ostin) 365,555
Bwith 3$7,555 o& a((umulated de#re(iation2 &or 3$7,555 (ash,
resultin) in a 3%,555 loss.
We also re(onstru(t the entr &or De#re(iation A+#ense usin)
in&ormation &rom the in(ome statement.
16 - 32
P3
Cash 'lows &rom In-estin)
16 - 33
P3
Cash 'lows &rom 'inan(in)
*dentify changes in
financing"related
accounts
xplain these
changes using
reconstruction
analysis
%eport their cash
flow effects
A three-stage process to determine cash
provided or used by financing activities:
16 - 34
P3
Cash 'lows &rom 'inan(in)
*his analsis re-eals:
$.an in(rease in notes #aable
&rom 3%:,555 to 3C5,555,
7.an in(rease in share (a#ital
&rom 395,555 to 3C8,555, and
6.an in(rease in retained
earnin)s &rom 399,555 to
3$$7,555.
16 - 35
P3
Cash 'lows &rom 'inan(in)
Item e: 0otes with a (arrin) amount o& 36:,555 are retired &or
3$9,555 (ash, resultin) in a 3$%,555 )ain.
Item b: Genesis #ur(hased #ro#ert, #lant and e/ui#ment o& 345,555
b issuin) 3%5,555 in notes #aable to the seller and #ain) 3$5,555
in (ash.
16 - 36
P3
Cash 'lows &rom 'inan(in)
Item d: Issued 6,555 no.#ar ordinar shares &or 38 #er share.
Item &: Cash di-idends o& 3$:,555 are #aid.
16 - 37
P3
16 - 38
P3
16 - 39
Anal1in) Cash
Sour(es and <ses
A1
.ost managers stress the importance of
understanding and predicting cash flows for business
decisions$
16 - 40
<sed, alon) with in(ome.based ratios, to
assess (om#an #er&orman(e.
<sed, alon) with in(ome.based ratios, to
assess (om#an #er&orman(e.
Cash &low on
total assets
D
,#eratin) (ash &lows
A-era)e total assets
Cash 'low on *otal Assets
A1
16 - 41
A##endi+ $%A: Dire(t Method o&
!e#ortin) ,#eratin) Cash 'lows
P4
)d;ust income statement accounts related to operating activities
for changes in their related balance sheet accounts'
Framework for
reporting cash
receipts and
cash payments
16 - 42
A##endi+ $%A: Dire(t Method o&
!e#ortin) ,#eratin) Cash 'lows
P4
16 - 43
And o& Cha#ter $%