13 Kieso

Slide
13-1
Chapter 13
Statement of
Cash Flows
Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso
Slide
13-2
Study
Study Objectives
Objectives
1. Indicate the usefulness of the statement of cash flows.

2. Distinguish among operating, investing, and financing
activities.
3. Prepare a statement of cash flows using the indirect
method.
4. Analyze the statement of cash flows.
Slide
13-3
Statement
Statement of
of Cash
Cash Flows
Flows
The Statement of Preparing the

Cash Flows: Statement of Cash Using Cash Flows to
Usefulness and FlowsIndirect Evaluate a Company
Format Method
Usefulness Step 1: Operating Free cash flow

Classifications activities
Significant non-cash Step 2: Investing and
activities financing activities
Format Step 3: Net change
in cash
Preparation
Indirect and direct
methods
Slide
13-4
Usefulness
Usefulness and
and Format
Format
Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entitys ability to generate future cash flows.
2. Entitys ability to pay dividends and obligations.
3. Reasons for difference between net income and net cash

provided (used) by operating activities.
4. Cash investing and financing transactions during the

period.
Slide
13-5
SO 1 Indicate the usefulness of the statement of cash flows.
Usefulness
Usefulness and
and Format
Format
Classification of Cash Flows
Operating
Activities Investing
Activities Financing
Income
Statement Activities
Generally
Items Non-Current
Generally Non-
Asset Items
Current
Liability and
Equity Items
Slide
13-6
SO 2 Distinguish among operating, investing, and financing activities.
Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows Illustration 13-1
Slide
13-7
Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows Illustration 13-1
Slide
13-8
Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows
IFRS requires that the following amounts be disclosed:

Cash paid for taxes.
Cash received and paid from interest and dividends.
Illustration 13-2
Daimlers statement of
cash flows note
Slide
13-9
Usefulness
Usefulness and
and Format
Format
Significant Non-Cash Activities

1. Direct issuance of ordinary shares to purchase assets.
2. Conversion of bonds into ordinary shares.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report these activities in either a separate note or

supplementary schedule to the financial statements.
Slide
13-10
Slide
13-11
Usefulness
Usefulness and
and Format
Format
Format of the Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.
The cash flows from operating activities section always

appears first, followed by the investing and financing sections.
Slide
13-12
Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 13-3
Slide
13-13 SO 2 Distinguish among operating, investing, and financing activities.
Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
During its first week, Hu Na Company had these
transactions.
Classification
1. Issued 100,000 HK$50 par value ordinary shares
for HK$8,000,000 cash. Financing
2. Borrowed HK$2,000,000 from Castle Bank,
signing a 5-year note bearing 8% interest. Financing
3. Purchased two semi-trailer trucks for
HK$1,700,000 cash. Investing
4. Paid employees HK$120,000 for salaries and
Operating
wages.
5. Collected HK$200,000 cash for services provided. Operating
Slide
13-14
Usefulness
Usefulness and
and Format
Format
Preparing the Statement of Cash Flows

Three Sources of Information:
1. Comparative statement of financial position
2. Current income statement
3. Additional information
Slide
13-15
Usefulness
Usefulness and
and Format
Format
Three Major Steps: Illustration 13-4
Slide
Usefulness
Usefulness and
and Format
Format
Three Major Steps: Illustration 13-4
Slide
Usefulness
Usefulness and
and Format
Format
Indirect and Direct Methods

Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare, and
2. Focuses on the differences between net income and net

cash flow from operating activities.
Slide
13-18
Slide
13-19
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration
Illustration 13-5
Indirect
Method
Slide
13-20 SO 3 Prepare a statement of cash flows using the indirect method.
Preparing
Preparing
the
the
Statement
Statement
of
of Cash
Cash
Flows
Flows
Indirect
Method
Illustration 13-5
Slide
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Additional information for 2011:

1. The company declared and paid a $29,000 cash dividend.
2. Issued $110,000 of long-term bonds in direct exchange for land.
3. A building costing $120,000 and equipment costing $25,000 were
purchased for cash.
4. The company sold equipment with a book value of $7,000 (cost
$8,000, less accumulated depreciation $1,000) for $4,000 cash.
5. Issued ordinary shares for $20,000 cash.
6. Depreciation expense was comprised of $6,000 for building and
$3,000 for equipment.
Slide
13-22
SO 3 Prepare a statement of cash flows using the indirect method.
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Indirect
Step 1: Operating Activities Method
Determine net cash provided/used by operating activities
by converting net income from an accrual basis to a cash
basis.
Common adjustments to Net Income (Loss):

