Financial Accounting

Module 14: Statement of Cash Flows

Module Learning Outcomes

Prepare a Statement of Cash Flows

14.1:
Define cash flows and the purpose of the Statement of Cash
Flows
14.2:
Understand how a statement of Cash Flows is prepared using
the indirect method

14.3: Prepare a Statement of Cash Flow

Statement of Cash Flows
Learning Outcomes: Statement of Cash Flows

14.1: Define cash flows and the purpose of the Statement of Cash
Flows
14.1.1: Explain the purpose of the Statement of Cash Flows
14.1.2: List and describe the elements of the Statement of Cash Flows
14.1.3: Distinguish between the Direct and Indirect methods of preparing a
Statement of Cash Flows
14.1.4: Calculate cash flows from operating activities by the direct method
Explain the Purpose of the Statement of Cash
Flows
 Explain the Purpose of the Statement of Cash
Flows
Statement of Cash Flows provides cash
receipt and cash payment information and
reconciles the change in cash for a period of
time.

Cash receipts and cash payments are

summarized and categorized as operating,
investing, or financing activities. It indicates
where cash came from and where cash went
for a period of time.

Provides useful information to management,

investors, creditors, and other interested
parties and information about the effects on
cash of the operating, investing, and
financing activities of a company during an
accounting period.
 List and Describe the elements of the Statement
of Cash Flow
Statement of cash flows classifies cash receipts and disbursements as operating,
investing, and financing cash flows. Both inflows and outflows are included within
each category.

1. Operating activities generally include the cash effects (inflows and outflows) of
transactions and other events that enter into the determination of net income.

Cash inflows from operating activities affect items that appear on the income
statement and include:

a. cash receipts from sales of goods or services;

b. interest received from making loans;
c. dividends received from investments in equity securities;
d. cash received from the sale of trading securities; and
e. other cash receipts that do not arise from transactions defined as investing or
financing activities, such as amounts received to settle lawsuits, proceeds of
certain insurance settlements, and cash refunds from suppliers.
List and Describe the elements of the Statement
of Cash Flow (cont’d)
2. Investing activities include transactions
involving the acquisition or disposal of
noncurrent assets.
Cash inflows from investing activities include
cash received from: (1) the sale of property,
plant, and equipment; (2) the sale of available-
for-sale and held-to-maturity securities; and (3)
the collection of long-term loans made to others.
Cash outflows for investing activities include
cash paid: (1) to purchase property, plant, and
equipment; (2) to purchase available-for-sale
and held-to-maturity securities; and (3) to make
long-term loans to others.
List and Describe the elements of the Statement
of Cash Flow (cont’d)
3. Financing activities generally include the cash effects (inflows and
outflows) of transactions and other events involving creditors and owners.
Cash inflows from financing activities include cash received from issuing
capital stock and bonds, mortgages, and notes, and from other short- or
long-term borrowing.

Cash outflows for financing activities include payments of cash dividends or

other distributions to owners (including cash paid to purchase treasury
stock) and repayments of amounts borrowed. Payment of interest is not
included because interest expense appears on the income statement and is,
therefore, included in operating activities. Cash payments to settle accounts
payable, wages payable, and income taxes payable are not financing
activities. These payments are included in the operating activities section.
Distinguish Between the Direct and Indirect
Methods of Preparing a Statement of Cash Flows
Cash flows from operating activities show
the net amount of cash received or
disbursed during a given period for items
that normally appear on the income
statement. You can calculate these cash $
Beginning balance
flows using either the direct or indirect 1,750
method. The direct method deducts from
cash sales only those operating expenses Accrual basis sales 45,785
that consumed cash. This method
converts each item on the income Balance before payments 47,535
statement directly to a cash basis.
Alternatively, the indirect method starts Less: Ending balance 1,735
with accrual basis net income and
indirectly adjusts net income for items Cash payments from $
that affected reported net income but did
not involve cash. customers 45,800

The direct method converts each item

on the income statement to a cash
basis.
 Calculate Cash Flows from Operating Activities
Using the Direct Method
The direct method of presenting the statement of cash flows presents the specific cash
flows associated with items that affect cash flow. Items that typically do so include:

● Cash collected from customers

● Interest and dividends received

● Cash paid to employees

● Cash paid to suppliers

● Interest paid

● Income taxes paid

Practice Question 1

In a company’s Statement of Cash Flows, which of these activities generate

positive cash flow from a financing activity?

