The Statement of Cash Flows 2 Learning Objective 1 Identify the purposes of the statement of cash flows and distinguish among operating, investing, and financing cash flows ©2014

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The Statement of Cash Flows

Chapter 16

©2014 Pearson Education, Inc. Publishing as Prentice Hall 16-1

Learning Objectives

1. Identify the purposes of the statement of cash flows and distinguish among operating, investing, and financing cash flows

2. Prepare the statement of cash flows by the indirect method


Learning Objectives

3. Use free cash flow to evaluate business performance

4. Prepare the statement of cash flows by the direct method (Appendix 16A)

5. Prepare the statement of cash flows by the indirect method using a spreadsheet (Appendix 16B)


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Learning Objective 1

Identify the purposes of the statement of

cash flows and distinguish among

operating, investing, and financing cash

flows


Purpose of the Statement of Cash Flows

• Reports on the cash flows of a business.

• Reports why cash increased or decreased during the period.

• Covers the same period of time as the income statement.

Can be used to:• Predict future cash

flows.• Evaluate

management decisions.

• Predict ability of the company to pay debts and dividends.


Classification of Cash Flows

Cash Flows From:

• Operating Activities

• Investing Activities

• Financing Activities


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Cash Flows From:




Cash receipts and disbursements related to revenue or expense

activities. Includes cash flows related to:

• interest income and expense

• dividend revenue• income tax expense



Cash Flows From:




Cash receipts and disbursements related

to increases and decreases in long-term

assets, including:

• PP&E• Notes Receivable• Investments



Cash Flows From:




Cash receipts and disbursements related

to increases and decreases in long-term

liabilities and equity. Includes:

• Borrowing• Issuing stock• Paying dividends


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Two Formats for Operating Activities

Indirect Method• Starts with accrual

net income.

• Adjusts net income to net cash from operations using known relationships.

Direct Method• Restates the Income

Statement in terms of cash

• Shows actual cash receipts and cash disbursements.


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Prepare the statement of cash

flows by the indirect method


Preparing a Statement of Cash Flows with the Indirect Method

Information Needed:• Current Income

Statement• Current Balance Sheet• Immediate past

Balance Sheet• Changes in long-term

assets and long-term liabilities

• Changes in equity

To compute Cash Flows from

Operations, we need:• Net Income• Non-cash expenses• Gains/Losses• Changes in current

assets and current liabilities


Computing Cash Flows from Operating Activities


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Smart Touch Learning’s Net

Income for 2015 is $40,000



Non-cash expense include

Depreciation, Depletion and Amortization.

Depreciation is $20,000.



Smart Touch Learning has no Losses, but has a $10,000 Gain on Disposal of Plant Assets.


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Smart Touch Learning’s Inventory

decreased by $2,000 during 2015, and A/R increased by

$17,000.



Smart Touch Learning’s Accounts Payable

increased by $40,000 during

2015.



Smart Touch Learning’s Accrued

Liabilities decreased by $5,000 during

2015.


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Reporting Cash Flows from Operating Activities


Computing Cash Flows from Investing Activities

Smart Touch Learning’s records indicate:

• $310,000 in plant assets were purchased with cash during 2015.

• The $10,000 gain resulted from selling plant assets with a cost of $55,000 and accumulated depreciation of $15,000 for $50,000.


Reporting Cash Flows from Investing Activities


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Computing Cash Flows from Financing Activities

Smart Touch Learning’s records indicate:• $90,000 was borrowed on a note payable.

• $10,000 was paid to retire old notes.

• $120,000 was received from issuing shares of common stock.

• $20,000 was paid to acquire treasury stock.

• $10,000 in dividends were paid.


Reporting Cash Flows from Financing Activities



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Use free cash flow to evaluate business

performance


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Free Cash Flow

Measures the amount of cash flow available for unexpected opportunities.


Free Cash Flow

Smart Touch Learning expects operating cash flow of $200,000. They plan to spend $160,000 to modernize its production facilities, and to

pay $15,000 in cash dividends.



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Prepare the statement of cash flows by the direct

method

(Appendix 16A)


Cash Flows from Operating Activities

• Each item on the income statement will be converted from the accrual basis to cash basis.

• Most of the amounts will be adjusted based on changes in current asset amounts and current liability amounts.

• Non-cash expenses and gains and losses will be ignored.


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• Cash Collections from Customers

• Cash Receipts of Interest



• Cash Receipts of Dividends

• Payments to Suppliers



• Payments to Employees

• Payments for Interest Expense and Tax Expense


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End of Chapter 16


The Statement of Cash Flows 2 Learning Objective 1 Identify the purposes of the statement of cash flows and distinguish among operating, investing, and financing cash flows ©2014

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