Add back non-cash expenses (depreciation and
amortization expense).
Deduct gains and add losses that resulted from investing
and financing activities.
Analyze changes in non-cash current assets and current
Slide
liabilities.
13-23
Operating
Operating Activities
Activities
Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of shares.
c. Payment of cash dividends to the companys
shareholders.
d. None of the above.
Slide
13-24
Operating
Activities
Depreciation Expense
Although depreciation expense reduces net income, it does not
reduce cash.
Illustration 13-7
Slide
13-25
Operating
Activities
Loss on Sale of Equipment

Because companies report as a source of cash in the investing
activities section the actual amount of cash received from the
sale:
Any loss on sale is added to net income in the operating

section.
Any gain on sale is deducted from net income in the

operating section.
Slide
13-26
Operating
Activities
Loss on Sale of Equipment
Computer Services income statement reports a $3,000 loss on

the sale of equipment (book value $7,000, less $4,000 cash
received from sale of equipment).
Illustration 13-8
Slide
13-27
Operating
Activities
Changes to Non-Cash Current Asset Accounts

When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 13-9
Accounts Receivable
1/1/011 Balance 30,000 Receipts from customers 517,000

Revenues 507,000
12/31/11 Balance 20,000
Therefore, the company adds to net income the amount of the

decrease in accounts receivable.
Slide
13-28
Operating
Activities

Illustration 13-10
Slide
13-29
Operating
Activities

When the Inventory balance increases, the cost of
merchandise purchased exceeds the cost of goods sold.
Merchandise Inventory
1/1/11 Balance 10,000 Cost of goods sold 150,000

Purchases 155,000
12/31/11 Balance 15,000
As a result, cost of goods sold does not reflect cash payments

made for merchandise. The company deducts from net income
this inventory increase.
Slide
13-30
Operating
Activities

Illustration 13-10
Slide
13-31
Operating
Activities

When the Prepaid Expense balance increases
Cash paid for expenses is higher than expenses reported on

an accrual basis.
Company deducts the increase from net income to arrive at

net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher

than the expenses paid.
Slide
13-32
Operating
Activities

Illustration 13-10
Slide
13-33
Operating
Activities
Changes to Non-Cash Current Liability Accounts

When Accounts Payable increases
Company received more in goods than it actually paid for.
Increase is added to net income.
When Income Tax Payable decreases

Income tax expense was less than the amount of taxes paid
during the period.
Decrease is subtracted from net income.
Slide
13-34
Operating
Activities
Changes to Non-Cash Current Liability Accounts

Illustration 13-11
Slide
13-35
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Summary of Conversion to Net

Illustration 13-12
Cash Provided by Operating
ActivitiesIndirect Method
Slide
13-36
Step
Step 2:
2: Investing
Investing and
and Financing
Financing Activities
Activities
From the additional information, the company purchased land of
$110,000 by issuing long-term bonds. This is a significant
noncash investing and financing activity that merits disclosure in
a separate schedule.
Land
1/1/11 Balance 20,000
Issued bonds 110,000
12/31/11 Balance 130,000
Bonds Payable
1/1/11 Balance 20,000
For land 110,000
12/31/11 Balance 130,000
Slide
13-37
Investing
Investing and
and Financing
Activities
Partial statement Illustration 13-14
Slide
13-38
Investing
Investing and
and Financing
Activities
From the additional information, the company acquired an office

building for $120,000 cash. This is a cash outflow reported in
the investing section.
Building
1/1/11 Balance 40,000

Office building 120,000
12/31/11 Balance 160,000
Slide
13-39
Investing
Investing and
and Financing
Activities
Partial statement Illustration 13-14
Slide
13-40
Investing
Investing and
and Financing
Activities
The additional information explains that the equipment increase
resulted from two transactions: (1) a purchase of equipment of
$25,000, and (2) the sale for $4,000 of equipment costing $8,000.
Equipment
1/1/11 Balance 10,000 Equipment sold 8,000

Purchase 25,000
12/31/11 Balance 27,000
Cash 4,000
Journal Accumulated depreciation 1,000
Entry Loss on sale of equipment 3,000
Equipment 8,000
Slide
13-41
Statement
Statement
of
of Cash
Cash
Flows
Flows
Indirect
Method
Illustration 13-14
Slide
13-42
Investing
Investing and
and Financing
Activities
The additional information notes that the increase in share
capital - ordinary resulted from the issuance of new shares.
Ordinary Shares
1/1/11 Balance 50,000

Shares sold 20,000
12/31/11 Balance 70,000
Slide
13-43
Investing
Investing and
and Financing
Activities
Illustration 13-14
Partial statement
Slide
13-44
Investing
Investing and
and Financing
Activities
Retained earnings increased $116,000 during the year. This
increase can be explained by two factors: (1) Net income of
$145,000 increased retained earnings. (2) Dividends of $29,000
decreased retained earnings
Retained Earnings
1/1/11 Balance 48,000