A. A $100,000 increase in value of a parcel of land.

B. A company acquiring additional treasury stock.
C. A company issuing 10,000 shares of additional stock.
D. A company paying the shareholders dividends.
Indirect Method of Preparing a Statement
of Cash Flows
Learning Outcomes: Indirect Method of Preparing
a Statement of Cash Flows
14.2: Understand how a statement of Cash Flows is prepared using
the indirect method
14.2.1: Identify Cash Flows using the indirect method
14.2.2: Calculate cash flows from investing activities
14.2.3: Calculate cash flows from financing activities
Identify Cash Flows Using the Indirect Method

The direct method deducts from

cash sales only those operating Cash Flows from Operating Activities: Net Income
expenses that consumed cash.
This method converts each item
+ Depreciation Expense (from income statement)
on the income statement + Losses (from income statement)
directly to a cash basis.
Alternatively, the indirect – Gains (from income statement)
method starts with accrual basis
net income and indirectly + Amortization, depletion (from income statement)
adjusts net income for items
that affected reported net + DECREASE in Current Assets (other than cash)
income but did not involve cash.
– INCREASE in Current Assets (other than cash)

Cash flows from investing and + Increase in Current Liabilities

financing are prepared the same
way under the direct and – Decrease in Current Liabilities
indirect methods for the
Net cash provided by Operating Activities
statement of cash flows.
Identify Cash Flows Using the Indirect Method
Calculate Cash Flows from Investing Activities

Investing activities would include any changes to long-term assets including fixed assets (also called property, plant, and
equipment), long-term investments in notes receivable, or stocks or bonds of other companies, and intangible assets
(patents, trademarks, etc.). Where would we find this information? We would look on the balance sheet. If there was a
change in any long-term asset (increase or decrease during the year), we need to account for that item in the Investing
section.

Cash flows from Investing activities:

+ cash received from sale of long-term

assets

– cash paid for purchase of new long-

term assets

Net cash provided (used) by Investing

Activities
Calculate Cash Flows from Financing Activities

Financing activities would include any

changes to long-term liabilities (and Cash flows from Financing
short-term notes payable from the activities:
bank) and equity accounts (common + cash received from long-term
stock, paid in capital accounts, liabilities
treasury stock, etc.). We would get
most of the information from the – cash paid on long-term liabilities
balance sheet, but it may be + cash received from issuing stock
necessary to use the Statement of
Retained Earnings as well for any – cash paid for dividends
information on dividends. As with – cash paid to purchase treasury
investing, if there has been a change stock
in a long-term liability or equity
(increase or decrease during the Net cash provided (used) by Financing
year), we must account for the item in Activities
the Financing section of the statement
of cash flows.
Preparing a Statement of Cash Flows
Learning Outcomes: Preparing a Statement of
Cash Flows
14.3: Prepare a Statement of Cash Flow
14.3.1: Prepare a Statement of Cash Flows in Proper Form (both direct and
indirect)
14.3.2: Demonstrate the use of a worksheet to create the Statement of
Cash Flows
14.3.3: Explain required disclosures, including non-cash activities
 Prepare a Statement of Cash Flows In Proper
Form (both from Direct and Indirect Method)
Accountants follow specific procedures
when preparing a statement of cash
flows.
1. After determining the change in cash,
the first step is to calculate the cash
flows from operating activities, using
either the direct or indirect method.
2. The second step is to analyze all of the
noncurrent accounts and additional data
for changes resulting from investing and
financing activities.
3. The third step is to arrange the
information gathered in steps 1 and 2
into the proper format for the statement
of cash flows.
 Rumble Corp.Statement of Cash Flowsfor the year ended 12/31/x1
In millions

