5 The Statement of
Cash Flows
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Conceptual overview and uses of the
Statement of Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
A statement of cash flows is a financial
statement of a company that shows
the cash inflows,cash outflows,and
net change in cash from its operating,
investing,and financing activities
during an accounting period,in a
manner that reconciles the company's
beginning and ending cash balances,
Uses of Statement of Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
The statement of cash flows helps users to assess--
? The company’s ability to generate positive future cash flows.
? The company’s ability to meet its obligations and pay
dividends.
? The company’s need for external financing.
? The reasons for differences between the company’s net
income and associated cash receipts and payments.
? Both the cash and noncash aspects of the company’s
investing and financing transactions.
2,Structure of the Statement of Cash
Flows
Three categories of cash flows
(1) Cash flows from operating
activities.
(2) Cash flows from investing
activities.
(3) Cash flows from financing
activities.
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows from Operating Activities
Operating activities include all transactions and other
events that are not investing and financing activities,
Operating activities include transactions involving
acquiring,selling,and delivering goods for sale,as well
as providing services.
Cash receipts from the sale
of goods or services and
collections of accounts
receivable are typical cash
inflows from operating
activities.
Cash payments to
suppliers for inventory
and on account,for
wages,and for taxes are
examples of cash
outflows from operating
activities.
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows from Investing Activities
The Cash Flows From Investing Activities section
includes all the cash inflows and outflows involved in
investing activities transactions of the company,
Common cash flows from investing activities are--
Intermediate Accounting 5 The Statement of Cash Flows
? Receipts from selling investments in stocks and debt
securities.
? Receipts from selling property,plant,and equipment.
? Payments for investments in stocks and debt
securities.
? Payments for purchases of property,plant,and
equipment.
Cash Flows from Financing Activities
Intermediate Accounting 5 The Statement of Cash Flows
The Cash Flows From Financing Activities section
includes all the cash inflows and outflows involved in
the financing activities transactions of the company,
Common financing activities are--
? Receipts from the issuance of debt securities.
? Receipts from the issuance of stocks.
? Payment of dividends.
? Payments to retire debt securities.
? Payments to reacquire stock.
Supplemental disclosures
Non-cash investing and financing
activities affect an entity’s
financial position but not the
entity’s cash flow during a period
should be disclosed in
supplemental part to cash flow
statement.
Intermediate Accounting 5 The Statement of Cash Flows
3,Reporting Cash Flow From Operations
Operating cycle
A company's operating cycle is the average time taken to
spend cash for inventory,process and sell the inventory,
collect the accounts receivable,and convert them back into
cash.
Net income and the net cash flow within the operating
cycle are unlikely to be the same because of differences
between the timing of the cash flows and the recognition of
revenues and expenses,
Intermediate Accounting 5 The Statement of Cash Flows
Two methods
FASB allows two
methods for
calculating and
reporting a company's
net cash flow from
operating activities,
? Direct method
? Indirect method
Intermediate Accounting 5 The Statement of Cash Flows
Direct Method
Intermediate Accounting 5 The Statement of Cash Flows
?This method reports directly the major classes of
operating cash receipts and payments of an entity
during a period.
?Accrual-basis revenues and expenses must be
converted to equivalent cash receipts and
payments.
?The amount of cash actually collected or paid is
determined.
Direct Method Example,Cash Receipts
Intermediate Accounting 5 The Statement of Cash Flows
Sales and Cash Collected from Customers:
Beginning accounts receivable $ 50
+ Sales 160
= Cash available for collection $210
- Ending accounts receivable 70
= Cash collected from customers $140
Direct Method Example,Cash Paid
Intermediate Accounting 5 The Statement of Cash Flows
Cost of Goods Sold and Cash Paid for Inventory:
Ending inventory $ 90
+ Cost of goods sold 120
= Required inventory $215
- Beginning inventory 100
= Cash paid for inventory this year $ 115
Direct Method Example
Intermediate Accounting 5 The Statement of Cash Flows
Sales revenue (cash and A/R) $70,000
Less:
Cost of goods sold (cash and A/P) $(29,000)
Salaries expense (cash and S/P) (13,000)
Depreciation expense (8,000) (50,000 )
Income before income taxes $20,000
Income tax expense (cash) (6,000 )
Net income $14,000
Yummy Corporation’s Income
Statement is as follows:
Direct Method Example
Cash flows From Operating Activities:
Cash Inflows:
Cash received from customers $72,600
Cash inflows from operating
activities $72,600
Cash Outflows:
Cash paid to suppliers $(38,000)
Cash paid to employees (12,200)
Cash paid for income taxes (6,000)
Cash outflows for operating
activities (56,200 )
Net cash provided by operating activities $16,400
Decrease in accounts
receivable ($2,600) +
sales revenue
($70,000)Increase in inventory ($2,000) +
decrease in accounts payable ($7,000)
+ cost of goods sold ($29,000).
Salaries expense – increase
in salaries payable
Amount paid in cash.
Intermediate Accounting 5 The Statement of Cash Flows
Indirect Method
Intermediate Accounting 5 The Statement of Cash Flows
?This is a method of reporting net cash flow from
operations that involves reconciling net income to
a cash basis,It shows how non-cash flows affect
net income.
?This method makes the following adjustments:
? Adjustments for receivables and other current operating
assets.
? Adjustments for payables and other current liabilities.
? Adjustments for depreciation and other non-cash items.
? Adjustments for gains and losses.
Changes in accounts receivable directly affect revenues
recorded on an accrual basis.
Account Adjustment to
Account Change Net Income
Accounts Receivable
Accounts Receivable
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Receivables
Changes in liabilities mean the reverse of
changes in current operating asset accounts.
Account Adjustment to
Account Change Net Income
Accounts Payable
Accounts Payable
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Payables
?Depreciation and similar non-cash items do not
affect cash and are not reported on the statement
of cash flows.
?Any non-cash item that reduces net income should
be added back to net income in the indirect
method.
?Any non-cash item that increases net income
should be subtracted from net income in the
indirect method.
Intermediate Accounting 5 The Statement of Cash Flows
Non-cash Adjustments
Gains or losses do not represent the cash effect of the
transaction.
Adjustment to
Account Net Income
Losses
Gains
These adjustments are made to net income since the sale of an
investment is an investing activity,not an operating activity.
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Gains
and Losses
Business engages in
operating activities
Cash is received and
disbursed
Operating cash flow
Net income
Apply accrual
accounting rules
“Undo” accrual
accounting to get
back to cash flow
Intermediate Accounting 5 The Statement of Cash Flows
Relationship Between Net Income and
Operating Cash Flow
Indirect Method Example
Net Cash flows From Operating Activities:
Net income $14,000
Adjustments for differences
between income flows and cash
flows for operating activities:
Add,Depreciation expense 8,000
Decrease in accounts receivable 2,600
Increase in salaries payable 800
Less,Increase in inventory (2,000 )
Decrease in accounts payable (7,000 )
Net cash provided by operating
activities $16,400
Added back since
depreciation is not
an outflow of cash.
Same amount as the direct method
Intermediate Accounting 5 The Statement of Cash Flows
4,Preparing a complete Statement of
Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
① Prepare the heading for the statement of cash flows and
list the three major sections.
② Calculate the net change in cash that occurred during the
accounting period.
③ Determine the net income and list this amount as the first
item in the net cash flow from operating activities
section.
Process for preparing a statement of
cash flows
Continued
Intermediate Accounting 5 The Statement of Cash Flows
④ Calculate the increase or decrease that occurred during
the accounting period in each balance sheet account
(except cash).
⑤ Determine whether the increase or decrease in each
balance sheet account (except cash) caused an inflow or
outflow of cash and,if so,whether the cash flow was
related to an operating,investing,or financing activity.
⑥ If no cash flow occurred in Step 5,determine whether
the increase or decrease in each balance sheet account
(except cash) was the result of a non-cash income
statement item or a simultaneous investing and/or
financing transaction.
