17 Statement of
Cash Flows
Learning Objectives
After studying this chapter, you should be able to:
[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.
17-1
Preview of Chapter 17
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
17-2
Usefulness and Format
Usefulness of the Statement of Cash Flows
Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s 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.
17-3 LO 1 Indicate the usefulness of the statement of cash flows.
Usefulness and Format
Classification of Cash Flows
Operating Investing Financing
Activities Activities Activities
Income Changes in Changes in
Statement Items Investments and Long-Term
Long-Term Liabilities and
Asset Items Stockholders’
Equity Items
17-4 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Illustration 17-1
Classification of Cash Flows Typical receipt and
payment classifications
Operating activities—Income statement items
Cash inflows:
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.
17-5 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Illustration 17-1
Classification of Cash Flows Typical receipt and
payment classifications
Investing activities—Changes in investments and long-term
assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities.
17-6 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Illustration 17-1
Classification of Cash Flows Typical receipt and
payment classifications
Financing activities—Changes in long-term liabilities and
stockholders’ equity
Cash inflows:
From sale of common stock.
From issuance of debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock (treasury stock).
17-7 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Significant Noncash Activities
1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report noncash activities in either a
separate schedule (bottom of the statement) or
separate note to the financial statements.
17-8 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Format of the Statement of Cash Flows
Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.
3. Financing activities.
17-9 LO 2 Distinguish among operating, investing, and financing activities.
> DO IT!
Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 shares of $5 par value
Financing
common stock for $800,000 cash.
2. Borrowed $200,000, signing a 5-year note Financing
bearing 8% interest.
3. Purchased two semi-trailer trucks for $170,000 Investing
cash.
4. Paid employees $12,000 for salaries and Operating
wages.
5. Collected $20,000 cash for services performed. Operating
17-10 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Preparing the Statement of Cash Flows
Three Sources of Information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
17-11 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-12 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-13 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Preparing the Statement of Cash Flows
Three Major Steps:
Illustration 17-3
17-14 LO 2 Distinguish among operating, investing, and financing activities.
Usefulness and Format
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. Easier and less costly to
prepare.
2. Focuses on differences
between net income and net
cash flow from operating
activities.
17-15 LO 2 Distinguish among operating, investing, and financing activities.
Preparing the Statement of Cash Flows
Illustration – Indirect Method
Illustration 17-4
17-16 LO 3 Prepare a statement of cash flows using the indirect method.
Preparing the Statement of Cash Flows
Illustration 17-4
17-17 LO 3 Prepare a statement of cash flows using the indirect method.
Preparing the Statement of Cash Flows
Illustration 17-4
Additional information for 2014:
1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also
purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
17-18 LO 3
Preparing the Statement of Cash Flows
Step 1: Operating Activities
Determine net cash provided/used by operating activities by
converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):
Add back non-cash expenses (depreciation, amortization, or
depletion expense).
Deduct gains and add losses.
Changes in noncash current assets and current liabilities.
17-19 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Depreciation Expense
Although depreciation expense reduces net income, it does not
reduce cash. The company must add it back to net income.
Illustration 17-6
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities $ 154,000
17-20 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Loss on Disposal of Equipment
Companies report as a source of cash in the investing
activities section the actual amount of cash received from the
sale.
Any loss on disposal is added to net income in the
operating section.
Any gain on disposal is deducted from net income in the
operating section.
17-21 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Loss on Disposal of Equipment
Illustration 17-7
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of equipment 3,000
Net cash provided by operating activities $ 157,000
17-22 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Changes to Noncash Current Asset Accounts
Illustration 17-9
Cash flows from operating activities:
Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of equipment 3,000
Decrease in accounts receivable 10,000
Net cash provided by operating activities $ 167,000
17-23 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Changes to Noncash Current Asset Accounts
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual basis.
The company deducts the decrease from net income to arrive at
net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher
than the expenses paid.
17-24 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Changes to Noncash Current Liability Accounts
When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Tax Payable decreases, the income tax expense
reported on the income statement was less than the amount of
taxes paid during the period. The decrease is subtracted from
net income to determine net cash provided by operating activities.
17-25 LO 3 Prepare a statement of cash flows using the indirect method.
Step 1: Operating Activities
Summary of Conversion to Net Cash Provided
by Operating Activities—Indirect Method
Illustration 17-11
17-26
LO 3
Step 2: Investing and Financing Activities
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
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance 20,000
For land 110,000
12/31/14 Balance 130,000
17-27 LO 3 Prepare a statement of cash flows using the indirect method.
Step 2: Investing 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
1/1/14 Balance 40,000
Office building 120,000
12/31/14 Balance 160,000
17-28 LO 3 Prepare a statement of cash flows using the indirect method.
Step 2: Investing and Financing Activities
Partial statement Illustration 17-13
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
Disclosure: Issuance of bonds to purchase land $ 110,000
17-29 LO 3
Illustration 17-13
Statement Cash flows from operating activities:
Net income $ 145,000
of Cash Adjustments to reconcile net income to net cash
provided by operating activities:
Flows Depreciation expense
Loss on disposal of equipment
9,000
3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Indirect Decrease in income taxes payable (2,000)
Method Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
17-30
LO 3
Step 2: Investing and Financing Activities
Illustration 17-13
Partial statement
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
Disclosure: Issuance of bonds to purchase land $ 110,000
17-31
LO 3
Illustration 17-13
Statement Cash flows from operating activities:
Net income $ 145,000
of Cash Adjustments to reconcile net income to net cash
provided by operating activities:
Flows Depreciation expense
Loss on disposal of equipment
9,000
3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Indirect Decrease in income taxes payable (2,000)
Method Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
17-32
LO 3
Step 3: Net Change in Cash
Compare the net change in cash on the Statement of Cash Flows
with the change in the cash account reported on the Balance
Sheet to make sure the amounts agree.
Illustration 17-4
17-33 LO 3 Prepare a statement of cash flows using the indirect method.