Statement of Cash Flows

Chapter 13

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Purpose of the Statement
Provides information about the cash
receipts and cash payments of a business
entity during the accounting period.

Helps investors with questions about the company’s

• Ability to generate positive cash flows.
• Ability to meet its obligations and to pay dividends.
• Need for external financing.
• Investing and financing transactions for the period.

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13-3
Classification of Cash Flows

The Statement of Cash Flows must

include the following three sections:
• Cash Flows from Operating
Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing
Activities

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 Operating Activities

Inflows from:
• Interest and dividends
received +
• Sales to customers Cash
Flows from
Outflows to: Operating
• Suppliers of merchandise and Activities
services _
• Employees
• Lenders for interest
• Governments for taxes

13-5
 Investing Activities
Inflows from:
• Sale of investments
and plant assets
• Collection of principal +
on loans Cash
Flows from
Outflows to: Investing
• Purchase investments and Activities
plant assets _
• Purchase debt or equity
investments
• Make loans

13-6
 Financing Activities

Inflows
Inflows from:
from:
• Short-term
Short-term and
and long-term
long-term
borrowing
borrowing +
• Owners Cash
Owners (for
(for example,
example, from
from
issuing
issuing stock)
stock) Flows from
Financing
Outflows Activities
Outflows to:
to:
•• Make
Make payments
payments onon borrowed
borrowed _
funds
funds
•• Owners
Owners for
for dividends
dividends
•• Purchase
Purchase treasury
treasury stock
stock

13-7
Cash and Cash Equivalents

Cash

Cash Equivalents Currency

• Short-term, highly liquid investments.

• Readily convertible into cash.
• So near maturity that market value is unaffected
by interest rate changes.

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Direct Method: Cash
Received from Customers
•Accrual basis revenue includes sales
that did not result in cash inflows.
•Can be computed as:
Decrease in
+ receivables =
Cash
Net Sales Received from
Customers
Increase
Increase in
in
– receivables
receivables =

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Direct Method: Interest and
Dividends Received

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Direct Method: Cash Paid
for Purchases of
Merchandise
Step 1

Step 2

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Reconciling Net Income
with
Net Cash Flows
There are two major categories of
reconciling items. They include
adjusting for:
1. Noncash Expenses.
2. Timing Differences.

Depreciation Expense
Accounts receivable

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Reporting Operating Cash
Flows by the Indirect Method
Changes in current assets and current
liabilities as shown on the following table

Cash Flows from

Net
Operating
Income
Activities

+ Losses and + Noncash

- Gains expenses such as
depreciation and
amortization

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Reconciling Net Income with
Net Cash Flows

Use this table when adjusting Net

Income to Operating Cash Flows.

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Supplemental Information
We are required to disclose information concerning
major investing and financing activities that do not
involve cash.

Supplem 13-15
End of Chapter 13

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