Chapter 12 – Statement of Cash Flows
12–13
VI. Chapter Supplement A: Reporting Cash Flows from Operating
Activities – Direct Method
A. Direct method – presents a summary of all operating
transactions that result in either a debit or a credit to cash
B. Prepared by adjusting each revenue and expense on the
income statement from the accrual basis to the cash basis
C. The following adjustments must commonly be made to
convert income statement items to the related operating cash
flow amounts:
Illustrated in Exhibit 12.8
1. Converting Sales Revenues to Cash Inflows:
Sales Revenue + Decrease in Accounts Receivable (A)
(or – Increase in Accounts Receivable (A)) = Collections
from customers
2. Converting Cost of Goods Sold to Cash Paid to Suppliers:
Cost of Goods Sold + Increase in Inventory (A) (or –
Decrease in Inventory (A)) – Increase in Accounts
Payable (L) (or + Decrease in Accounts Payable (L)) =
Payments to suppliers of inventory
3. Converting Operating Expense to Cash Outflow:
Other Expenses + Increase in Prepaid Expenses (A) (or –
Decrease in Prepaid Expenses (A)) – Increase in Accrued
Expenses (L) (or + Decrease in Accrued Expenses (L)) =
Payments to suppliers of services (e.g., rent, utilities,
wages, interest)
Refer students to Pause for
Feedback – Self-Study Quiz
Use Supplemental
Enrichment Activity #3
VII. Chapter Supplement B: Adjustments for Gains and Losses on
Sale of Long-Term Assets – Indirect Method
A. Whenever a company sells property, plant, and equipment
(PPE), it records three things:
1. Decreases in the PPE accounts for the assets sold,
2. An increase in the Cash account for the cash received on
disposal, and
3. A gain if the cash received is more than the book value of
the assets sold (or a loss if the cash received is less than
the book value of the assets sold)
B. The only part of this transaction that qualifies for the
statement of cash flows is the cash received on disposal
1. This cash inflow is classified as an investing activity, just
like the original equipment purchase
2. Since a gain on sale are included in net income, the gain
on sale is subtracted (or the loss is added) as an
adjustment to net income in the operating activities
section as an adjustment to net income in the operating
activities section
3. The proceeds from the disposal or sale are listed as a cash
inflow in the investing activities section
Chapter 12 – Statement of Cash Flows
12–14
VIII. Chapter Supplement C: T-account Approach (Indirect Method)
A. Changes in cash must equal the sum of the changes in all
other balance sheet accounts
1. Based on this idea, we used the following three steps to
prepare the statement of cash flows:
a. Determine the change in each balance sheet account.
From this year’s ending balance, subtract this year’s
beginning balance (i.e., last year’s ending balance)
b. Identify the cash flow category or categories to which
each account relates
c. Create schedules that summarize operating, investing,
and financing cash flows
2. Instead of creating separate schedules for each section of
the statement, many accountants prefer to prepare a single
large T-account to represent the changes that have taken
place in cash subdivided into the three sections of the
cash flow statement
Illustrated in Panel A of
Exhibit 12.9
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 12-1
Use HANDOUT 12-1 for an in-class activity designed to review the reporting of various items in the
three cash flow statement categories. The solution follows the handout master.
2. Handout 12-2
Use HANDOUT 12-2 for an in-class activity designed to review the preparation of the statement of
cash flows using the indirect method. The solution follows the handout master.
3. Handout 12-3
Use HANDOUT 12-3 for an in-class activity designed to review the preparation of the statement of
cash flows using the direct method. The solution follows the handout master.
Chapter 12 – Statement of Cash Flows
12–15
HANDOUT 12 – 1
CASH FLOW CATEGORIES
Maya Corporation reports the following items in its statement of cash flows prepared using the direct
method. Indicate whether each item is disclosed in the operating, investing, or financing activities section
of the statement.
Operating
Investing
Financing
Cash paid for salaries and wages
Cash paid to purchase property, plant, and equipment
Cash received from issuing stock to owners
Cash paid for income taxes
Cash paid to purchase investments in securities
Dividends paid to owners
Interest paid on liabilities
Cash received from sale of property, plant, and equipment
Cash used for repaying principal to lenders
Cash used to repurchase stock from owners
Cash provided by dividends and interest on investments
Cash received from customers
Cash from sale or maturity of investments in securities
Cash provided by borrowing from a bank
Chapter 12 – Statement of Cash Flows
12–16
HANDOUT 12 – 1 SOLUTION
CASH FLOW CATEGORIES
Maya Corporation reports the following items in its statement of cash flows prepared using the direct
method. Indicate whether each item is disclosed in the operating, investing, or financing activities section
of the statement.
Operating
Investing
Financing
Cash paid for salaries and wages
X
Cash paid to purchase property, plant, and equipment
X
Cash received from issuing stock to owners
X
Cash paid for income taxes
X
Cash paid to purchase investments in securities
X
Dividends paid to owners
X
Interest paid on liabilities
X
Cash received from sale of property, plant, and equipment
X
Cash used for repaying principal to lenders
X
Cash used to repurchase stock from owners
X
Cash provided by dividends and interest on investments
X
Cash received from customers
X
Cash from sale or maturity of investments in securities
X
Cash provided by borrowing from a bank
X
Chapter 12 – Statement of Cash Flows
12–17
HANDOUT 12 – 2
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
3/31/15
12/31/14
ASSETS
Current Assets:
Cash and Cash Equivalents
$92,069
$72,634
Accounts Receivables, Net
55,947
75,492
Inventories
50,784
53,129
Prepaid Expenses
12,112
13,057
Total Current Assets
210,912
214,312
Equipment
145,444
134,312
Less: Accumulated Depreciation
(50,515)
(36,689)
Total Assets
$305,841
$311,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
$25,466
$34,879
Accrued Liabilities
40,574
40,722
Total Current Liabilities
66,040
75,601
Long-Term Debt
10,422
10,206
Stockholders’ Equity:
Contributed Capital
1,662
1,284
Retained Earnings
227,717
224,844
Total Stockholders’ Equity
229,379
226,128
Total Liabilities And Stockholders’ Equity
$305,841
$311,935
Consolidated Statement of Income
(in thousands)
Quarter
ended
3/31/15
Net Sales
$130,896
Cost of Sales
74,040
Gross Profit
56,856
Operating Expenses:
Selling, General & Administrative Expenses
33,211
Depreciation Expense
13,826
Total Operating Expenses
47,037
Operating Income
9,819
Interest Income
239
Income Before Income Taxes
10,058
Income Tax Expense
3,621
Net Income
$ 6,437
Chapter 12 – Statement of Cash Flows
12–18
HANDOUT 12 – 2, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the quarter ended 3/31/15.
The company declared and paid dividends in the amount of $3,564 during the quarter ended 3/31/15.
Using the information provided above, compute the net cash flow provided by (used for) operating
activities using the indirect method.
