Chapter 13

Statement of Cash Flows
Chapter 13
McGraw-Hill/Irwin
Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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
companys
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.
13-2
Company Name
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activities
$ #####
Cash flows from investing activities:

Net cash provided (used) by investing activities
#####
Cash flows from financing activities:

Net cash provided (used) by financing activities
#####
Net increase (decrease) in Cash
$ #####
Cash (and equivalents) balance at beginning of period

#####
Cash (and equivalents) balance at end of period
$ #####
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
13-4
Operating Activities
Inflows from:
Interest and dividends
received
Sales to customers
Outflows to:
Suppliers of merchandise and
services
Employees
Lenders for interest
Governments for taxes
Cash
Flows from
Operating
Activities
13-5
Investing Activities
Inflows from:
Sale of investments and
plant assets
Collection of principal on
loans
Cash
Flows from
Investing
Activities
Outflows to:
Purchase investments and
plant assets
Purchase debt or equity
investments
Make loans
13-6
Financing Activities
Inflows from:
Short-term and long-term
borrowing
+
Owners (for example, from
issuing stock)
Outflows to:
Make payments on borrowed
funds
Owners for dividends
Purchase treasury stock
Cash
Flows from
Financing
Activities
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.
13-8
Company Name
Period Covered
Net cash provided (used) by operating activities
$ #####

Net cash provided (used) by investing activities
#####
The operating
Lets look at
cash flows section
the direct
#####
can be prepared
method
for
Net increase (decrease) in Cash
$ #####
using either the
preparing
the
Cash (and equivalents) balance at beginning
of period
#####
direct method or
Cash (and equivalents) balance at end of period
$ #####
Statement
of
the indirect
Cash Flows.
method.
Net cash provided (used) by financing activities
13-9
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
Received from
Customers
Net Sales
Increase in
receivables
=
13-10
Direct Method: Cash Received

from Customers
The accounts receivable balance was
$80,000 on 12/31/08 and $110,000 on
12/31/09. If accrual sales revenue for
2009 was $900,000, what was cash basis
revenue?
Net Sales
$900,000
$870,000
Cash Received
from Customers
$30,000
Increase in
receivables
13-11
Direct Method: Interest and

Dividends Received
Interest
Received
Interest
=
Revenue
Dividends
Dividends
=
Received
Revenue
+ Decrease in
interest receivable
- Increase in interest
receivable
+ Decrease in
dividends receivable
- Increase in dividends
receivable
13-12
Direct Method: Cash Paid for

Purchases of Merchandise
Step 1
Purchases = COGS
+ Increase in inventory
- Decrease in inventory
Step 2
Cash paid for
merchandise
= Purchases
+ Decrease in A/P
- Increase in A/P
13-13
Direct Method: Cash Payments

for Expenses
After deducting depreciation and other
noncash expenses, the cash paid for
expenses is affected by
(1) whether the expense was prepaid, and
(2) whether the expense was accrued.
Cash Paid for

Expenses
= Expenses
+ Increase in
prepaid expenses
- Decrease in
prepaid expenses
+ Decrease in
accrued liabilities
- Increase in
accrued liabilities
13-14
Direct Method
Martin Co.
Martin
Co.
Comparative Balance Sheets - Liabilities and Equity
Comparative Balance Sheets - Assets
December 31,
December
31,
2008
2009
Accounts Payable
$2008
15,000 $2009
12,000
Salaries Payable
7,000
5,000
Cash Payable
$ 60,000
Interest
11,950 $ 70,370
7,350
Accounts
net
27,000
35,000
Income
TaxReceivable,
Payable
20,000
17,000
Notes
Payable, 1st Bank
70,000
60,000
Inventory
230,000
200,000
Bonds Payable
250,000
150,000
Trading
Securities
25,000
Premium on Bonds Payable
5,000
4,000
Equipment, net
Common
Stock
Investments
Retained Earnings
Total Assets
Total Liabilities and Equity
500,000
450,000
100,000
425,000
500,000
130,000
88,050
130,020
$ 917,000
$ 917,000
$ 885,370
$ 885,370
13-15
Direct Method
Martin Co.
Income Statement Amounts
For the Year Ending December 31, 2009
Sales Revenues
Cost of Goods Sold
Depreciation Expense
Interest Expense
Income Tax Expense
Salary Expense
Other Expenses
Amortization of Bond Premium
Gain on Sale of Equipment
Extraordinary Loss
Equity in Investee Income
$ 800,000
560,000
5,000
28,050
27,980
80,000
71,000
1,000
3,000
30,000
40,000
Net Income
41,970
13-16
Direct Method
Additional Information
Trading Securities were purchased during 2009 at a cost of
$25,000.
Equipment with a book value of $40,000 was sold during the
year for $43,000.
Equipment with a book value of $30,000 was destroyed during a
freak flood in 2009. There was no insurance.
Martin owns 25% of the common stock of another company and
uses the equity method to account for this investment.
Martins tax rate is 40%.
The Notes Payable to the bank carry a 12% rate. The payments
are due on the first day of each month.
The Bonds Payable carry a 9% rate. Interest is payable
semiannually on July 1 & Jan. 1.
Sold stock during 2009 for $50,000.
Received $10,000 dividends from its equity investment.
13-17
Direct Method
Cash Received from Customers
Sales Revenues
Less: Increase in A/R
$ 800,000
(8,000)
$ 792,000
Cash Paid to Employees

Salary Expense
Add: Decrease in Salary Payable
80,000
2000
2,000
82,000
13-18
Direct Method
Cash Paid for Inventory
Cost of Goods Sold
$ 560,000
Add : Decrease in A/P

Less: Decrease in Inventory
3,000
(30,000)
$ 533,000
Cash Paid for Interest

Interest Expense
Add: Decrease in Interest Payable
28,050
2000
4,600
32,650
13-19
Direct Method
Cash Paid for Taxes
Income Tax Expense
Add: Decrease in Taxes Payable
27,980
2000
3,000
Cash Paid for Taxes
30,980
Other Operating Cash Flows

Add : Dividends from Tiny Co.
Less: Purchase of Trading Securities
Less: Other Operating Expenses
10,000
(25,000)
(71,000)
Cash Flow from Other Sources
$ (86,000)
13-20
Direct Method
Cash Flows From Operating
Activities
792,000
(82,000)
(533,000)
(32,650)
Cash Paid for Taxes
(30,980)
Cash Paid to Other Sources
(86,000)
Cash From Operating Activities
27,370
13-21
Martin Co.
Equipment Statement
with a book of
value
of Flows
Cash
$40,000 was sold for $43,000.
For the Period Ending December 31, 2009
Operating Cash Flows
$ 27,370
Investing Cash Flows

Bonds Payable decreased from
Proceeds
from
sale of
Equipment
$250,000 to
$150,000
during
2009.
Financing Cash Flows
Proceeds from sale of Stock
Principal paid on Bonds
Principal paid on Notes
$ 50,000
(100,000)
(10,000)
43,000
(60,000)
Net Cash
Flows
for the
Period from
Notes
Payable
decreased
$ 10,370
$70,000 to $60,000
during 2009.
Add: Beginning
Cash Balance
60,000
Ending Cash Balance
$ 70,370
13-22
Martin Co.
For the Period Ending December 31, 2009
Notice that the Ending Cash

Operating Cash Flows
Balance per the Statement of
Investing Cash
Flows
Cash
Flows agrees with the
balance on the
Proceeds 12/31/09
from saleCash
of Equipment
Balance Sheet.
$ 27,370
43,000
Financing Cash Flows
Proceeds from sale of Stock

Principal paid on Bonds
Principal paid on Notes
Net Cash Flows for the Period
Add: Beginning Cash Balance
Ending Cash Balance
$ 50,000
(100,000)
(10,000)
(60,000)
$ 10,370
60,000
$ 70,370
13-23
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.
Accounts receivable
Depreciation Expense
13-24
Reporting Operating Cash Flows by

the Indirect Method
Changes in current assets and current
liabilities as shown on the following table
Cash Flows from
Operating
Activities
Net
Income
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization
13-25
Reconciling Net Income with Net

Cash Flows
Current
Assets
Current
Liabilities
Change in Account Balance During Year

Increase
Decrease
Subtract from net
Add to net income
income
Add to net income
Subtract from net
income
Use this table when adjusting Net

Income to Operating Cash Flows.
13-26
The Indirect Method: A Summary

Net Income
Add: Depreciation expense
Decrease in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued expenses payable
Nonoperating losses deducted in computing net income
Deduct: Increase in accounts receivable
Increase in inventories
Increase in prepaid expenses
Decrease in accounts payable
Decrease in accrued expenses payable
Decrease in deferred income taxes payable
Nonoperating gains added in computing net income
Net Cash Provided by (used in) operating activities

13-27
Managing Cash Flows

Cash Budgets are used by management to plan
and forecast future cash flows.
A Cash Budget can be used to:
Force management to coordinate activities.
Provide managers with advance notice of available resources.
Provide targets useful in evaluating performance.
Provide advance warnings of potential cash shortages.
13-28
Managing Cash Flows

Increase collection of accounts
receivables.
Keep inventory low.
Delay payment of liabilities.
Plan timing of major expenditures.
Invest idle cash.
13-29
A Worksheet for Preparing a