Continued
Process for preparing a statement of cash
flows
Process for preparing a statement of cash
flows
Intermediate Accounting 5 The Statement of Cash Flows
⑦ Complete the various sections of the statement of cash
flows and check that the subtotals of the sections sum to
the net change in cash and that the sum of the net change
in cash and the beginning cash balance is equal to the
ending cash balance reported on the balance sheet.
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
LEYTON COMPANY
Statement of Cash Flows
For Year Ended December 31,2005
The statement’s
heading
Continued
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
Net Cash Flow From Operating Activities
Net income $ 7,000
Adjustments for differences between income
and cash flows from operating activities:
Add,Depreciation expense 2,300
Increase in accounts payable 1,500
Less,Increase in accounts receivable (2,700 )
Net cash provided by operating activities $8,100
Cash Flows From Investing Activities
Payment for purchase of building $(12,000 )
Proceeds from sale of land,at cost 3,000
Net cash used for investing activities (9,000 )
Continued
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows From Financing Activities
Proceeds from issuance of bonds $ 7,000
Payment of dividends (3,500 )
Net cash provided by financing activities 3,500
Net increase in Cash $2,600
Cash,January 1,2005 4,000
Cash,December 31,2005 $6,600
This amount should match
the balance of the Cash
account in the ledger.
5,Using cash flow data to assess
financial strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow-to-net income
Cash from operations
Net income
o Measure of earnings quality
o Tends to be greater than 1
o Should remain fairly stable for the
years for a specific company
Assessing Financial Strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow adequacy
Cash from operations
Cash required for investing activities
o Measures relationship between investment spending and
cash generated by operations
o Indicate a company’s attitude towards reinvestment in long-
lived production assets
o When ratio is small it indicates that cash flows from
operations fall short of funding growth
Assessing Financial Strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow adequacy
Cash from operations + Interest paid + Taxes paid
Cash paid for interest
o Measures ability to service debt
o Generally,a higher ratio indicates
more solvency
Intermediate Accounting 5 The Statement of Cash Flows
The End
Cash Flows
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
1,Conceptual overview and uses of the
Statement of Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
A statement of cash flows is a financial
statement of a company that shows
the cash inflows,cash outflows,and
net change in cash from its operating,
investing,and financing activities
during an accounting period,in a
manner that reconciles the company's
beginning and ending cash balances,
Uses of Statement of Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
The statement of cash flows helps users to assess--
? The company’s ability to generate positive future cash flows.
? The company’s ability to meet its obligations and pay
dividends.
? The company’s need for external financing.
? The reasons for differences between the company’s net
income and associated cash receipts and payments.
? Both the cash and noncash aspects of the company’s
investing and financing transactions.
2,Structure of the Statement of Cash
Flows
Three categories of cash flows
(1) Cash flows from operating
activities.
(2) Cash flows from investing
activities.
(3) Cash flows from financing
activities.
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows from Operating Activities
Operating activities include all transactions and other
events that are not investing and financing activities,
Operating activities include transactions involving
acquiring,selling,and delivering goods for sale,as well
as providing services.
Cash receipts from the sale
of goods or services and
collections of accounts
receivable are typical cash
inflows from operating
activities.
Cash payments to
suppliers for inventory
and on account,for
wages,and for taxes are
examples of cash
outflows from operating
activities.
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows from Investing Activities
The Cash Flows From Investing Activities section
includes all the cash inflows and outflows involved in
investing activities transactions of the company,
Common cash flows from investing activities are--
Intermediate Accounting 5 The Statement of Cash Flows
? Receipts from selling investments in stocks and debt
securities.
? Receipts from selling property,plant,and equipment.
? Payments for investments in stocks and debt
securities.
? Payments for purchases of property,plant,and
equipment.
Cash Flows from Financing Activities
Intermediate Accounting 5 The Statement of Cash Flows
The Cash Flows From Financing Activities section
includes all the cash inflows and outflows involved in
the financing activities transactions of the company,
Common financing activities are--
? Receipts from the issuance of debt securities.
? Receipts from the issuance of stocks.
? Payment of dividends.
? Payments to retire debt securities.
? Payments to reacquire stock.
