VISUAL #16-1
CLASSIFYING ACTIVITIES IN THE STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Cash inflows from Cash outflows to
Customers for cash sales
Collections on credit sales
Borrowers for interest
Dividends received
Lawsuit settlements
Salaries and wages
Lenders for interest
Charities
Suppliers of goods and services
Government for taxes and fines
INVESTING ACTIVITIES
Cash inflows from Cash outflows to
Selling investments in securities
Selling (discounting) notes
Collecting principal on notes
Selling long-term productive assets
Make loans to others
Purchase long-term productive assets
Purchase investments in securities
FINANCING ACTIVITIES
Cash inflows from Cash outflows to
Contributions by owners
Issuing notes and bonds
Issuing its own equity stock
Issuing short-term and long-term
debt
Repay cash loans
Pay withdrawals by owners
Pay dividends to shareholders
Purchase treasury stock
NONCASH INVESTING AND FINANCING ACTIVITIES
Retirement of debt by issuing equity stock
Conversion of preferred stock to common stock
Leasing of assets in a capital lease transaction
Purchase of a long-term asset by issuing a note or a bond
Exchange of noncash assets for other noncash assets
Purchase of noncash assets by issuing equity or debt
VISUAL #16-2
STEPS TO DETERMINE INFORMATION
STATEMENT OF CASH FLOWS
1. Find change in Cash—This is the target number.
2. Find cash flow from operations
(Using direct or indirect method)
3. Find Cash Flow from A. Financing and
B. Investing
Procedure:
In real life: Using data from comparative balance sheets, trace
changes through ledgers and journals probably using a worksheet
to organize, analyze, and prove data disclosed.
In the classroom: Determine the changes in noncurrent accounts
and notes from comparative balance sheets. Use the relevant data
the text provides that comes from the ledgers and the journals to
systematically analyze the data using chart and/or reconstructing
journal entries.
4. Combine cash flows from all three activities (from 2 and 3) to find
net cash flow and prove change in cash. (Target number
determined in Step 1).
Note: Once the above information has been gathered, the statement
can be prepared following the required format. If the direct method
was used, GAAP requires a reconciliation of net income to cash
provided from operations.
VISUAL #16-3
Determining Cash Flows from Operating Activities
Direct Method
(Need income statement and balance sheet data)
1. Cash = Sales + Decrease in
Receipts Accounts
from Customers* Receivable
or
– Increase in
Accounts
Receivable
2. Cash = Cost of + Increase in + Decrease in
Payments Goods Sold Inventory Accounts
to Suppliers or Payable
– Decrease in – Increase in
Inventory Accounts
Payable
3. Cash = Operating + Increase in + Decrease in – Depreciation
Payments Expenses Prepaid Accrued and Other
for Expenses Liabilities Noncash
Operating** or or Expenses
Expenses – Decrease in – Increase in
Prepaid Accrued
Expenses Liabilities
4. Cash = Income + Decrease in
Payments Taxes Income
for Expense Taxes
Income Payable
Taxes or
-Increase in
Income
Taxes
Payable
5. Cash = Interest + Decreases in
Payments Expense Interest Payable
for – Increase in
Interest Interest Payable **Wage expense would be
taken out if CP for wages was
*use similar computations for to be reported separately.
CR from Interest &/or Dividends The related prepaids and
CR from Rent payables would be considered
in the computation.
VISUAL #16-4
START WITH
NET INCOME OR (NET LOSS)
Add Subtract
1. Write-offs or noncash 1. Gains
expenses 2. Increases in current assets
2. Losses 3. Decreases in current
3. Decreases in current assets liabilities
4. Increases in current
liabilities.
RESULT
CASH FLOWS FROM
OPERATING ACTIVITIES
Alternate Demonstration Problem
Chapter Sixteen
The Carpet Company’s 2014 and 2015 balance sheets included the
following items:
December 31
2015 2014
Debits
Cash ………………………………………………………………… $10,500 $ 4,000
Accounts receivable…………………………………………… 8,000 9,000
Merchandise inventory……………………………………….. 21,000 18,000
Equipment…………………………………………………………. 18,000 15,000
Totals……………………………………………………….. $57,500 $46,000
Credits
Accumulated depreciation, equipment………………… $ 4,000 $ 3,000
Accounts payable………………………………………………. 7,000 5,000
Taxes payable……………………………………………………. 1,000 2,000
Dividends payable……………………………………………… 1,500 0
Common stock, $10 par value……………………………… 27,000 25,000
Contributed capital in excess of par, common stock 6,000 5,000
Retained earnings………………………………………………. 11,000 6,000
Totals……………………………………………………….. $57,500 $46,000
The Carpet Company’s income statement was as follows:
CARPET COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales ………………………………………………………………… $61,000
Cost of goods sold…………………………………………….. $40,000
Wages and other operating expenses………………….. 6,300
Income taxes expense………………………………………… 4,200
Depreciation expense…………………………………………. 1,500 52,000
Net income………………………………………………………… $ 9,000
Required:
Prepare the statement of cash flows under both the direct method and the
indirect method for the year ended December 31, 2015. Additional
information includes the following:
a. Equipment costing $3,500 was purchased during the year.
b. Fully depreciated equipment that cost $500 was discarded and its
cost and accumulated depreciation were removed from the
accounts.
c. Two hundred shares of stock were sold and issued at $15 per share.
d. The company declared $4,000 of cash dividends and paid $2,500.
Solution: Alternate Demonstration Problem
Chapter Sixteen
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Cash received from customers………………………… $ 62,000
Cash paid for merchandise……………………………… (41,000)
Cash paid for wages and other operating
expenses……………………………………………………. (6,300)
Cash paid for taxes…………………………………………. (5,200)
Net cash provided by operating activities…………. $ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant assets…………….. (3,500)
Net cash used by investing activities……………….. (3,500)
Cash flows from financing activities:
Cash received from issuing stock……………………. 3,000
Cash paid for dividends………………………………….. ( 2,500)
Net cash provided by financing activities…………. 500
Net increase in cash…………………………………………….. $ 6,500
Cash balance at end of 2014…………………………………. 4,000
Cash balance at end of 2015…………………………………. $10,500
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Net income………………………………………………………….. $ 9,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accounts receivable……………………… 1,000
Increase in merchandise inventory………………….. (3,000)
Increase in accounts payable………………………….. 2,000
Decrease in taxes payable………………………………. (1,000)
Depreciation expense……………………………………… 1,500
Net cash provided by operating activities…………. $ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant asset………………. (3,500)
Net cash used by investing activities……………….. (3,500)
Cash flows from financing activities:
Cash received from issuing stock……………………. 3,000
Cash paid for dividends………………………………….. (2,500)
Net cash provided by financing activities…………. 500
Net increase in cash…………………………………………….. 6,500
Cash balance at end of 2014…………………………………. 4,000
Cash balance at end of 2015…………………………………. $10,500