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Chapters 4 B. Statement of Cash Flows. Objectives of this Chapter. I. Identify business activities which can generate or use cash and differentiate between income flows (i.e., accrual basis) and cash flows from operating activities.

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Chapters 4 b

Chapters 4 B

Statement of Cash Flows


Objectives of this chapter
Objectives of this Chapter

  • I. Identify business activities which can generate or use cash and differentiate between income flows (i.e., accrual basis) and cash flows from operating activities.

  • II. The Importance and the usefulness of the statement of cash flows.

Statement of Cash Flows


Objectives of this chapter contd
Objectives of this Chapter (contd.)

  • III. Learn how to prepare the statement of cash flows.

  • VI. The “cash burn rate” and the use of this rate in evaluating the financial viability of start-up companies.

  • V. Learn the two alternatives (direct and indirect methods) in preparing net cash flows from operating activities.

Statement of Cash Flows


I activities which can either generate cash or use cash for a business entity
I. Activities which can either generate cash or use cash for a business entity

  • A. Operating activities.

  • B. Investing activities.

  • C. Financing activities.

Statement of Cash Flows


A operating activities i e sales revenue expenses
A. Operating Activities (i.e., sales revenue, expenses) a business entity

  • All these activities are reported in the I/S (income statement). However, I/S only provides the accrual-basis net income (revenue –expense + gains – losses ) which very often is not the change in cash.

  • Therefore, we need to adjust from net income flows to cash flows in order to report the net cash provided by (or used in) operating activities.

Statement of Cash Flows


A operating activities contd
A. Operating Activities (contd.) a business entity

  • There are two approaches to reconcile net income to net cash provided by (or used in) operating activities:

    • 1. Indirect Method

    • ==> Lump-Sum Adjustment

    • 2. Direct Method

    • ==> Individual Account Adjustment

Statement of Cash Flows


1 indirect method
1. Indirect Method a business entity

  • Adjust net income (the lump sum amount of all revenues and expenses) for all differences between income flows and cash flows.

Statement of Cash Flows


2 direct method
2. Direct Method a business entity

  • Adjust each revenue account to cash collection and adjust each expense account to cash payment. Subtract total cash payments from total cash collections to derive net cash flows of the operation activities.

  • SFAS No. 95 allows a choice between the direct and indirect approach for the cash flow statement

Statement of Cash Flows


Cash flows from operating activities
Cash flows from operating activities a business entity

  • Cash Inflows:

    • 1. Collections from customers including cash received from sales (or services) and collections of A/R.

    • 2. Cash receipts of interests or dividends.

    • 3. Collections of other operating receipts (i.e., unearned revenue, rent revenue).

Statement of Cash Flows


Cash flows from operating activities contd
Cash Flows from a business entityOperating Activities (contd.)

  • Cash Outflows:

    • 1. Payments to suppliers.

    • 2. Payments to employees.

    • 3. Payments for interest expense.

    • 4. Payments for income taxes.

    • 5. Payments for other expenses(i.e., Prepaid expenses; rent expenses).

Statement of Cash Flows


Activities which can either generate cash or use cash for a business entity
Activities which can either generate cash or use cash for a business entity

  • A. Operating activities.

  • B. Investing activities.

  • C. Financing activities.

Statement of Cash Flows


B investing activities
B. Investing Activities business entity

  • In addition to generate cash from or use cash in the operating activities, companies can also generate cash from (or use cash in) investing activities.

Statement of Cash Flows


Cash flows from investing activities
Cash Flows from business entityInvesting Activities

  • Transactions involving acquiring (Investing (Cash outflows)) and selling (Disinvesting (Cash inflows)):

    • a. Property, Plant and Equipment.

    • b. Investments (current and non-current).

    • c. Notes Receivable (current and non-current).

Statement of Cash Flows


Notes receivable
Notes Receivable business entity

  • Notes Receivable (current and non-current), including:

    • Lending money (N/R , cash outflow);

    • Collecting of loan (N/R , cash inflow);

    • Selling of N/R (N/R, discounting N/R, cash inflow)

Statement of Cash Flows


Activities which can either generate cash or use cash for a business entity1
Activities which can either generate cash or use cash for a business entity

  • A. Operating activities.

  • B. Investing activities.

  • C. Financing activities.