Prepare a Statement of Cash

Cash flows from operating activities

Flows In Proper Form (both

Net income $ 2,610
Adjustments to reconcile net income to net cash provided by operating

from Direct and Indirect

activities:
Depreciation and amortization 125
Decrease in Accounts Receivable 15
Gain on sale of equipment (90)
Increase in Accounts Payable 32
Increase in income taxes payable 80
Increase in other liabilities 18
Method)
Total adjustments 180
Net cash from operating activities $2,790

Cash flows from investing activities

Purchase of property, plant, and equipment (580)
Proceeds from sale of equipment 150
Net cash used in investing activities (430)

Proceeds from issuance of common stock 1,000

Proceeds from issuance of long-term debt 500
Dividends paid (460)
Net cash used in financing activities 1,040

Net increase in cash and cash equivalents 3,400

Cash and cash equivalents at beginning of period 1,640
Cash and cash equivalents at end of period $5,040

Supplemental information:
Cash paid for interest $ 310
 Prepare a Statement of Cash Flows In Proper
Form (both from Direct and Indirect Method)
Step Two:

Cash flows from investing activities

Purchase of property, plant, and equipment (580)
Proceeds from sale of equipment 150
Net cash used in investing activities (430)
 Prepare a Statement of Cash Flows In Proper
Form (both from Direct and Indirect Method)
Step 3:

Cash flows from financing activities

Proceeds from issuance of common stock 1,000
Proceeds from issuance of long-term debt 500
Dividends paid (460)
Net cash used in financing activities 1,040

Net increase in cash and cash equivalents 3,400

Cash and cash equivalents at beginning of
1,640
period
Cash and cash equivalents at end of period $5,040

Supplemental information:
Cash paid for interest $ 310
Cash paid for income taxes $ 1,700
 Panel B – Statement of Cash Flows
Demonstrate the Use of Cash Flows from Operating Activities:

a Worksheet to Create Net Income

Adjustments to Reconcile Net Income to Net Cash
the Statement of Cash Provided by Operating Activities
Depreciation Expense – Plant Assets
Flows
In order to ensure accuracy and make the
Decrease in accounts receivable
Gain on sale of equipment
process as efficient as possible, accountants
have developed a worksheet process to create Increase in Accounts Payable
the statement of cash flows. We’ll demonstrate Increase in Wages Payable
that process here using the indirect method Increase in Income Taxes Payable
because that is its most common use and the
indirect method is the most common Net Cash Provided by Operating Activities
presentation. Cash Flows from Investing Activities:
Cash Paid for Acquisition of Plant Assets
Proceeds from sale of equipment
Net Cash Used for Investing Activities
Cash Flows from Financing Activities:
Cash Receipt from Issuance of Common Stock
Proceeds from issuance of long-term debt
Cash Payment of Dividends
Net Cash Provided by Financing Activities
Net Increase (Decrease) in Cash:
Total
–
Demonstrate the Use of a Worksheet to Create
the Statement of Cash Flows
Operating Fiscal year is January-December. All values USD millions.
2015 2016 2017 2018 2019

Activities Net Income before Extraordinaries 752.21M 692.16M 521.76M 531.45M 423.64M

Depreciation, Depletion & Amortization 198.07M 209.56M 222.19M 264.86M 232.54M

Depreciation and Depletion 195.27M 202.56M 217.99M 264.46M 231.64M

Amortization of Intangible Assets 2.8M 7M 4.2M 400,000 900,000

Deferred Taxes & Investment Tax Credit (16.48M) (165,000) 50.86M (33.98M) 21.55M

Deferred Taxes (16.48M) (165,000) 50.86M (33.98M) 21.55M

Investment Tax Credit - - - - -

Other Funds 174.68M 228.06M 266.25M 239.04M 248.98M

Funds from Operations 1.11B 1.13B 1.06B 1B 926.7M

Extraordinaries - - - - -

Changes in Working Capital (8.35M) 44.73M (55.99M) 204.54M (58.43M)

