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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
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
16-11
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).
16-12
VISUAL #16-3
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
VISUAL #16-4
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.
16-14
Alternate Demonstration Problem
Chapter Sixteen
The Carpet Company’s 2013 and 2014 balance sheets included the
following items:
December 31
2014
2013
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, 2014
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
16-15
Required:
Prepare the statement of cash flows under both the direct method and the
indirect method for the year ended December 31, 2014. 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.
16-16
Solution: Alternate Demonstration Problem
Chapter Sixteen
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2014
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 2009 .........................................
4,000
Cash balance at end of 2010 .........................................
$10,500
16-17
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2014
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 2013 .........................................
4,000
Cash balance at end of 2014 .........................................
$10,500