Statement of Cash Flows


C financing activities
C. Financing Activities business entity

  • Companies can also generate cash or use cash through financing activities:

Statement of Cash Flows


Cash flows from financing activities
Cash Flows from business entityFinancing Activities

  • Obtaining resources from owners and creditors (cash inflows) and repaying the amount borrowed (cash outflows).

  • Cash inflows:

    • Cash received from issuance of common stock.

    • Cash received from issuance of bonds.

    • Cash received from issuance of N/P (short-term or long term).

Statement of Cash Flows


Cash flows from financing activities contd
Cash Flows from business entityFinancing Activities (contd.)

  • Cash Outflows:

    • Retirement of bonds.

    • Retirement of stock.

    • Payments of N/P.

    • Payments of dividends.

Statement of Cash Flows


Ii the importance and usefulness of the statement of cash flows
II. The Importance and Usefulness of the Statement of Cash Flows

  • Possible earnings managements may result in unreliable accrual earnings.

  • Accrual accounting relies on many subjective judgments that may introduce measurement error and uncertainty into reported earnings.

  • One-time write-offs and restructuring charges can reduce the quality of reported earnings.

  • For these reasons, analysts scrutinize a firm’s cash flows—not just its accrual earnings—to evaluate performance and creditworthiness.


The importance and usefulness of the statement of cash flows cont
The Importance and Usefulness of the Statement of Cash Flows (cont.)

  • In order to show cash flows of a company, cash flows of all three activities should be reported.

  • In doing so, investors can also obtain all the information of operating, investing, and financing activities of a company. Moreover, the following questions can also be answered:

Statement of Cash Flows


The importance and the usefulness of the statement of cash flows contd
The Importance and the Usefulness of the Statement of Cash Flows (contd.)

  • 1. What is the relationship between net income and cash provided by operations?

  • 2. Why did cash decreased when net income increased?

  • 3. What expansion (investment) activities took place and how were they financed?

Statement of Cash Flows


The importance and the usefulness of the statement of cash flows contd1
The Importance and the Usefulness of the Statement of Cash Flows (contd.)

  • 4. How much is the cash provided by operating activities?

  • 5. What happened to the proceeds received from issuance of bonds or common stock?

  • All of these cannot be answered from either the income statement or the balance sheet statement.

Statement of Cash Flows


Sfas no 95
SFAS No. 95 Flows (contd.)

  • To improve the comparability, SFAS No. 95, “Statement of Cash Flows,” requires companies present the statement of cash flows using a specific format.

Statement of Cash Flows


Sfas no 95 contd
SFAS No. 95 (contd.) Flows (contd.)

  • Following SFAS No. 95, the statement of cash flows should have three sections:

    • 1. Cash flows from operating activities (using a direct or an indirect method).

    • 2. Cash flows from investing activities.

    • 3. Cash flows from financing activities.

Statement of Cash Flows


Cash flow statement wal mart example
Cash flow statement: Flows (contd.)Wal-Mart example

Adjustments to accrual earnings

4-25


Cash flow statement wal mart example1
Cash flow statement: Flows (contd.)Wal-Mart example

4-26


Iii procedures for preparation of the statement of cash flows
III. Procedures for Preparation of the Statement of Cash Flows

  • 1. Operating Cash Flows (indirect method).

  • 2. Investing Cash Flows.

  • 3. Financing Cash Flows.

Statement of Cash Flows


1 operating cash flows indirect method reconciliation method
1. Operating Cash Flows Flows(Indirect Method; Reconciliation Method)

  • Net Income

    •  Adjustments

    • + Any increase in current Liabilities (except for N/P)

    • + Any decrease in current assets (except for cash and N/R)

    • - Any decrease in current liabilities (except for N/P)

    • - Any increase in current assets (except for cash and N/R)

Statement of Cash Flows


2 investing cash flows
2. Investing Cash Flows Flows

  • Inflows: decrease in noncurrent assets (i.e., long-term investments, P.P.E.) and certain current assets (i.e., trading securities, N/R).

  • Outflows: increases in noncurrent assets and certain current assets

Statement of Cash Flows


3 financing cash flows
3. Financing Cash Flows Flows

  • Inflows: increases in noncurrent liabilities (i.e., B/P, N/P), stockholders’ equity and certain current liability (i.e., N/P).

  • Outflows: decreases in noncurrent liabilities, stockholders’ equity, certain current liability and dividend payment.

