Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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.
