Cash Flow Statement
Kathmandu University School of
Management
Facilitator: Asst. Prof. Nisha Adhikari
Purpose of the Statement
of Cash Flows
Explains changes in cash over a period of time
Summarizes cash inflows and outflows from:
Operating Financing
Activities Investing Activities
Activities
LO1
Cash Flows and Net Income for
Four Companies
Increase
(in millions) (Decrease) Net Income
Company Fiscal Year end in Cash (Loss)
Apple, Inc. (9/25/10) $ 5,998 $14,013
Best Buy, Co (2/26/11) (723) 1,366
AMR Corp. 15
(12/31/10) (471)
U.S. Steel Corp. (12/31/10) (640) (482)
Cash Equivalents
Readily convertible
to cash
Examples: Little risk of price
Commercial paper
U.S. Treasury bills change
Certain money market funds Original maturity to
investor of three
months or less
LO2
Statement of Cash Flows Format
inflows Cash outflows
Classified by:
Operating activities
Investing activities
Financing activities
=
+Beginning
Cash and = Ending
Increase or decrease in Cash and
Cash cash and cash
Equivalents Cash
equivalents Equivalents
LO3
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $ xxx
Cash flows from investing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $xxx
from balance sheets
Operating Activities
Collection of Payment to suppliers
customer accounts for inventory
Cash
transactions
concerned with
acquiring and
selling products
and services
Payment of taxes Payment of wages
Financing Activities
Issuance/repurchase Issuance/repayment
of stock Cash of bank note
transactions
concerned with
the raising and
repayment of
funds in the
form of debt
and equity
Issuance/retirement
of bonds Payment of dividends
Categorizing Cash Flow Activities
Operating Activities Current
Investing Activities assets
and
current
liabilities
Long-term
Long-term liabilities
assets
Financing or
Activities stockholders’
equity
Methods to Report Cash from
Operating Activities
Direct Method The amount of
• Reports major classes of cash provided by
gross cash receipts and operating
cash payments activities is the
same under both
Indirect Method methods
• Adjusts net income to
remove the effect of all
accruals and deferrals
LO4
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $xxx
Cash flows from investing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Inflows
Only operating section $ xxx
Outflows of statement differs in (xxx)
form activities
Net cash provided (used) by financing between direct xxx
Net increase (decrease) in cash and
andcash equivalents
indirect method $xxx
Cash and cash equivalents at beginning of year
(net cash flow total is xxx
Cash and cash equivalents at end of year $xxx
the same)
Preparing the Statement Cash Flows:
Direct Method
Step 1: Set up three master T accounts
Cash Flows from Cash Flows from Cash Flows from
Operating Activities Investing Activities Financing Activities
Step 2: Determine the cash flows from
operating activities
LO5
Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Receivable 670,000
Sales Revenue* 670,000
To record sales on account.
*from income statement
Accounts Receivable
Sales on account 670,000
??? Cash collections
Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Receivable 670,000
Sales Revenue* 670,000
To record sales on account.
*from income statement
From Balance Accounts Receivable
Sheet
Bal., Jan. 1 57,000
Sales on account 670,000 664,000 Cash collections
Bal., Dec. 31 63,000
Direct Method: Operating Activities
Review journal entries recorded during period:
Cash 15,000
Interest Revenue 15,000
To record interest earned and received.
Interest Revenue
15,000 Interest
Direct Method: Operating Activities
Review journal entries recorded during period:
Cost of goods sold* 390,000
Inventory 390,000
To record cost of goods sold.
*from income statement
From Balance Inventory
Sheet
Bal., Jan. 1 92,000
Purchases on account ?? 390,000 Cost of goods sold
Bal., Dec. 31 84,000
Direct Method: Operating Activities
Review journal entries recorded during period:
Cost of goods sold* 390,000
Inventory 390,000
To record cost of goods sold.