Statement of Cash Flows


Adjustments to convert net income to net cash flow from operating activities

Net Income Flows

Adjustments

Adjustments to Convert Net Income to Net Cash Flow from Operating Activities

  • + Depreciation, depletion and amortization expense, B/D expense

  • + Amortization of discount on B/P

  • + Amortization of premium on investment in bonds

  • + Increase in deferred income tax liability

  • + Loss on disposal of assets or liabilities

  • + Investment loss under the equity method

Statement of Cash Flows


Adjustments to convert net income to net cash flow from operating activities contd
Adjustments to Convert Net Income to Net Cash Flow from Operating Activities (contd.)

  • + Increases in current liabilities other than N/P (i.e., A/P, salaries payable, interest payable, I/T payable, deferred I/T, and any other current liabilities related to operations)

  • + Decreases in current assets other than cash and N/R (i.e., A/R, interest receivable, inventory, prepaids, and any other current assets related to operations)

Statement of Cash Flows


Adjustments to convert net income to net cash flow from operating activities contd1

Adjustments Operating Activities (contd.)

Adjustments to Convert Net Income to Net Cash Flow from Operating Activities (contd.)

  • - Amortization of premium on B/P

  • - Amortization of discount on investment in bonds

  • - Gain on disposal of assets or liabilities

  • - Investment income under the equity method

  • - Decrease in deferred income tax liability

  • - Decreases in current liabilities

  • - Increases in current assets

  • | |

  • Net Cash Flows from Operating Activities

Statement of Cash Flows


Adjustments amortization of discount on b p
Adjustments: Operating Activities (contd.)+ Amortization of Discount on B/P

  • Example: Issue a 2-year bond, market int. rate = 12%, bond int. rate = 10%

    • P.V. of Bond = $10,000 x 0.797 + 1,000 x 1.690 = 9,600

  • 1. 1/1/x1

    • Cash 9,660

    • Discount on B/P 340

    • B/P 10,000

Statement of Cash Flows


Adjustments amortization of dis on b p contd
Adjustments: Operating Activities (contd.)+ Amortization of Dis. on B/P (contd.)

  • 2. Payment of Interest on 12/31/x1

    • Interest Expense

    • (12% x 9660)1159.2

    • Cash 1,000.0

    • Dis. On B/Pa 159.2

    • a. Amortization of bond discount increase interest expense but does not use cash.

Statement of Cash Flows


Adjustments amortization of dis on b p contd1

Dis Operating Activities (contd.)

340 159.2

174.4

Adjustments:+ Amortization of Dis. on B/P (contd.)

  • 3. Payable of Interest on 12/31/x2

    • Interest Expense

    • (9660 +159.2)  0.12 1,174.4

    • Cash 1,000.0

    • Discount On B/P 174.4

Statement of Cash Flows


Adjustments amortization of premium on investment in bonds
Adjustments: Operating Activities (contd.)+ Amortization of Premium on Investment in Bonds

  • Example: GEO Corp. purchased $100,000, 10% 5-year bonds on 1/1/x2, with interest payable on 7/1 and 1/1. The bonds sell for $108,111 which results in bond premium of $8,111 and an effective interest rate of 8%.

Statement of Cash Flows


Amortization of premium on investment in bonds contd
+ Amortization of Premium on Investment in Bonds (contd.) Operating Activities (contd.)

  • Example (contd.)

    • Record the purchase on 1/1/x2:

    • Investments 108,111

    • Cash 108,111

    • Record the interest revenue on 7/1/x2:

    • Cash 5,000

    • Interest Revenue 4,324a

    • Investments 676

    • a. Interest revenue = $108,111 x 4% = $4,324

Statement of Cash Flows


Adjustments loss on disposal of ppe or investments
Adjustments: Operating Activities (contd.)+ Loss on Disposal of PPE or Investments

  • Example: Sale a piece of land with a cost of $7,000 for $5,000

    • Cash 5,000

    • Loss on Sale of Landa 2,000

    • Land 7,000

    • a. This transaction results in a cash increase of $5,000 reported in the investing activity section, not the operating activity section.

Statement of Cash Flows


Adjustments investment loss under equity method
Adjustments: Operating Activities (contd.) + Investment Loss under equity method

  • Equity method must be used to account for return on investment in stock when gaining ownership of 20% ~ 50% with significant influence.

  • Example:

    • Obtain 30% of ownership with significant influence on investment in stock of Green Corp. for $40,000

Statement of Cash Flows


Investment loss under equity method contd
+ Investment Loss under equity method (contd.) Operating Activities (contd.)

  • 2/4/x2

    • Investment in Stock 40,000

    • Cash 40,000

  • 12/31/x2

    • Green’s Loss of Year x2

    • = 100,000

    • Loss in Investment 30,000

    • Investment in Stock 30,000

Statement of Cash Flows


Data needed to prepare statement of cash flows
Data needed to prepare statement of cash flows Operating Activities (contd.)

  • 1. Comparative balance sheet statements.

  • 2. The income statement.

  • 3. The retained earnings statement.

  • 4. Other supplemental information concerning the reasons for the changes in the B/S accounts (other than cash).

Statement of Cash Flows


Example 1 layton company balance sheet 12 31 x2
Example 1 Operating Activities (contd.)Layton Company Balance Sheet (12/31/x2)

  • a. Land was sold at cost for cash during the year.

  • b. A building was purchased for cash during the year and no building or equipment was sold during the year.

Statement of Cash Flows


Example 1 contd layton company balance sheet 12 31 x2
Example 1 (contd.) Operating Activities (contd.)Layton Company Balance Sheet (12/31/x2)

  • a. Bonds were issued at the end of year.

Statement of Cash Flows


Example 1 contd income statement for the year ended 12 31x2
Example 1 (contd.) Operating Activities (contd.)Income Statement (for the year ended 12/31x2)

Statement of Cash Flows


Example 1 contd layton company retained earnings 20x2
Example 1 (contd.) Operating Activities (contd.)Layton Company Retained Earnings (20x2)

Statement of Cash Flows


Layton company statement of cash flows for the year ended december 31 20x2
Layton Company Operating Activities (contd.)Statement of Cash Flows For the Year Ended December 31, 20x2

  • Net cash flow from operating activities:

  • Net Income $7,000

  • Adjustments to reconcile net

  • income to net cash provided by

  • operating activities:

  • Add: Depreciation expense 2,300

  • Increase in A/P 1,500

  • Less: Increase in A/R (2,700)

  • Net cash provided by

  • operating activities $8,100

Statement of Cash Flows


Layton company statement of cash flows contd
Layton Company Operating Activities (contd.)Statement of Cash Flows (contd.)

  • Cash flows from investing activities:

    • Proceeds from sale of land $3,000

    • Payments for

    • purchase of building (12,000)

    • Net cash used

    • by investing activities (9,000)

    • Cash flows from financing activities:

    • Proceeds from issuance of bonds 7,000

    • Payments of dividends (3,500)

    • Net cash provided by

    • financing activities 3,500

Statement of Cash Flows


Layton company statement of cash flows contd1
Layton Company Operating Activities (contd.)Statement of Cash Flows (contd.)

  • Net increase in cash $2,600

  • Cash, Jan 1, 20x2 $4,000

  • Cash, Dec 31, 20x2 $6,600

Statement of Cash Flows


Example 2 green company balance sheet
Example 2: Operating Activities (contd.)Green Company Balance Sheet

  • Accounts 1/1/x2 12/31/x2 Difference

  • Cash $3,500 $5,500

  • A/R 4,400 3,600 800 

  • Inventory 5,000 6,600 1,600 

  • Land 8,200 12,200 4,000c 

  • Building & Equip 35,700 48,700 13,000a,d

  • Acc. Depr. (6,000) (8,700)

  • Total Assets $50,800$67,900

Statement of Cash Flows


Green company balance sheet contd
Green Company Balance Sheet (contd.) Operating Activities (contd.)

  • A/P $5,100 $3,200 1,900 

  • Salary Payable 1,400 1,800 400 

  • B/P, 10% 7,000 15,000 8,000b 

  • Common Stock, $10 par 8,000 9,000 1,000

  • Paid-in Capital 16,000 19,000 3,000 

  • R/E 13,300 19,900

  • Total Liabilities

  • & Equity $50,800$67,900

Statement of Cash Flows


Income Statement Operating Activities (contd.)