AUTO SUPPLY COMPANY
Comparative Balance Sheets
December 31
2008
2009
Assets
Cash
Marketable securities
Accounts receivable
Inventory
Plant and equipment (net of depreciation)
Totals
Liabilities & Stockholders' Equity
Accounting payable
Accured expenses payable
Mortage note payable (long-term)
Bonds payable (due in 2020)
Capital stock (no par)
Retained earnings
Totals
50,000
40,000
320,000
240,000
600,000
$ 1,250,000
150,000
60,000
500,000
160,000
380,000
$ 1,250,000
45,000
25,000
330,000
235,000
640,000
$ 1,275,000
160,000
45,000
70,000
350,000
160,000
490,000
$ 1,275,000
13-30
A Worksheet for Preparing a

Additional Information
1.Net income for the year amounted to $250,000.
cash dividends of $140,000 were declared and
paid.
2.Autos only noncash expense was depreciation,
which totaled $60,000.
3.Marketable securities costing $15,000 were sold
for $35,000 cash, resulting in a $20,000
nonoperating gain.
4.The company purchased plant assets for
$100,000, making a $30,000 cash down payment
and issuing a $70,000 mortgage not payable for
the balance of the purchase price.
13-31
The Worksheet
AUTO SUPPLY COMPANY
Worksheet for Statement of Cash Flows
For the Year Ended December 31, 2009
Effects of Transactions
Beginning
Debit
Credit
Balance
Changes
Changes
Balance sheet effects:

Assets
Cash
Accounts receivable
Inventory
Cash effects:
Operating activities:
Totals
Net
incomeEquity
Liabilities &
Stockholders'
Accounting payable
Retained earnings
Totals
50,000
40,000
320,000Sources of
240,000
Cash
600,000
1,250,000
(1) 250,000
150,000
60,000
500,000
160,000
380,000
1,250,000
Ending
Balance
45,000
25,000
Uses of 330,000
Cash 235,000
640,000
1,275,000
(1) 250,000
160,000
45,000
70,000
350,000
160,000
490,000
1,275,000
13-32
The Worksheet
Sources of
Uses of
Cash
AUTO SUPPLYCash
COMPANY
Cash effects:
Operating activities: Worksheet for Statement of Cash Flows
Net income
(1) 250,000 Effects of Transactions
Credit
Depreciation expense
(3)Beginning
60,000 Debit
Assets
Cash
Accounts receivable
Inventory
Investing activities:
Totals
Accounting payable
Financing activities:
BondsDividends
payable (duepaid
in 2020)
Retained
Netearnings
change in cash
Totals
Balance
Changes
50,000
40,000
320,000
240,000
600,000
1,250,000
150,000
60,000
500,000
160,000
380,000
1,250,000
Changes
(3) 60,000
(2) 140,000
(2) 140,000
(1) 250,000
Ending
Balance
45,000
25,000
330,000
235,000
640,000
1,275,000
160,000
45,000
70,000
350,000
160,000
490,000
1,275,000
13-33
The Worksheet
AUTO SUPPLY
COMPANY
Sources
of
Uses of
Worksheet
for Statement
of Cash Flows
Cash effects:
Cash
Cash
Net income
(1) 250,000
Beginning
Debit
Credit
(3) 60,000
Balance sheet
effects:receivable
Balance
Changes
Increase
in accounts
(4) 10,000Changes
Assets in inventory
Decrease
(5) 5,000
Cash
(6) 10,000 50,000
Marketableinsecurities
40,000
Decreases
accrued expenses
(7)
15,000
Accounts receivable
320,000 (4) 10,000
Inventory
240,000
(5) 5,000
600,000
(3) 60,000
Totals
1,250,000
Accounting payable
150,000
(6) 10,000
60,000 (7) 15,000
500,000
160,000
Retained earnings
380,000 (2) 140,000 (1) 250,000
Totals
1,250,000
Ending
Balance
45,000
25,000
330,000
235,000
640,000
1,275,000
160,000
45,000
70,000
350,000
160,000
490,000
1,275,000
13-34
The Worksheet
AUTO SUPPLY COMPANY
Cash effects:
Sources of for
Cash
Uses of Cash
Worksheet
Statement
of Cash Flows
Net income
(1) 250,000
(3) 60,000
Beginning
Debit
Credit
Increase in accounts receivable
(4) 10,000
Balance
Changes
Changes Ending Balance
Decrease in inventory
(5) 5,000
Assets
(6) 10,000
Cash
50,000
45,000
Decreases in accrued expenses
(7)
15,000
Marketable
40,000
(8) 15,000
25,000
Gain
on sale securities
of securities
(8)
20,000
Accounts activities:
receivable
320,000 (4) 10,000
330,000
Investing
Inventoryfor sale of securities
(5) 5,000
235,000
Preceeds
(8) 35,000 240,000
Plantacquired
and equipment
600,000
(9) 100,000 (3) 60,000
640,000
Plant
for cash(net of depreciation)
(9) 30,000
Totals activities:
1,250,000
1,275,000
Financing
Dividends
(2) 140,000
Liabilities paid
& Stockholders' Equity
Retirement
bonds payable
(10)
150,000
Accounting of
payable
150,000
(6) 10,000
160,000
Net
decrease
in
cash
5,000
60,000 (7) 15,000
45,000
(9) 70,000
70,000
500,000 (10) 150,000
350,000
160,000
160,000
Retained earnings
380,000 (2) 140,000 (1) 250,000
490,000
Totals
1,250,000
415,000
410,000
1,275,000
13-35
The Worksheet
AUTO SUPPLY COMPANY
Cash effects:
Sources of
Uses of
Worksheet
forCash
Statement
of Cash Flows
Net income
(1) 250,000
(3) 60,000
Beginning
Debit
Credit
Increase
in
accounts
receivable
(4)
10,000
Balance
Changes
Changes Ending Balance
(5) 5,000
Assets
(6) 10,000
Cash
50,000
(x) 5,000
45,000
Decreases in accrued expenses
(7) 15,000
40,000
(8) 15,000
25,000
Gain on sale of securities
(8) 20,000
Accounts receivable
320,000 (4) 10,000
330,000
Investing activities:
Inventory
240,000
(5) 5,000
235,000
Preceeds for sale of securities
(8) 35,000
600,000 (9) 100,000 (3) 60,000
640,000
Plant acquired for cash
(9) 30,000
Totals activities:
1,250,000
1,275,000
Financing
Liabilities
Stockholders' Equity
Dividends&paid
(2) 140,000
Accounting
150,000
(6) 10,000
160,000
Retirementpayable
of bonds payable
(10) 150,000
Accured
expenses
payable
(7) 15,000
45,000
Net decrease
in cash
(x) 5,000 60,0005,000
(9) 70,000
70,000
500,000 (10) 150,000
350,000
160,000
160,000
Retained earnings
380,000 (2) 140,000 (1) 250,000
490,000
Totals
1,250,000
415,000
415,000
1,275,000
13-36