Dividends 29,000 Net income 145,000
12/31/11 Balance 164,000
Slide
13-45
Illustration 13-14
Statement
Statement
of
of Cash
Cash
Flows
Flows
Indirect
Method
Step 3: Net
Change in
Cash
Slide
Investing
Investing and
and Financing
Activities
Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds
payable.
b. Payment of cash to repurchase outstanding
shares.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
Slide
13-47
Using
Using Cash
Cash Flows
Flows to
to Evaluate
Evaluate aa Company
Company
Free Cash Flow
Free cash flow describes the cash remaining from

operations after adjustment for capital expenditures and
dividends.
Slide
13-48
SO 4 Analyze the statement of cash flows.
Using
Using Cash
Cash Flows
Flows to
to Evaluate
Evaluate aa Company
Company
Illustration 13-16
Slide
13-49 SO 4 Analyze the statement of cash flows.
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences Statement of Cash Flows

Companies preparing financial statements under both IFRS and
GAAP must prepare a statement of cash flows as an integral
part of the financial statements.
Both IFRS and GAAP require that the statement of cash flows
should have three major sectionsoperating, investing, and
financingalong with changes in cash and cash equivalents.
Similar to IFRS, the cash flow statement can be prepared using

either the indirect or direct method under GAAP. In both U.S.
and international settings, most companies choose the indirect
method for reporting net cash flows from operating activities.
Slide
13-50
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences Statement of Cash Flows

The definition of cash equivalents used in GAAP is similar to
that used in IFRS. A major difference is that in certain
situations, bank overdrafts are considered part of cash and
cash equivalents under IFRS, which is not the case in GAAP.
Under GAAP, bank overdrafts are classified as financing
activities.
IFRS requires that non-cash investing and financing activities

be excluded from the statement of cash flows. Non-cash
investing and financing activities should be disclosed in the
notes instead of in the financial statements. Under GAAP,
companies may present this information at the bottom of the
cash flow statement.
Slide
13-51
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future Statement of Cash Flows

Presently, the FASB and the IASB are involved in a joint project on
the presentation and organization of information in the financial
statements. One interesting approach, revealed in a published
proposal from that project, is that in the future the income
statement and statement of financial position would adopt headings
similar to those of the statement of cash flows. That is, the income
statement and statement of financial position would be broken into
operating, investing, and financing sections. With respect to the
cash flow statement specifically, the notion of cash equivalents will
probably not be retained. That is, cash equivalents will not be
combined with cash but instead will be reported as a form of highly
continued
Slide
13-52
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future Statement of Cash Flows

liquid, low-risk investments. The definition of cash in the existing
literature would be retained, and the statement of cash flows would
present information on changes in cash only. In addition, the FASB
favors presentation of operating cash flows using the direct method
only. However, the majority of IASB members express a preference
for not requiring use of the direct method of reporting operating
cash flows. So, the two Boards will have to resolve their differences
in this area in order to issue a converged standard for the statement
of cash flows.
Slide
13-53
Using
Using aa Worksheet
Worksheet to
to Prepare
Prepare the
the Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect Method
Method
Appendix A
Illustration 13A-1
Slide SO 5 Explain how to use a worksheet to prepare the statement of cash flows
13-54 using the indirect method.
Using
Using aa Worksheet
Worksheet to
to Prepare
Prepare the
the Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect Method
Method
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the
statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that

explain the changes in the statement of financial position accounts
other than cash and their effects on the statement of cash flows.
3. Enter the cash line and at the bottom of the worksheet the increase
or decrease in cash. This entry should enable the totals of the
reconciling columns to be in agreement.
Slide SO 5 Explain how to use a worksheet to prepare the statement of cash flows
13-55 using the indirect method.
Using
Using aa Worksheet
Worksheet
to
to Prepare
Prepare the
the
Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect
Method
Method
Illustration 13A-3
Completed worksheet
Slide indirect method
13-56
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Appendix B
1. Under the direct method, companies compute net cash
provided by operating activities by adjusting each item in the
income statement from the accrual basis to the cash basis.
2. To simplify and condense the operating activities section,

companies report only major classes of operating cash
receipts and cash payments.
3. For these major classes, the difference between cash receipts

and cash payments is the net cash provided by operating
activities.
Slide
13-57 SO 6 Prepare a statement of cash flows using the direct method.
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 1: Operating Activities

Illustration 13B-2
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Illustration 13B-1
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Illustration 13B-1
Additional information:
1. In 2011, the company declared and paid a $32,000 cash dividend.
2. Bonds were issued at face value for $130,000 in cash.
3. Equipment costing $180,000 was purchased for cash.
4. Equipment costing $20,000 was sold for $17,000 cash when the book value of the
equipment was $18,000.
5. Ordinary shares of $60,000 were issued to acquire land.
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Receipts from Customers

For Juarez Company, accounts receivable decreased $3,000.
Illustration 13B-3
Illustration 13B-5
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments to Suppliers
In 2011, Juarez Companys inventory increased $10,000
and cash payments to suppliers were $678,000.
Illustration 13B-6 Illustration 13B-7
Illustration 13B-9
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments for Operating Expenses

Cash payments for operating expenses were $179,000,
Illustration 13B-10
Illustration 13B-11
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments for Income Taxes

Cash payments for income taxes were $24,000,
Illustration 13B-12
Illustration 13B-13
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2: Investing and Financing Activities

Increase in Equipment. (1) Juarez purchased for cash equipment
costing $180,000. And (2) it sold for $17,000 cash equipment
costing $20,000, whose book value was $18,000.
Illustration 13B-15
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method

Increase in Land. Juarezs land
increased $60,000. The additional Significant non-cash
information section indicates that the investing and financing
company issued ordinary shares to transaction.
purchase the land.
Increase in Bonds Payable. Bonds

Payable increased $130,000. The
additional information indicated that Financing activity.
Juarez issued, for $130,000 cash,
bonds with a face value of $130,000.
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method

Increase in Share Capital - Ordinary.
The Share Capital - Ordinary account Significant non-cash
increased $60,000. The additional investing and financing
information indicated that Juarez transaction.
acquired land from the issuance of
ordinary shares.
Increase in Retained Earnings. The

$52,000 net increase in Retained
Earnings resulted from net income of Financing activity (cash
$84,000 and the declaration and dividend).
payment of a cash dividend
of $32,000.
Slide
Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2:
Investing
and
Financing
Activities
Step 3: Net
Change in
Cash
Illustration 13B-16
Slide
Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Slide
13-69

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Slide

Financial Accounting, IFRS Edition

1. Indicate the usefulness of the statement of cash flows.

The Statement of Preparing the

Usefulness Step 1: Operating Free cash flow

Usefulness of the Statement of Cash Flows

2. Entitys ability to pay dividends and obligations.

3. Reasons for difference between net income and net cash

4. Cash investing and financing transactions during the

Classification of Cash Flows

IFRS requires that the following amounts be disclosed:

Cash received and paid from interest and dividends.

Significant Non-Cash Activities

Companies report these activities in either a separate note or

Format of the Statement of Cash Flows

The cash flows from operating activities section always

Preparing the Statement of Cash Flows

Three Major Steps: Illustration 13-4

Three Major Steps: Illustration 13-4

Indirect and Direct Methods

1. Easier and less costly to prepare, and

2. Focuses on the differences between net income and net

Additional information for 2011:

Common adjustments to Net Income (Loss):

Loss on Sale of Equipment

Any loss on sale is added to net income in the operating

Any gain on sale is deducted from net income in the

Loss on Sale of Equipment

Computer Services income statement reports a $3,000 loss on

Changes to Non-Cash Current Asset Accounts

1/1/011 Balance 30,000 Receipts from customers 517,000

12/31/11 Balance 20,000

Therefore, the company adds to net income the amount of the

Changes to Non-Cash Current Asset Accounts

Changes to Non-Cash Current Asset Accounts

1/1/11 Balance 10,000 Cost of goods sold 150,000

12/31/11 Balance 15,000

As a result, cost of goods sold does not reflect cash payments

Changes to Non-Cash Current Asset Accounts

Changes to Non-Cash Current Asset Accounts

Cash paid for expenses is higher than expenses reported on

Company deducts the increase from net income to arrive at

If prepaid expenses decrease, reported expenses are higher

Changes to Non-Cash Current Asset Accounts

Changes to Non-Cash Current Liability Accounts

Increase is added to net income.

When Income Tax Payable decreases

Changes to Non-Cash Current Liability Accounts

Summary of Conversion to Net

From the additional information, the company acquired an office

1/1/11 Balance 40,000

12/31/11 Balance 160,000

1/1/11 Balance 10,000 Equipment sold 8,000

12/31/11 Balance 27,000

1/1/11 Balance 50,000

12/31/11 Balance 70,000

1/1/11 Balance 48,000

12/31/11 Balance 164,000

Free Cash Flow

Free cash flow describes the cash remaining from

Key Differences Statement of Cash Flows

Similar to IFRS, the cash flow statement can be prepared using

Key Differences Statement of Cash Flows