978-0324651140 Chapter 15 Lecture Note

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15-1 Notes

CHAPTER 15

STATEMENT OF CASH FLOWS: ANOTHER LOOK

I. Learning Objectives

1. Review the rationale for the statement of cash flows, emphasizing why net

income differs from cash flows.

2. Review the T-account procedure, introduced in Chapter 5, for preparing the

statement of cash flows.

3. Solidify your understanding of the cash flow effects of various transactions

presented in Chapters 7 through 14.

4. Develop skills in analyzing and interpreting the statement of cash flows.

II. Organization of Class Sessions

Begin the coverage of this chapter by reviewing the statement of cash

flows, discussing its rationale and illustrating a T-account approach for its

preparation. Previous chapters described the effect of various transactions on

the income statement and the balance sheet but did not consider their effect on

the statement of cash flows. This chapter discusses the effect of these

transactions on the statement of cash flows, using a comprehensive example.

This chapter brings together material from Chapters 5 through 14 dealing

with the statement of cash flows. Even if instructors considered the effects of

various transactions on the statement of cash flows as each topic was covered

in previous chapters, we find it useful to assign a problem or two to cement

understanding of this important financial statement. The instructor can

assign Chapters 5 and 15 sequentially at the end of the course as an

alternative to the sequence set forth in the chapter layout.

III. Lecture Outline

1. Review the rationale for the statement of cash flows, emphasizing

why net income differs from cash flows.

Students have considerable difficulty understanding the rationale for

the statement of cash flows. We spend considerable class time trying to deal

with their difficulties. Revenues from sales of goods or services to customers

during a particular period do not necessarily equal cash received from

Notes 15-2

customers during the same period. The receipt of cash can precede, coincide

with, or follow the recognition of revenue. Expenses incurred to generate

revenues during a particular period do not necessarily equal cash expended

for the goods and services consumed in operations during the same period.

The expenditure of cash can precede, or coincide with, or follow the

recognition of expenses. Thus, net income for a particular period will likely

differ from cash flow from operations for the same period.

2. Review the T-account procedure, introduced in Chapter 5, for

preparing the statement of cash flows.

If the instructor covers Chapter 5 early in the course, then a few

minutes devoted to a review of the T-account work sheet is time well spent.

The accountant prepares the statement of cash flows after completing the

balance sheet and the income statement. Chapter 5 describes and

illustrates a procedure for preparing the statement of cash flows using a T–

account work sheet. A summary of the procedure follows: Step 1: Obtain a

balance sheet for the beginning and the end of the period for which you

wish to prepare the statement of cash flows. Step 2: Prepare a T-account

work sheet. Step 3: Explain the change in the master T-account for Cash

between the beginning and the end of the period by accounting for the cash

effect change from each noncash account during the period. Step 4 Prepare

a statement of cash flows using information in the T-account work sheet.

We place a blank T-account work sheet on an overhead transparency and

then work Problem 15.4. Next, use Problem 15.5 to review constructing the

direct method derivation of cash flows from operations.

3. Solidify your understanding of the cash flow effects of various

transactions presented in Chapters 7 through 14.

We assign problems to accomplish this learning objective. Problems

15.7 through 15.9 appeared on CPA examinations and are more

challenging. Problem 15.12 is a more complex problem for the preparation

of a statement of cash flows. Problems 15.10 and 15.11 use amounts for

actual companies and require both the preparation and interpretation of the

statement of cash flows. Thus, these last two problems help accomplish

both this and the next learning objective. Chapter 13 discusses the

accounting for investments. Exhibit 13.8 summarizes the effect on the

balance sheet and income statement of the various forms of investment.

Coverage of Exhibit 13.8 is recommended because it summarizes the effects

on the statement of cash flows in U.S. GAAP.

15-3 Notes

4. Develop skills in analyzing and interpreting the statement of cash

flows.

Instructors may be tempted to skip this step in the interest of

conserving class time. Our students, however, find this step important in

bringing together the material on the statement of cash flows. Chapter 5

points out that the proper interpretation of information in the statement of

cash flows requires an understanding of the economic characteristics of the

industries in which a firm conducts operations, and a multi-period view.

This section discusses the interpretation of the statement of cash flows

more fully, the relation between net income and cash flow from operations,

changes in noncurrent assets and noncurrent liabilities, changes in

operating working capital accounts, relations among cash flows from

operating, investing, and financing activities. We assign several problems

to get students to involve in both preparation and interpretation of the

statement of cash flows. We particularly like Problems 15.10 and 15.11

because they involve both the preparation and interpretation of the

statement of cash flows. Problems 15.14 and 15.15 involve just the

interpretation of this financial statement.