VISUAL #16-1
CLASSIFYING ACTIVITIES IN THE STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Cash inflows from Cash outflows to
Customers for cash sales
Salaries and wages
Cash inflows from Cash outflows to
Selling investments in securities
Selling (discounting) notes
Collecting principal on notes
Make loans to others
Purchase long-term productive
assets
Issuing its own equity stock
Issuing short-term and long-term
debt
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
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:
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).
1. Cash = Sales + Decrease in
Receipts Accounts
2. Cash = Cost of + Increase in + Decrease in
Payments Goods Sold Inventory Accounts
3. Cash = Operating + Increase in + Decrease in – Depreciation
Payments Expenses Prepaid Accrued and Other
4. Cash = Income + Decrease in
Payments Taxes Income
for Expense Taxes
5. Cash = Interest + Decreases in
Payments Expense Interest Payable
for – Increase in
Interest Interest Payable **Wage expense would be
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
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
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
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:
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: