Chapter 16 – Reporting the Statement of Cash Flows
CHAPTER 16
REPORTING THE STATEMENT OF CASH FLOWS
Related Assignment Materials
Student Learning Objectives Questions
Quick
Studies* Exercises* Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Distinguish between operating,
investing, and financing
activities, and describe how
noncash investing and financing
activities are disclosed
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8, 9,14
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Analytical objectives:
A1. Analyze the statement
of cash flows and apply the cash
flow on total assets ratio.
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Procedural objectives:
P1. Prepare a statement of cash
flows.
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16-9, 16-11,
16-12, 16-17,
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16-3, 16-4,
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P2. Compute cash flows from
operating activities using
the indirect method.
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P3. Determine cash flows from
both investing and financing
activities.
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15
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P4A.Illustrate use of a spreadsheet to
prepare a statement of
cash flows (Appendix 16A)
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P5B.Compute cash flows from
operating activities using
the direct method.(Appendix
16B)
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16-12, 16-14,
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*See additional information on next page that pertains to these quick studies, exercises and problems.
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Chapter 16 – Reporting the Statement of Cash Flows
Additional Information on Related Assignment Material
Corresponding problems in set B (in text), also relate to learning objectives identified in grid on
previous page. The Serial Problem for Success Systems continues in this chapter. Problems 16-6A,
16-7A and 16-8A can be completed using Excel.
Connect reproduces assignments online, in static or algorithmic mode, which allows instructors to
monitor, promote, and assess student learning. It can be used for practice, homework, or exams.
Synopsis of Chapter Revisions
Dave’s Killer Bread: NEW opener with new entrepreneurial assignment
New infographics for operating, investing and financing activities
New linkage of cash flow classifications to balance sheet
Simplified discussion of noncash investing and financing
New, simplified preparation steps for statement of cash flows
New, overall summary T-account for preparing statement of cash flows
New reconstruction entries to help determine cash
Updated cash flow analysis using Nike
Numerous new assignments
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Chapter 16 – Reporting the Statement of Cash Flows
Chapter Outline Notes
I. Basics of Cash Flow Reporting
A. Purpose of a Statement of Cash Flows
To report all major cash receipts (inflows) and cash payments
(outflows) during a period. This report classifies cash flows into
operating, investing, and financing activities. It answers important
questions such as:
1. How does a company obtain its cash?
2. Where does a company spend its cash?
3. What explains the change in the cash balance?
4. How much is paid in cash dividends?
B. Importance of Cash Flows
1. Be readily convertible to a known amount of cash.
2. Be sufficiently close to its maturity date so its market value is
unaffected by interest rate changes.
1. Operating activities include transactions and events that
determine net income (with some exceptions such as unusual
gains and losses). Specific examples:
2. Investing activities include transactions and events that affect
long-term assets, namely the purchase or sale of these assets.
Specific examples:
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Chapter 16 – Reporting the Statement of Cash Flows
Chapter Outline Notes
3. Financing activities include transactions and events that affect
long-term liabilities and equity:
a. Cash inflows from owner contributions, from issuing
company’s own stock, from issuing bonds and notes and
1. Lists cash flows by categories (operating, financing and
2. Combines the net cash flow in each of the three categories and
identifies the net change in cash for the period.
3. Combines the net change in cash with the prior period ending
cash to prove the current period ending cash.
4. Contains a separate schedule or note disclosure of any noncash
1. Five steps:
a. Compute the net increase or decrease in cash (bottom line
or target number).
b. Compute and report net cash provided (used) by operating
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Chapter 16 – Reporting the Statement of Cash Flows
Chapter Outline Notes
2. Sources of information for preparing the statement of cash
flows
3. Alternative approaches to preparing the statement:
a. Analyzing the cash account.
1. Direct Method—separately lists each major item of operating
cash receipts and each major item of operating cash payments.
Cash payments are subtracted from cash receipts to determine
the net cash provided (used) by operating activities.
2. Indirect Method—reports net income and then adjusts it for
items necessary to obtain net cash provided (used) by
operating activities.
3. Note that the net cash provided (used) by operating activities
is identical under both the direct and indirect method.
B. Application of the Indirect Method of Reporting
1. Reports net income and then adjusts it for three types of items
necessary to obtain net cash provided (used) by operating
activities.
2. The types of adjustments are:
a. to income statement items involving operating activities
that do not affect
i. Revenues and gains are deducted from net
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Chapter 16 – Reporting the Statement of Cash Flows
16-12 in text.
Chapter Outline Notes
III. Cash Flows from Investing—identical under direct and indirect
methods. Three-stage process of analysis to determine cash provided
entries by the preparer).
C. Report their cash flow effects.
V. Proving Cash Balances
Last step in preparing the statement is to report the beginning and
ending cash balances and provide that the net change in cash is
explained by operating, investing and financing cash flows. Exhibit
16.13 in text.
VI. Global View—Compares U.S. GAAP to IFRS
A. Both systems permit the direct or indirect approach to reporting
cash flows from operating activities and the application of both
methods are fairly consistent under both systems. Two basic
differences are:
1. U.S. GAAP requires cash inflows from interest and dividend
revenue is classified as operating activities, whereas IFRS
permits classification under operating or investing provided it
is consistent across periods.
2. U.S.GAAP requires cash outflows for interest expense to be
classified as operating activities, whereas IFRS permits
classification under operating or investing provided it is
consistent across periods.
B. Both systems are fairly similar in reporting cash flows from
investing and financing activities.
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Chapter 16 – Reporting the Statement of Cash Flows
Chapter Outline Notes
VII. Decision Analysis—Cash Flow Analysis
A. Analyzing Cash Sources and Uses
1. Managers stress understanding and predicting cash flows for
business decisions.
2. Creditor and investor decisions are also based on a company’s
cash flow evaluations.
3. Operating cash flows are generally considered to be most
1. Similar to return on total assets except the return is analyzed
based on operating cash flows rather than net income.
2. Computed by dividing cash flow from operations by average
total assets.
VIII. Spreadsheet Preparation of the Statement of Cash Flows (Appendix 16A)
A spreadsheet approach may be used to organize and analyze the information to prepare a
statement of cash flows by the indirect method, including the supplemental disclosures of
noncash investing and financing activities.
A. The spreadsheet has four columns containing dollar amounts.
1. Columns one and four contain the beginning and ending balances of each balance
sheet account.
2. Columns two and three are for reconciling the changes in each balance sheet account.
B. Separate sections on the working paper present (a) balance sheet items with debit
1. By adjusting net income for the changes in all noncash current asset and current
liability account balances. This reconciles the changes in these accounts.
2. By eliminating from net income the effects of all noncash revenues and expenses.
This begins the reconciliation of noncurrent assets.
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Chapter 16 – Reporting the Statement of Cash Flows
Chapter Outline Notes
3. By eliminating from net income any gains or losses from
investing and financing activities. This involves the
reconciliation of noncurrent assets and noncurrent liabilities
and perhaps the recording of disclosures in sections (c) – (g).
4. By entering any remaining items, such as dividend
payments, which are necessary to reconcile the changes in all
balance sheet accounts.
IX. Direct Method of Reporting Operating Cash Flows (Appendix
16B)
A. Separately list each major item or class of operating cash
receipts and cash payments.
B. Classes of operating cash receipts include cash received from
customers, renters, interest, and dividends.
reconciliation of net income to net cash provided (used) by
operating activities. This is operating cash flows computed
using the indirect method.
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