Then, compute the net cash flow for each category by completing the following table:
Quarter
ended
3/31/15
Net cash flow provided by (used for) operating activities
Net cash flow provided by (used for) investing activities
Net cash flow provided by (used for) financing activities
Net increase (decrease) in cash
19,435
Cash and cash equivalents, beginning of the quarter
72,634
Cash and cash equivalents, end of the quarter
$92,069
Chapter 12 – Statement of Cash Flows
12–19
HANDOUT 12 – 2 SOLUTION
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
3/31/15
12/31/14
Change
ASSETS
Current Assets:
Cash and Cash Equivalents
$92,069
$72,634
+ $19,435
O
Accounts Receivables, Net
55,947
75,492
– 19,545
O
Inventories
50,784
53,129
– 2,345
O
Prepaid Expenses
12,112
13,057
– 945
Total Current Assets
210,912
214,312
I
Equipment
145,444
134,312
+ 11,132
O
Less: Accumulated Depreciation
(50,515)
(36,689)
– 13,826
Total Assets
$305,841
$311,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
O
Accounts Payable
$25,466
$34,879
– $9,413
O
Accrued Liabilities
40,574
40,722
– 148
Total Current Liabilities
66,040
75,601
F
Long-Term Debt
10,422
10,206
216
Stockholders’ Equity:
F
Contributed Capital
1,662
1,284
+ 378
O,F
Retained Earnings
227,717
224,844
+ 2,873
Total Stockholders’ Equity
229,379
226,128
Total Liabilities And Stockholders’ Equity
$305,841
$311,935
Consolidated Statement of Income
(in thousands)
Quarter
ended
3/31/15
Net Sales
$130,896
Cost of Sales
74,040
Gross Profit
56,856
Operating Expenses:
Selling, General & Administrative Expenses
33,211
Depreciation Expense
13,826
Total Operating Expenses
47,037
Operating Income
9,819
Interest Income
239
Income Before Income Taxes
10,058
Income Tax Expense
3,621
Net Income
$ 6,437
Chapter 12 – Statement of Cash Flows
12–20
HANDOUT 12 – 2 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the quarter ended 3/31/08.
The company declared and paid dividends in the amount of $3,564 during the quarter ended 3/31/08.
Using the information provided above, compute the net cash flow provided by (used for) operating
activities using the indirect method.
Net Income
$6,437
Adjustments:
Depreciation
13,826
Change in Accounts Receivable
19,545
Change in Inventories
2,345
Change in Prepaid Expenses
945
Change in Accounts Payable
(9,413)
Change in Accrued Liabilities
(148)
Net cash flows provided by operations
$33,537
Compute total net cash flows and their effect on cash at the end of the period.
Quarter
ended
3/31/15
Net cash flows from operating activities (see above)
$33,537
Net cash outflows for investing activities (1)
(11,132)
Net cash outflows for financing activities (2)
(2,970)
Net increase (decrease) in cash
19,435
Cash and cash equivalents, beginning of quarter
72,634
Cash and cash equivalents, end of quarter
$92,069
(1) Attributable to purchases of equipment (that is, the increase in the equipment account). There were no
other investing activities.
(2) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
$ 216
Proceeds from issuance of stock
378
Payment of dividends
(3,564)
Net cash outflow for financing activities
$(2,970)
Chapter 12 – Statement of Cash Flows
12–21
HANDOUT 12 – 3
STATEMENT OF CASH FLOWS (DIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
3/31/15
12/31/14
ASSETS
Current Assets:
Cash and Cash Equivalents
$92,069
$72,634
Accounts Receivables, Net
55,947
75,492
Inventories
50,784
53,129
Prepaid Expenses
12,112
13,057
Total Current Assets
210,912
214,312
Equipment
145,444
134,312
Less: Accumulated Depreciation
(50,515)
(36,689)
Total Assets
$305,841
$311,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
$25,466
$34,879
Accrued Liabilities
40,574
40,722
Total Current Liabilities
66,040
75,601
Long-Term Debt
10,422
10,206
Stockholders’ Equity:
Contributed Capital
1,662
1,284
Retained Earnings
227,717
224,844
Total Stockholders’ Equity
229,379
226,128
Total Liabilities And Stockholders’ Equity
$305,841
$311,935
Consolidated Statement of Income
(in thousands)
Quarter
ended
3/31/15
Net Sales
$130,896
Cost of Sales
74,040
Gross Profit
56,856
Operating Expenses:
Selling, General & Administrative Expenses
33,211
Depreciation Expense
13,826
Total Operating Expenses
47,037
Operating Income
9,819
Interest Income
239
Income Before Income Taxes
10,058
Income Tax Expense
3,621
Net Income
$ 6,437
Chapter 12 – Statement of Cash Flows
12–22
HANDOUT 12 – 3, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the quarter ended 3/31/15.