*from income statement
From Balance Inventory
Sheet
Bal., Jan. 1 92,000
Purchases on
390,000 Cost of goods sold
account 382,000
Bal., Dec. 31 84,000
Direct Method: Operating Activities
Review journal entries recorded during period:
Inventory 382,000
Accounts Payable 382,000
To record purchases on account.
From Balance Accounts Payable
Sheet
31,000 Bal., Jan. 1
Cash payments ??? 382,000 Purchases
38,000 Bal., Dec. 31
Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Payable 375,000
Cash 375,000
To record cash payments on account.
From Balance Accounts Payable
Sheet
31,000 Bal., Jan. 1
Cash payments 375,000 382,000 Purchases
38,000 Bal., Dec. 31
Direct Method: Operating Activities
Review journal entries recorded during period:
Salaries and Wages Expense 60,000
Salaries and Wages Payable 60,000
To record salaries and wages.
From Balance Salaries and Wages Payable
Sheet
9,000 Bal., Jan. 1
Cash payments ??? 60,000 Expense
7,000 Bal., Dec. 31
Direct Method: Operating Activities
Review journal entries recorded during period:
Salaries and Wages Payable 62,000
Cash 62,000
To record cash paid to employees.
From Balance Salaries and Wages Payable
Sheet
9,000 Bal., Jan. 1
Cash payments 62,000 60,000 New unpaid wages
7,000 Bal., Dec. 31
Direct Method: Operating Activities
Review journal entries recorded during period:
Depreciation Expense 40,000
Accumulated Depreciation 40,000
To record depreciation.
There is no effect on cash flow from
depreciation.
Direct Method: Operating Activities
Review journal entries recorded during period:
Insurance Expense 12,000
Prepaid Insurance 12,000
To record expiration of insurance.
From Balance Prepaid Insurance
Sheet
Bal., Jan. 1 18,000
Cash payments ?? 12,000 Expense
Bal., Dec. 31 12,000
Direct Method: Operating Activities
Review journal entries recorded during period:
Prepaid Insurance 6,000
Cash 6,000
To record cash paid for insurance.
From Balance Prepaid Insurance
Sheet
Bal., Jan. 1 18,000
Cash payments 6,000 12,000 Expense
Bal., Dec. 31 12,000
Direct Method: Operating Activities
Review journal entries recorded during period:
Interest Expense 15,000
Cash 15,000
To record interest expense.
From Balance Interest Expense
Sheet
Bal., Jan. 1 0
Cash payments 15,000 15,000 Expense
Bal., Dec. 31 0
Direct Method: Operating Activities
Review journal entries recorded during period:
Income Taxes Expense 50,000
Income Taxes Payable 50,000
To record income taxes.
From Balance Income Taxes Payable
Sheet
5,000 Bal., Jan. 1
Cash payments ??? 50,000 Expense
8,000 Bal., Dec. 31
Direct Method: Operating Activities
Review journal entries recorded during period:
Income Taxes Payable 47,000
Cash 47,000
To record cash paid in taxes.
From Balance Income Tax Payable
Sheet
5,000 Bal., Jan. 1
Cash payments 47,000 50,000 Expense
8,000 Bal., Dec. 31
Master T Account for Cash Flows
from Operating Activities
Cash Flows from Operating Activities
Cash receipts from: Cash payments for:
Sales on account 664,000 375,000 Inventory purchases
Interest 15,000 62,000 Salaries and wages
6,000 Insurance
15,000 Interest
47,000 Taxes
Net cash inflows 174,000
Investing Activities
Cash transactions
concerned with
acquiring and Capital
expenditures
disposing of long-
term assets
Sale of property, plant Purchase/sale of
and equipment another company
Preparing the Statement of
Cash Flows: Direct Method
Step 3: Determine the cash flows from
investing
activities
Direct Method: Investing Activities
Review journal entries recorded during period:
Long-Term Investments 30,000
Cash 30,000
To record purchase of investments.
From Balance Long-Term Investments
Sheet
Bal., Jan. 1 90,000
Cash payments 30,000
Bal., Dec. 31 120,000
Direct Method: Investing Activities
Review journal entries recorded during period:
Land 50,000
Notes Payable 50,000
To record acquisition of land in exchange for note.