AUTO SUPPLY COMPANY
Net income
$ 250,000
Add: Depreciation expense
60,000
5,000
10,000
Less: Increase in accounts receivable
(10,000)
Decrease in accrued expenses
(15,000)
Gain on sale of securities
(20,000)
Net cash provided by operating activities
280,000
Proceeds from sale of securities
$ 35,000
Cash paid for plant assets
(30,000)
Net cash provided by investing activities
5,000
Dividends paid
(140,000)
Retirement of bonds payable
(150,000)
Net cash used for financing activities
(290,000)
Net decrease in cash
(5,000)
Cash and cash equivalents, January 1, 2009
50,000
Cash and cash equivalents, December 31, 2009
$ 45,000
13-37
Supplemental Information
We are required to disclose information concerning
major investing and financing activities that do not
involve cash.
AUTO SUPPLY COMPANY
Supplementary Schedule: Noncash Investing and Financing Activities
Purchases of plant assets
Less: Portion financed by issuance of long-term debt
Cash paid to acquire plant assets
$ 100,000
70,000
$ 30,000
13-38
End of Chapter 13
13-39

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Statement of Cash Flows

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Purpose of the Statement

Ability to generate positive cash flows.

Cash flows from investing activities:

Cash flows from financing activities:

Net increase (decrease) in Cash

Cash (and equivalents) balance at beginning of period

Classification of Cash Flows

Sale of investments and

Short-term and long-term

Cash and Cash Equivalents

Short-term, highly liquid investments.

Cash flows from investing activities:

Direct Method: Cash Received

Direct Method: Cash Received

Direct Method: Interest and

Direct Method: Cash Paid for

Direct Method: Cash Payments

Cash Paid for

Total Liabilities and Equity

Cash Received from Customers

Cash Paid to Employees

Cash Paid to Employees

Add : Decrease in A/P

Cash Paid for Interest

Cash Paid for Interest

Cash Paid for Taxes

Other Operating Cash Flows

Cash Flow from Other Sources

Cash Paid to Employees

Cash Paid for Inventory

Cash Paid for Interest

Cash Paid for Taxes

Cash Paid to Other Sources

Cash From Operating Activities

Investing Cash Flows

Ending Cash Balance

Notice that the Ending Cash

Financing Cash Flows

Proceeds from sale of Stock

Reconciling Net Income with

Reporting Operating Cash Flows by

Reconciling Net Income with Net

Change in Account Balance During Year

Use this table when adjusting Net

The Indirect Method: A Summary

Net Cash Provided by (used in) operating activities

Managing Cash Flows

Managing Cash Flows

A Worksheet for Preparing a

A Worksheet for Preparing a

Balance sheet effects:

Statement of Cash Flows

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