Supplemental disclosures
Non-cash investing and financing
activities affect an entity’s
financial position but not the
entity’s cash flow during a period
should be disclosed in
supplemental part to cash flow
statement.
Intermediate Accounting 5 The Statement of Cash Flows
3,Reporting Cash Flow From Operations
Operating cycle
A company's operating cycle is the average time taken to
spend cash for inventory,process and sell the inventory,
collect the accounts receivable,and convert them back into
cash.
Net income and the net cash flow within the operating
cycle are unlikely to be the same because of differences
between the timing of the cash flows and the recognition of
revenues and expenses,
Intermediate Accounting 5 The Statement of Cash Flows
Two methods
FASB allows two
methods for
calculating and
reporting a company's
net cash flow from
operating activities,
? Direct method
? Indirect method
Intermediate Accounting 5 The Statement of Cash Flows
Direct Method
Intermediate Accounting 5 The Statement of Cash Flows
?This method reports directly the major classes of
operating cash receipts and payments of an entity
during a period.
?Accrual-basis revenues and expenses must be
converted to equivalent cash receipts and
payments.
?The amount of cash actually collected or paid is
determined.
Direct Method Example,Cash Receipts
Intermediate Accounting 5 The Statement of Cash Flows
Sales and Cash Collected from Customers:
Beginning accounts receivable $ 50
+ Sales 160
= Cash available for collection $210
- Ending accounts receivable 70
= Cash collected from customers $140
Direct Method Example,Cash Paid
Intermediate Accounting 5 The Statement of Cash Flows
Cost of Goods Sold and Cash Paid for Inventory:
Ending inventory $ 90
+ Cost of goods sold 120
= Required inventory $215
- Beginning inventory 100
= Cash paid for inventory this year $ 115
Direct Method Example
Intermediate Accounting 5 The Statement of Cash Flows
Sales revenue (cash and A/R) $70,000
Less:
Cost of goods sold (cash and A/P) $(29,000)
Salaries expense (cash and S/P) (13,000)
Depreciation expense (8,000) (50,000 )
Income before income taxes $20,000
Income tax expense (cash) (6,000 )
Net income $14,000
Yummy Corporation’s Income
Statement is as follows:
Direct Method Example
Cash flows From Operating Activities:
Cash Inflows:
Cash received from customers $72,600
Cash inflows from operating
activities $72,600
Cash Outflows:
Cash paid to suppliers $(38,000)
Cash paid to employees (12,200)
Cash paid for income taxes (6,000)
Cash outflows for operating
activities (56,200 )
Net cash provided by operating activities $16,400
Decrease in accounts
receivable ($2,600) +
sales revenue
($70,000)Increase in inventory ($2,000) +
decrease in accounts payable ($7,000)
+ cost of goods sold ($29,000).
Salaries expense – increase
in salaries payable
Amount paid in cash.
Intermediate Accounting 5 The Statement of Cash Flows
Indirect Method
Intermediate Accounting 5 The Statement of Cash Flows
?This is a method of reporting net cash flow from
operations that involves reconciling net income to
a cash basis,It shows how non-cash flows affect
net income.
?This method makes the following adjustments:
? Adjustments for receivables and other current operating
assets.
? Adjustments for payables and other current liabilities.
? Adjustments for depreciation and other non-cash items.
? Adjustments for gains and losses.
Changes in accounts receivable directly affect revenues
recorded on an accrual basis.
Account Adjustment to
Account Change Net Income
Accounts Receivable
Accounts Receivable
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Receivables
Changes in liabilities mean the reverse of
changes in current operating asset accounts.
Account Adjustment to
Account Change Net Income
Accounts Payable
Accounts Payable
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Payables
?Depreciation and similar non-cash items do not
affect cash and are not reported on the statement
of cash flows.
?Any non-cash item that reduces net income should
be added back to net income in the indirect
method.
?Any non-cash item that increases net income
should be subtracted from net income in the
indirect method.
Intermediate Accounting 5 The Statement of Cash Flows
Non-cash Adjustments
Gains or losses do not represent the cash effect of the
transaction.
Adjustment to
Account Net Income
Losses
Gains
These adjustments are made to net income since the sale of an
investment is an investing activity,not an operating activity.
Intermediate Accounting 5 The Statement of Cash Flows
Adjustments for Gains
and Losses
Business engages in
operating activities
Cash is received and
disbursed
Operating cash flow
Net income
Apply accrual
accounting rules
“Undo” accrual
accounting to get
back to cash flow
Intermediate Accounting 5 The Statement of Cash Flows
Relationship Between Net Income and
Operating Cash Flow
Indirect Method Example
Net Cash flows From Operating Activities:
Net income $14,000
Adjustments for differences
between income flows and cash
flows for operating activities:
Add,Depreciation expense 8,000
Decrease in accounts receivable 2,600
Increase in salaries payable 800
Less,Increase in inventory (2,000 )
Decrease in accounts payable (7,000 )
Net cash provided by operating
activities $16,400
Added back since
depreciation is not
an outflow of cash.
Same amount as the direct method
Intermediate Accounting 5 The Statement of Cash Flows
4,Preparing a complete Statement of
Cash Flows
Intermediate Accounting 5 The Statement of Cash Flows
① Prepare the heading for the statement of cash flows and
list the three major sections.
② Calculate the net change in cash that occurred during the
accounting period.
③ Determine the net income and list this amount as the first
item in the net cash flow from operating activities
section.
Process for preparing a statement of
cash flows
Continued
Intermediate Accounting 5 The Statement of Cash Flows
④ Calculate the increase or decrease that occurred during
the accounting period in each balance sheet account
(except cash).
⑤ Determine whether the increase or decrease in each
balance sheet account (except cash) caused an inflow or
outflow of cash and,if so,whether the cash flow was
related to an operating,investing,or financing activity.
⑥ If no cash flow occurred in Step 5,determine whether
the increase or decrease in each balance sheet account
(except cash) was the result of a non-cash income
statement item or a simultaneous investing and/or
financing transaction.
Continued
Process for preparing a statement of cash
flows
Process for preparing a statement of cash
flows
Intermediate Accounting 5 The Statement of Cash Flows
⑦ Complete the various sections of the statement of cash
flows and check that the subtotals of the sections sum to
the net change in cash and that the sum of the net change
in cash and the beginning cash balance is equal to the
ending cash balance reported on the balance sheet.
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
LEYTON COMPANY
Statement of Cash Flows
For Year Ended December 31,2005
The statement’s
heading
Continued
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
Net Cash Flow From Operating Activities
Net income $ 7,000
Adjustments for differences between income
and cash flows from operating activities:
Add,Depreciation expense 2,300
Increase in accounts payable 1,500
Less,Increase in accounts receivable (2,700 )
Net cash provided by operating activities $8,100
Cash Flows From Investing Activities
Payment for purchase of building $(12,000 )
Proceeds from sale of land,at cost 3,000
Net cash used for investing activities (9,000 )
Continued
Simple Example
Intermediate Accounting 5 The Statement of Cash Flows
Cash Flows From Financing Activities
Proceeds from issuance of bonds $ 7,000
Payment of dividends (3,500 )
Net cash provided by financing activities 3,500
Net increase in Cash $2,600
Cash,January 1,2005 4,000
Cash,December 31,2005 $6,600
This amount should match
the balance of the Cash
account in the ledger.
5,Using cash flow data to assess
financial strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow-to-net income
Cash from operations
Net income
o Measure of earnings quality
o Tends to be greater than 1
o Should remain fairly stable for the
years for a specific company
Assessing Financial Strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow adequacy
Cash from operations
Cash required for investing activities
o Measures relationship between investment spending and
cash generated by operations
o Indicate a company’s attitude towards reinvestment in long-
lived production assets
o When ratio is small it indicates that cash flows from
operations fall short of funding growth
Assessing Financial Strength
Intermediate Accounting 5 The Statement of Cash Flows
Cash flow adequacy
Cash from operations + Interest paid + Taxes paid
Cash paid for interest
o Measures ability to service debt
o Generally,a higher ratio indicates
more solvency
Intermediate Accounting 5 The Statement of Cash Flows
The End