No cash was involved in this transaction
so it should be reported in a separate
schedule instead of directly on the
statement of cash flows.
Direct Method: Investing Activities
Review journal entries recorded during period:
Property and equipment 75,000
Cash 75,000
To record acquisition of equipment for cash.
From Balance Property and Equipment
Sheet
Bal., Jan. 1 280,000
Acquisitions 75,000 Disposals 35,000
Bal., Dec. 31 320,000
Direct Method: Investing Activities
Book value of equipment sold was $20,000.
Original cost of equipment was $35,000.
From Balance Accumulated Depreciation
Sheet
75,000 Bal., Jan. 1
Disposals 15,000 40,000 Depreciation Exp.
100,000 Bal., Dec. 31
Master T Account for Cash Flows
from Investing Activities
Cash Flows from Investing Activities
Cash receipts from: Cash payments for:
Sale of machine 25,000 30,000 Purchase of
investments
75,000 Purchase of
property and
equipment
80,000 Net cash outflows
Noncash Investing and
Financing Activities
Disclose important financing and investing
activities which do not require cash
Exchange stock for assets
Buy assets through debt financing
from supplier
Preparing the Statement of Cash
Flows: Direct Method
Step 4: Determine the cash flows
from financing
activities
Direct Method: Financing Activities
Review journal entries recorded during period:
Land 50,000
Notes Payable 50,000
To record acquisition of land in exchange for note.
No cash was involved in this transaction
so it should be reported in a separate
schedule instead of directly on the
statement of cash flows.
Direct Method: Financing Activities
Review journal entries recorded during period:
Loss on Retirement of Bonds (Retained Earnings) 3,000
Bonds Payable 60,000
Cash 63,000
To record retirement of bonds.
From Balance Bonds Payable
Sheet
260,000 Bal., Jan. 1
Retirement 60,000
200,000 Bal., Dec. 31
Direct Method: Financing Activities
Review journal entries recorded during period:
Cash 25,000
Capital Stock 25,000
To record issuance of stock in exchange for cash.
From Balance Capital Stock
Sheet
75,000 Bal., Jan. 1
25,000 Stock issued
100,000 Bal., Dec. 31
Direct Method: Financing Activities
Review journal entries recorded during period:
Retained Earnings 67,000
Cash 67,000
To record cash dividends paid.
From Balance Retained Earnings
Sheet
193,000 Bal., Jan. 1
Cash dividends 67,000 120,000 Net income 2012
246,000 Bal., Dec. 31
Master T Account for Cash Flows
from Financing Activities
Cash Flows from Financing Activities
Cash receipts from: Cash payments for:
Issuance of stock 25,000 63,000 Retirement of bonds
67,000 Payment of cash
dividends
105,000 Net cash outflows
Contd..
Indirect Method:
Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities
LO6
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Accounts Receivable
Bal. Jan. 1 57,000
Net increase 6,000 Decrease $6,000
Bal. Dec. 31 63,000
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Inventory
Bal. Jan. 1 92,000 8,000 Net decrease
Bal. Dec. 31 84,000 Increase $8,000
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Accounts Payable
31,000 Bal. Jan. 1
7,000 Net increase
Increase $7,000
38,000 Bal. Dec. 31
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Salaries and Wages Payable
9,000 Bal. Jan. 1
Net decrease 2,000 Increase $2,000
7,000 Bal. Dec. 31
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Prepaid Insurance
Bal. Jan. 1 18,000
6,000 Net decrease
Bal. Dec. 31 12,000 Decrease $6,000
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Income Taxes Payable
5,000 Bal. Jan. 1
Increase $3,000 3,000 Net increase
8,000 Bal. Dec. 31
Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Gain on sale of machine (5,000)
Depreciation expense 40,000
Loss on retirement of bonds 3,000
Report entire
Add back
Gain is not part of outflow as a
noncash expense
operating activities financing activity
End of Chapter 5