Receivables (13.67M) (45.93M) (18.15M) 9.92M 44.9M

Accounts Payable 138.82M 38.24M 10.13M 196.19M (18.46M)

Other Assets/Liabilities 21.71M (32.65M) (27.38M) 29.5M (26.17M)

Net Operating Cash Flow 1.1B 1.17B 1.01B 1.21B 868.27M

Demonstrate the Use of a Worksheet to Create
the Statement of Cash Flows
Investing Activities
2015 2016 2017 2018 2019 5-year
trend

Capital Expenditures (259.97M) (256.26M) (206.29M) (213.52M) (181.44M)

Capital Expenditures (Fixed Assets) (259.97M) (256.26M) (206.29M) (213.52M) (181.44M)

Capital Expenditures (Other Assets) - - - - -

Net Assets from Acquisitions (59.91M) - - - (7M)

Sale of Fixed Assets & Businesses - - - - -

Purchase/Sale of Investments 11.51M 40.01M 6.92M (10.01M) 10.01M

Purchase of Investments - - - (10.01M) -

Sale/Maturity of Investments 11.51M 40.01M 6.92M - 10.01M

Other Uses (3.75B) (3.66B) (3.59B) (3.76B) (3.85B)

Other Sources 3.14B 3.49B 3.23B 3.33B 3.52B

Net Investing Cash Flow (915.85M) (392.73M) (562.47M) (662.27M) (508.13M)

Demonstrate the Use of a Worksheet to Create
the Statement of Cash Flows
2015 2016 2017 2018 2019 5-year
trend

Cash Dividends Paid - Total (249.26M) (252.32M) (251.86M) (245.81M) (237.22M)

Financing Activities Common Dividends (249.26M) (252.32M) (251.86M) (245.81M) (237.22M)

Preferred Dividends - - - - -

Change in Capital Stock (1.52B) (449.56M) (453.91M) (387.08M) (292.93M)

Repurchase of Common & Preferred Stk. (1.54B) (465.34M) (465.26M) (390.61M) (296.52M)

Sale of Common & Preferred Stock 20.18M 15.78M 11.35M 3.53M 3.59M

Proceeds from Stock Options - - - - -

Other Proceeds from Sale of Stock 20.18M 15.78M 11.35M 3.53M 3.59M

Issuance/Reduction of Debt, Net 1.4B (78.26M) 155.51M 618.13M (182.07M)

Change in Current Debt 469.47M (145.81M) 212.81M (135.36M) (563.45M)

Change in Long-Term Debt 927.69M 67.56M (57.3M) 753.48M 381.38M

Issuance of Long-Term Debt 2.62B 1.26B 1.36B 2.1B 2.4B

Reduction in Long-Term Debt (1.69B) (1.19B) (1.42B) (1.35B) (2.02B)

Other Funds 14.88M 45.75M 8.46M - -

Other Uses - - - - -

Other Sources 14.88M 45.75M 8.46M - -

Net Financing Cash Flow (354.06M) (734.39M) (541.8M) (14.76M) (712.22M)

Practice Question 2

Chadwick is asked by his fellow classmate to give an example of an

investing or financing activity that takes place without generating or
consuming cash, otherwise known as a noncash expense. Which of the
following is an example of a noncash expense?

A. Sale of common stock

B. Depreciation
C. Sale of a building
D. Payment of taxes
Quick Review

• What is the purpose of the Statement of Cash Flows?

• What are each of the elements of the Statement of Cash Flows?
• What is the difference between the Direct and Indirect methods of preparing a
Statement of Cash Flows?
• How are cash flows from operating activities by the direct method calculated?
• How are cash Flows identified using the indirect method?
• How are cash flows from investing activities calculated?
• How are cash flows from financing activities calculated?
• How is a Statement of Cash Flows in Proper Form (both direct and indirect)
prepared?
• How is a worksheet used to create the Statement of Cash Flows?
• What are the required disclosures, including non-cash activities?