The company declared and paid dividends in the amount of $3,564 during the quarter ended 3/31/15.
Using the information provided above, compute the net cash flow provided by (used for) operating
activities using the direct method.
Then, compute the net cash flow for each category by completing the following table:
Quarter
ended
3/31/15
Net cash flows from operating activities
Net cash outflows for investing activities
Net cash outflows for financing activities
Net increase (decrease) in cash
19,435
Cash and cash equivalents, beginning of quarter
72,634
Cash and cash equivalents, end of quarter
$92,069
Chapter 12 – Statement of Cash Flows
12–23
HANDOUT 12 – 3 SOLUTION
STATEMENT OF CASH FLOWS (DIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
3/31/15
12/31/14
Change
ASSETS
Current Assets:
Cash and Cash Equivalents
$92,069
$72,634
+ $19,435
O
Accounts Receivables, Net
55,947
75,492
– 19,545
O
Inventories
50,784
53,129
– 2,345
O
Prepaid Expenses
12,112
13,057
– 945
Total Current Assets
210,912
214,312
I
Equipment
145,444
134,312
+ 11,132
O
Less: Accumulated Depreciation
(50,515)
(36,689)
– 13,826
Total Assets
$305,841
$311,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
O
Accounts Payable
$25,466
$34,879
– $9,413
O
Accrued Liabilities
40,574
40,722
– 148
Total Current Liabilities
66,040
75,601
F
Long-Term Debt
10,422
10,206
216
Stockholders’ Equity:
F
Contributed Capital
1,662
1,284
+ 378
O,F
Retained Earnings
227,717
224,844
+ 2,873
Total Stockholders’ Equity
229,379
226,128
Total Liabilities And Stockholders’ Equity
$305,841
$311,935
Consolidated Statement of Income
(in thousands)
Quarter
ended
3/31/15
Net Sales
$130,896
Cost of Sales
74,040
Gross Profit
56,856
Operating Expenses:
Selling, General & Administrative Expenses
33,211
Depreciation Expense
13,826
Total Operating Expenses
47,037
Operating Income
9,819
Interest Income
239
Income Before Income Taxes
10,058
Income Tax Expense
3,621
Net Income
$ 6,437
Chapter 12 – Statement of Cash Flows
12–24
HANDOUT 12 – 3 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the quarter ended 3/31/15.
The company declared and paid dividends in the amount of $3,564 during the quarter ended 3/31/15.
Using the information provided above, compute the net cash flow provided by (used for) operating
activities using the direct method.
Cash collected from customers (1)
$150,441
Cash payments to suppliers (2)
(81,108)
Cash payments for operating expenses (3)
(32,414)
Cash received for interest (4)
239
Cash payments for income tax expense (5)
(3,621)
$33,537
(1) Sales of $130,896 + decrease in Accounts Receivable of $19,545.
(2) Cost of Sales of $74,040 + decrease in Accounts Payable of $9,413 – decrease in Inventories of
$2,345.
(3) Operating Expenses (not including depreciation) of $33,211 + decrease in Accrued Liabilities of $148
– decrease in Prepaid Expenses of $945.
(4) Equals Interest Income; no change in Interest Receivable.
(5) Equals Income Tax Expense; no change in Taxes Payable.
Compute total net cash flows and their effect on cash at the end of the period.
Quarter
Ended
3/31/15
Net cash flows from operating activities (see above)
$33,537
Net cash outflows for investing activities (6)
(11,132)
Net cash outflows for financing activities (7)
(2,970)
Net increase (decrease) in cash
19,435
Cash and cash equivalent, beginning of quarter
72,634
Cash and cash equivalents, end of quarter
$92,069
(6) Attributable to purchases of equipment (that is, the increase in the equipment account). There were no
other investing activities.
(7) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
$ 216
Proceeds from issuance of stock
378
Payment of dividends
(3,564)
Net cash outflow for financing activities
$(2,970)