For the Year Ended 12/31/20x2

Sales Revenue $80,000

CGS (48,600)

Gross Profit $31,400

Operating Expenses:

Deprecation Expense $3,400

Other Expenses 15,900 (19,300)

$12,100

Other Revenues & Expenses

Gains on Sale of Equipment $600

Interest Expense (700) (100)

Income Before Income Tax $12,000

Income Tax Expense (3,600)

Net Income $8,400 .

Statement of Cash Flows

52


Retained earnings 20x2
Retained Earnings (20x2) Operating Activities (contd.)

  • Beginning balance

  • of retained earnings $13,300

  • Add: Net Income 8,400

  • 21,700

  • Less: Dividends (1,800)

  • Ending balance

  • of retained earning $19,900

Statement of Cash Flows


Supplemental information for 20x2
Supplemental Information for 20x2 Operating Activities (contd.)

  • (a) Equipment was purchased for cash at a cost of $15,200.

  • (b) Ten-year bonds payable with a face value of $8,000 were issued for $8,000 at the end of the year.

  • (c) Land was acquired through the issuance of 100 shares of $10 par common stock when the stock was selling at a market price of $40 per share.

  • (d) Equipment with a cost of $2,200 and a book value of $1,500 was sold for $2,100 cash.

Statement of Cash Flows


Green company statement of cash flows for the year ended december 31 20x2
GREEN Company Operating Activities (contd.)Statement of Cash Flows For the Year Ended December 31, 20x2

  • Net cash flows from operating activities:

  • Net Income $8,400

  • Adj. To reconcile net income to net

  • cash provided by operating activities:

  • Add: Depreciation Expense 3,400

  • Decrease in A/R 800

  • Increase in S/P 400

  • Less: Increase in Inventory (1,600)

  • Decrease in A/P (1,900)

  • Gain on sale of Equipment (600)

  • Net cash provided by operating activities $8,900

Statement of Cash Flows


GREEN Company Operating Activities (contd.)

Statement of Cash Flows (contd.)

Cash flows from investing activities:

Payments for purchase of equip. (15,200)

Proceeds from sale of equipment 2,100

Net cash used by investing activities (13,100)

Cash flows from financing activities:

Proceeds from issuance of bonds 8,000

Payments of dividends (1,800)

Net cash provided by financing activities 6,200

Net increase in cash (see Schedule 1) $2,000

Cash, Jan 1, 20x2 $3,500

Cash, Dec 31, 20x2 $5,500

56

Statement of Cash Flows


GREEN Company Operating Activities (contd.)

Statement of Cash Flows (contd.)

Schedule 1: Investing & financing activities not affecting cash flows:

Investing activities:

Acquisition of land by Issuance of

common stock ($4,000)

Financing Activities:

Issuance of common stock for land $4,000

57

Statement of Cash Flows


Special topics
Special Topics Operating Activities (contd.)

  • 1. Direct exchange.

  • 2. Partial cash investing and financing activities.

  • 3. Cash dividends declared.

Statement of Cash Flows


1 direct exchange
1. Direct Exchange Operating Activities (contd.)

  • Direct exchange: An example of a direct exchange is issuing bonds to acquire a building. This transaction should appear in the supplementary schedule of the cash flow statement as an investing activity (i.e., acquisition of building) and as a financing activity (i.e., issue bonds for building).

Statement of Cash Flows


2 partial cash investing and financing activities
2. Partial Cash Investing and Financing Activities Operating Activities (contd.)

  • Example: acquiring land costing $10,000 by paying $1,000 down and signing a $9,000 notes payable.

Statement of Cash Flows


2 partial cash investing and financing activities contd
2. Partial Cash Investing and Financing Activities (contd.) Operating Activities (contd.)

  • Presentation on Cash Flow Statement for Partial Investing & Financing Activities:

    • Cash Flows from Investing Activities:

    • Purchase of land by issuance

    • of note and cash ($10,000)

    • Less: issuance of note 9,000

    • Cash payment

    • for purchase of land ($1,000)

Statement of Cash Flows


Other examples of direct exchange
Other examples of Direct Exchange Operating Activities (contd.)

  • Other examples of significant noncash investing and financing activities include (required disclosure in the supplementary schedule of the cash flow statement):

    • conversion of bonds to stock.

    • purchase of assets with issue of stock.

    • purchase of assets with debt.

    • declaration (but not payment) of cash dividend.

    • stock dividends and stock splits.


