Chapter 16 – Reporting the Statement of Cash Flows
Comparative Analysis — BTN 16-2
1. Apple’s cash flow on total assets ratio ($ millions)
Current Year = Operating cash flows/Average total assets
= $53,666 / [($207,000 + $176,064)/2]
= $53,666 / $191,532 = 28.0%
= $16,619 / $83,186 = 20.0 %
2. The cash flow on total assets ratio reflects the return on average assets by
using actual operating cash flows instead of net income. This return
3. For both years, Apple has a higher cash flow on total assets ratio than
Google.
of cash for the period under analysis.
Ethics Challenge — BTN 16-3
1. The business actions available include
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Chapter 16 – Reporting the Statement of Cash Flows
a. Encourage early collection of receivables to reduce the accounts
receivable balance.
Many other business actions are possible that would accelerate cash
receipts and/or delay cash payments.
2. As a business owner, Katie Murphy certainly can exercise discretion over
business actions. However, the underlying economic realities should
Communicating in Practice — BTN 16-4
Here is a sample of what the body of the memorandum might include:
TO: Diana Wood
FROM: (Your Name)
SUBJECT: Statement of Cash Flows
DATE: _________________
I am pleased to hear your business is more profitable this year than last.
However, I have been thinking about what you said regarding the statement of
cash flows and have some thoughts as to why you found it confusing.
The statement of cash flows (operating section) can be prepared using either
of two methods—the direct or the indirect method. From what you describe,
adjustments. These adjustments often do not make sense to those that do
not have an accounting or finance background.
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Chapter 16 – Reporting the Statement of Cash Flows
I recommend that you request your accountant to provide you with a
statement of cash flows that is prepared using the direct method. This will
identify exactly how much cash came in from operating activities like sales. It
financing, and investing. This organization of cash information will allow you
to better project and plan for the future.
Please reconsider the value of the statement of cash flows for your business
decisions. If you wish to discuss this further, please call me.
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Chapter 16 – Reporting the Statement of Cash Flows
Taking It to the Net — BTN 16-5
1. Mendocino Brewing Company uses the indirect method to construct the
consolidated statement of cash flows.
2. The largest reconciling item is for increase in accounts receivable totaling
$1,395,400.
3. The following table shows the net income (or net loss) and the cash flows
from operations for Mendocino Brewing for 2012 and 2013. Over this two-
2012 2013
4. For the recent period, the largest cash outflow for investing was $819,000
5. In the recent period, for supplementary cash flow information, the company
reports cash flows related to: Interest paid and Income taxes paid.
financed equipment.”
Teamwork in Action — BTN 16-6
Part 1
a. The reporting objective of the statement of cash flows is to provide
information about important cash inflows and outflows for business
decision makers. It answers specific questions such as:
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Chapter 16 – Reporting the Statement of Cash Flows
b. The statement can be prepared using the direct method or the indirect
method for reporting cash flows from operating activities.
Similarities
Both methods report the same net cash flow from operating activities.
Both methods classify cash flows into operating, financing, and
investing categories.
Differences
Cash flow from operating activities is determined differently. The direct
method determines all operating cash inflows and outflows, and then
subtracts total operating outflows from inflows. The indirect method
starts with net income and applies a series of adjustments to reconcile
this accrual basis number to a cash basis number.
The indirect method is more widely used.
*Teamwork in Action (Continued)
c. Steps to prepare the statement of cash flows:
(i) Compute the net increase or decrease in cash using comparative
balance sheet data. This is the target number or the number the
statement will explain and prove.
Also, identify and list noncash financing and investing activities in a
separate schedule or note.
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Chapter 16 – Reporting the Statement of Cash Flows
d. Common analyses made from information in the statement of cash flows
include assessing a company’s:
Ability to generate future cash flows.
Part 2
Adjusting Net Income to Cash Flow from Operating Activities
Items to Add Items to Subtract
a. Noncash expenses Noncash revenues
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Chapter 16 – Reporting the Statement of Cash Flows
Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales – Increase in Accounts Receivable,
or, + Decrease in Accounts Receivable.
b. Cash paid for inventory requires a two-step computation.
(1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease
in inventory.
(2) Cash paid for inventory = Purchases + Decrease in Accounts Payable,
or, – Increase in Accounts Payable.
c. Cash paid for wages and operating expenses = Wages and other operating
expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid
expenses] and [+ Decrease in accrued liabilities, or, – Increase in accrued
liabilities].
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
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Chapter 16 – Reporting the Statement of Cash Flows
Entrepreneurial Decision — BTN 16-7
1. It is common that small businesses must pay cash in advance for items such
as rent, advertising, supplies, and facilities expansion. Consequently, those
2. As a privately owned company, it can potentially raise cash financing for
expansion by selling shares in the company or by borrowing money. The
Entrepreneurial Decision — BTN 16-8
Memorandum
To: Jenna and Matt Wilder
From: Your name
Subject: Performance evaluation of Mountain High
Date: Current Date
I have completed my evaluation of your company, Mountain High. My conclusion
is that Mountain High is performing well. This is in spite of its reported net loss
and its negative net cash flow, which I explain in this memorandum.
Second, with respect to its net cash outflow of $(5,000), please note that this is
mainly due to Mountain High’s renovation and expansion activities. This is
reflected in its summarized statement of cash flows. Specifically, its cash flows
provided by operating activities are an impressive $295,000. Again, using year-
end total assets of $800,000, Mountain High’s operating cash flow on total assets
operating cash flows relative to income from continuing operations, special
scrutiny should be directed at identifying and assessing differences between
cash flow and accrual amounts for important individual operating activities.
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Chapter 16 – Reporting the Statement of Cash Flows
Hitting the Road — BTN 16-9
1. The Motley Fool’s Website defines cash flow as earnings before interest,
taxes, depreciation, and amortization (EBITDA). The school’s justification
for this definition includes: “Interest income and expense, as well as taxes, are
all tossed aside because cash flow is designed to focus on the operating business
2. Some analysts tend to focus on this particular earnings definition
(earnings before interest and taxes or EBIT) as it purportedly allows a
3. Answer depends on the links visited and chosen for the report.
Global Decision — BTN 16-10
1. Samsung’s cash flow on total assets ratio follows (in KRW millions):
Current Year = Operating cash flows / Average total assets
2. For the current and prior years, Samsung’s ratios (23.6% and 22.5%,
respectively) are lower than Apple’s ratios (28.0% and 34.8%, respectively).
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