Chapter 14

• Statement of Cash Flows


  Reports on a business’s cash receipts and cash payments for a specific period
• Statement of Cash Flows

  • Reports on the cash flows of a business
  • Reports why cash increased or decreased during the period
  • Covers a span of time and is dated the same as the income statement
• The statement of cash flows explains why net income as reported on the income statement does not equal the change in the cash balance
• Purposes of the Statement of Cash Flows


  • Predict future cash flows
  • Evaluate management
  • Predict ability to pay debts and dividends
• Classification of Cash Flows

  • Operating activities
  • Investing activities
  • Financing activities
• Operating Activities


  Reports on activities that create revenue or expense in the entity’s business
• Investing Activities


  Reports cash receipts and cash payments that increase or decrease long-term assets
• Financing Activities


  Include cash inflows and outflows involved in long-term liabilities and equity
• Non-cash investing and financing activities appear as a separate schedule at the bottom of the statement of cash flows or in the notes to the financial statements
• Cash Inflows from Operating Activities

  • From customers for the sales of merchandise inventory and services
  • For interest revenue and dividend income
• Cash Outflows from Operating Activities

  • For the purchase of merchandise inventory and payment of operating expenses
  • For interest expense and income tax expense
• Cash Inflows from Investing Activities

  • From the sale of property, plant, equipment, and investments
  • From the collection of long-term notes receivable
• Cash Outflows from Investing Activities

  • To purchase property, plant, equipment, and investments
  • For loans made to borrowers
• Cash Inflows from Financing Activities

  • From issuance of stock and selling treasury stock
  • From receipt of borrowing money
• Cash Outflows from Financing Activities

  • For payment of dividends and buying treasury stock
  • For repayments of loans
• Two Formats for Operating Activities

  • Indirect method
  • Direct method
• Prepare the statement of cash flows by the indirect method

  1. Complete the cash flows from operating activities

  2. Complete the cash flows from investing activities section

  3. Complete the cash flows from financing activities section

  4. Compute the change in cash

  5. Prepare a schedule for non-cash activities
• When using the indirect method, the operating activities section begins with accrual-basis net income or loss
• Depreciation, depletion, and amortization expenses are added back to net income to reconcile net income to net cash flow from operating activities
• Gains and losses on the disposal of long-term assets must be removed from net income
• Most current assets and current liabilities result from operating activities
• Adjustments Made to Reconcile Net Income to Net Cash Provided by Operating Activities

  • Depreciation, Depletion, and Amortization Expense - Increase
  • Gains on Non-operating Activities - (Decrease)
  • Losses on Non-operating Activities - Increase
  • Increases in Current Assets other than Cash - (Decrease)
  • Decreases in Current Assets other than Cash - Increase
  • Increases in Current Liabilities - Increase
  • Decreases in Current Liabilities - (Decrease)
• Investing activities affect long-term assets

  • Plant Assets
  • Investments
  • Notes Receivable
• Financing activities affect long-term liability and equity accounts

  • Long-term Notes Payable
  • Bonds Payable
  • Common Stock
  • Retained Earnings
• Only cash dividends paid are reported on the statement of cash flows
• Direct method


  Provides clearer information about the sources and uses of cash than the indirect method
• Payments to Suppliers

  • Merchandise inventory
  • Operating expenses except employee compensation, interest, and income taxes
• Payments for interest expense and income tax expense are included in the operating activities section
• Non-cash expenses and gains or losses on disposal of long-term assets are reported on the income statement but are not included in the operating activities when using the direct method