3 cash dividends declared
3. Operating Activities (contd.)Cash Dividends Declared

  • (Stock dividends not reported on statement of cash flows.)

    • a. Cash dividends declared and paid in the same year:

      • Reported as a cash outflow of financing activities

Statement of Cash Flows


3 cash dividends declared contd
3. Operating Activities (contd.)Cash Dividends Declared (contd.)

  • b. Cash dividends declared in the current year but paid in the next year:

    • (1)No impact on cash of the current year; only increase dividends payable (D/P).

    • (2)When D/P decrease next year, reported as a cash outflow of financing activity.

Statement of Cash Flows


Iv cash burn rate source rcj textbook
IV. Cash Burn Rate Operating Activities (contd.)(Source: RCJ textbook)

  • The ability to generate positive operating cash flow is critical to the survival and success of any company.

  • This is particularly true for start-up companies:

    • Cash is essential for establishing the business and for growth.

    • Investment outlays are often large.

    • Operating cash flows are negative.

  • Cash burn rate is a popular metric for assessing how quickly a start-up firm will consume its cash reserves:

Cash used for capital expenditures or acquisitions

Cash used for operations

+

Cash burn rate =

# of months covered by cash flow statement


Cash burn rate amazon com illustration
Cash burn rate: Operating Activities (contd.)Amazon.com illustration

  • Cash burn rate:

  • Months to burnout:

= - ($119,782 + $50,321 +$6,198)/12 months = -$14,692 per month

= $996,585/14,692 = 67.8 months


Cash burn rate selected companies
Cash burn rate: Operating Activities (contd.)Selected companies


V cash flows from the operating activities the direct method
V. Cash Flows from Operating Activities (contd.)the Operating Activities ( the Direct Method)

  • Activities can be presented using:

    • a. Indirect Method (as used in examples 1,2,and 3):

    • N/I  Adjustments to reconcile net income to cash flows.

    • b. Direct Method: The operating cash outflows are deducted from the operating cash inflows to determine the net cash provided by (or used in) operating activities.

Statement of Cash Flows


Cash flows from the operating activities contd
Cash Flows from Operating Activities (contd.)the Operating Activities(contd.)

  • SFAS No. 95 allows the use of both methods, but encourages the use of the direct method. However, if the direct method is used, a reconcile of net income and cash using the indirect method must also be provided in the supplementary statement.

Statement of Cash Flows


Using the direct method in preparing the operating cash flows
Using The Direct Method in Preparing The Operating Cash Flows

  • Cash inflows from operating activities:

    • 1. Collections from customers.

    • 2. Interest & dividends collected.

    • 3. Other operating receipts.

Statement of Cash Flows


Using the direct method in preparing the operating cash flows contd
Using The Direct Method in Preparing The Operating Cash Flows (contd.)

  • Cash outflows from operating activities:

    • 1. Payments to suppliers.

    • 2. Payments to employees.

    • 3. Payments of interest.

    • 4. Other operating payments.

    • 5. Payments of income taxes.

Statement of Cash Flows


Adjustments to convert i s amount to operating cash flows a direct approach
Adjustments to Convert I/S Amount to Operating Cash Flows -- A Direct Approach

  • I/S Cash Flows from

    • Amounts AdjustmentsOperating ActivitiesNet

    • Collections

    • Sales +Dec. in A/R; or = from

    • Revenue -Inc. in A/R Customers

    • Cash

    • +Dec. in Int. Rec.; or Inflows

    • -Inc. in Int. Rec. from

    • Operating

    • Interest +Amort. Of Interest Activities

    • Premium on = Collected

    • Revenue Invest in Bonds;

    • or

    • -Amort. Of

    • Discount on

    • Invest in Bonds

Statement of Cash Flows


Adjustments to convert i s amount to operating cash flows contd
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)

  • I/S Cash Flows from

    • Amounts Adjustments Operating Activities Net

    • Dividend +Dec. in Dividend Rec. = Dividend

    • Revenue -Inc. in Dividend Rec. Collected

    • Cash

    • +Inc. in Unearned Rev.; Inflows

    • or from

    • Other -Dec. in Unearned Rev. Operating

    • -Gain on Disposal of Other Activities

    • Revenue Assets & Liabilities = Operating

    • Receipts

    • -Investment Income*

    • (Equity Method)

    • +Dec. (-Inc.) in Other

    • Receivable Accounts

    • * Unless listed as separate items on Income Statement (I/S).

    • 73

Statement of Cash Flows


Adjustments to convert i s amount to operating cash flows contd1
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)

  • I/S Cash Flows from

    • Amounts Adjustments Operating Activities Net

    • +Inc. in Inventory;

    • Cost of or Payments

    • Goods -Dec. in Inventory = to

    • Sold +Dec. in A/P; or Suppliers Cash

    • -Inc. in A/P Outflows

    • from

    • Salary +Dec. in Sal. Payable; Payments Operating

    • or = to Activities

    • Expense -Inc. in Sal. Payable Employees

    • 74

Statement of Cash Flows


Adjustments to convert i s amount to operating cash flows contd2
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)

  • I/S Cash Flows from

    • Amounts Adjustments Operating Activities Net

    • +Dec. in Int. Payable

    • Interest -Inc. in Int. Payable = Payments

    • Expense +Amort. of Prem. on B/P of Interest

    • or Cash

    • -Amort. of Dis. on B/P Outflows

    • from

    • +Inc. in Prepaids Operating

    • -Dec. in Prepaids Activities

    • -Depre., Depletion exp.

    • Other Amort. Exp.*, B/D exp. Other

    • -Losses on disposal of = Operating

    • Expense Assets and Liabilities Payments

    • -Investment lossa

    • (Equity method) a. Unless listed as

    • +Dec. (-Inc.) in Otherseparate items on the

    • Payable AccountsIncome Statement

    • 75

Statement of Cash Flows


Adjustments to convert i s amount to operating cash flows contd3
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)

  • I/S Cash Flows from

    • Amounts Adjustments Operating Activities Net

    • +Dec. in I/T Payable;

    • or

    • Income -Inc. in I/T Payable Payments Cash

    • Tax +Dec. in Deferred I/T = of Income Outflows

    • Expense Liability; or Tax from

    • -Inc. in Deferred I/T Operating

    • Liability Activities

    • 76

Statement of Cash Flows


Green company statement of cash flows
Green Company (contd.)Statement of Cash Flows

  • (Using the direct method in preparing the operating activities section of a cash flow statement.Information as provided in Example 2.)

  • Cash flows from Operating Activities:

    • Cash inflows:

    • Collections from customers $80,800 1

    • Cash inflows from

    • operating activities $80,800

    • 1. 80,000 + 800 = 80,800.

Statement of Cash Flows


Green company statement of cash flows contd
Green Company (contd.)Statement of Cash Flows (contd.)

  • Cash outflows:

    • Payments to suppliers $(52,100) 1

    • Payments of interest (700)

    • Other operating payments (15,500) 2

    • Payments of income tax (3,600)

    • Cash outflows

    • from operating activities (71,900)

    • 1. 48,600 + 1600 + 1900 = 52,100.

    • 2. 15,900 - 400 = 15,500.

Statement of Cash Flows


Green company statement of cash flows contd1
Green Company (contd.)Statement of Cash Flows (contd.)

  • Net cash inflow

    • from operating activities $8,900

    • Cash flows from investing activities

    • :

    • :

    • Cash flows from Financing Activities

    • :

    • :

    • * A reconciliation of net income and cash flows using indirect method must also be presented.

Statement of Cash Flows


Information as provided in example 3 direct method statement of cash flows
Information as provided in Example 3 (direct method) (contd.)Statement of Cash Flows

  • Cash flows from Operating Activities:

    • Cash inflows:

    • Collections from customers $86,0201

    • Cash inflows

    • from operating activities $86,020

    • Cash outflows:

    • Payments to suppliers (53,200)2

    • 1. 88,020 - 2,000 = 86,020.

    • 2. 52,200 - 300 + 1300 = 53,200.

Statement of Cash Flows


Statement of cash flows contd
Statement of Cash Flows (contd.) (contd.)

  • Payments of other expenses (16,000)1

  • Payments of interest expense (500)2

  • Payments if Income Tax (2,820)3

  • Cash outflows

  • from operating activities (72,520)

  • Net cash inflows

  • from operating activities $13,500

  • 1. 15,800 + 200 = 16,000.

  • 2. 1100 - 500 - 100 = 500.

  • 3 3,630 - 630 -180 = 2,820.

Statement of Cash Flows


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