Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 13
Statement of Cash Flows
LEARNING OBJECTIVES
1. INDICATE THE USEFULNESS OF THE STATEMENT OF
CASH FLOWS.
2. DISTINGUISH AMONG OPERATING, INVESTING, AND
FINANCING ACTIVITIES.
3. PREPARE A STATEMENT OF CASH FLOWS USING
THE INDIRECT METHOD.
4. ANALYZE THE STATEMENT OF CASH FLOWS.
*5. PREPARE A STATEMENT OF CASH FLOWS USING
THE DIRECT METHOD.
*6. EXPLAIN HOW TO USE A WORKSHEET TO PREPARE
THE STATEMENT OF CASH FLOWS USING THE
INDIRECT METHOD.
CHAPTER REVIEW
Purpose of the Statement of Cash Flows
1. (L.O. 1) The fourth basic financial statement is the statement of cash flows. The primary purpose
during a period.
2. The information in the statement of cash flows should help investors to assess the
activities.
Classification of Cash Flows
3. (L.O. 2) The statement of cash flows classifies cash receipts and cash payments by:
money and collecting the loans.
stockholders, repurchasing shares, and paying dividends.
4. Significant noncash transactions will include the conversion of bonds into common stock and
Format of the Statement of Cash Flows
5. The three classes of activities constitute the general format of the statement with the operating
in cash for the period.
b. The net change in cash for the period is then added to or subtracted from the beginning-of-
schedule at the bottom of the statement.
6. The statement of cash flows is not prepared from the adjusted trial balance. The information to
The Major Steps
7. The major steps in preparing the statement are:
Step 1: Determine net cash provided/used by operating activities. This step involves analyzing
selected additional data.
Step 2: Analyze changes in noncurrent asset and liability accounts and record as
investing and financing activities, or disclose as noncash transactions. This step
for their effects on cash.
Step 3: Compare the net change in cash on the statement of cash flows with the change in the
cash account reported on the balance sheet to make sure the amounts agree.
8. In performing step 1, the operating activities section must be converted from an accrual basis to
b. The indirect method is used extensively in practice.
The Indirect Method
9. (L.O. 3) The following points 10 through 15 explain and illustrate the indirect method.
The First Step—Indirect
expenses on a cash basis. This is determined by adjusting net income for items that did not
affect cash.
11. The operating section of the statement of cash flows should (a) begin with net income, (b) add
12. In determining net cash provided by operating activities,
a. increases in specific current assets other than cash are deducted from net income, and
decreases are added to net income.
from net income.
c. expenses for depreciation, amortization, and depletion and a loss on a sale of equipment are
added to net income, and a gain on a sale of equipment is deducted from net income.
The Second Step—Indirect
13. The second step, net cash provided/used by investing and financing activities is generally
determined from changes in noncurrent accounts reported in the comparative balance sheets and
selected additional data.
14. The redemption of debt and the retirement or reacquisition of capital stock are cash outflows from
financing activities.
The Third Step—Indirect
15. The third step is to determine the net change in cash on the statement of cash flows with the
Analysis of the Statement of Cash Flows
16. (L.O. 4) Free cash flow describes the cash remaining from operations after adjustment for capital
expenditures and dividends. The formula for free cash flow is:
Free Cash Flow = Cash Provided by Operations – Capital Expenditures – Cash Dividends.
Preparing the Statement of Cash Flows—
The Direct Method
*17. (L.O. 5) The following points 18 through 25 explain and illustrate the direct method.
The First Step—Direct
*18. The second step is to determine net cash provided/used by operating activities by adjusting each
item in the income statement from the accrual basis to the cash basis.
a. If the income statement shows sales revenue of $120,000 and accounts receivable (net)
increased $20,000 during the year, cash receipts are $100,000 ($120,000 – $20,000).
b. If the income statement reports operating expenses of $60,000 but accounts payable have
increased $12,000 during the year, cash operating expenses are $48,000 ($60,000 – $12,000).
*19. In the operating activities section, only major classes of cash receipts and cash payments are reported
as follows:
a. Cash receipts from (1) sales of goods and services to customers and (2) interest and
dividends on loans and investments.
b. Cash payments (1) to suppliers, (2) to employees, (3) for operating expenses, (4) for interest,
and (5) for taxes.
*20. The formula for computing cash receipts from customers is:
Sales
Revenue
+
–
Decrease in Accounts Receivable
or
Increase in Accounts Receivable
Cost of Goods
Sold
+
–
Increase in Inventory
or
Decrease in Inventory
+
–
Decrease in Accounts Payable
or
Increase in Accounts Payable
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 13-5
*22. The formula for computing cash payments for operating expenses is:
Operating
Expenses
+
–
Increase in Prepaid Expenses
or
Decrease in Prepaid Expenses
+
–
Decrease in Accrued Expenses Payable
or
Increase in Accrued Expenses Payable
Income Tax
Expense
+
–
Decrease in Income Taxes Payable
or
Increase in Income Taxes Payable
The Second Step—Direct
selected additional data.
The Third Step—Direct
*25. The third step is to determine the net increase or decrease in cash by determining the difference
Use of a Work Sheet
*26. (L.O. 6) A worksheet may be used to assemble and classify the data that will appear on the
statement of cash flows. The worksheet is divided into two parts:
*27. The following guidelines are important in using a worksheet.
a. In the balance sheet accounts section, accounts with debit balances are listed separately
from those with credit balances.
b. In the cash flow effects section, inflows of cash are entered as debits in the reconciling
account.
*28. The steps in preparing a worksheet are:
a. Enter the balance sheet accounts and their beginning and ending balances in the balance
sheet accounts section.
*29. The statement of cash flows is prepared entirely from the data that appears in the worksheet
under Statement of Cash Flows Effects.
LECTURE OUTLINE
A. Usefulness of the Statement of Cash Flows.
1. The statement of cash flows provides information about the cash receipts,
cash payments, and net change in cash resulting from the operating,
investing, and financing activities during a period.
2. The information in a statement of cash flows should help investors,
creditors, and others assess:
a. The entity’s ability to generate future cash flows.
b. The entity’s ability to pay dividends and meet obligations.
provided (used) by operating activities.
d. The cash investing and financing transactions during the period.
B. Classification of Cash Flows.
1. The statement of cash flows classifies cash receipts and cash payments
as operating, investing, and financing activities.
employees.
b. Investing activities include (1) acquiring and disposing of investments
and property, plant, and equipment, and (2) lending money and
collecting the loans.
c. Financing activities include (1) obtaining cash from issuing debt and
holders, repurchasing shares, and paying dividends.
2. Note that (1) operating activities involve income statement items, (2) invest-
items.
C. Significant Noncash Activities.
1. Companies do not report in the body of the statement of cash flows
significant financing and investing activities that do not affect cash.
2. They report these activities in either a separate schedule at the bottom
schedule to the financial statements.
3. Examples of significant noncash activities are:
a. Direct issuance of common stock to purchase assets.
b. Conversion of bonds into common stock.
c. Direct issuance of debt to purchase assets.
d. Exchanges of plant assets.
ACCOUNTING ACROSS THE ORGANIZATION
Net income is not the same as net cash provided by operating activities. Net cash
provided by operating activities is usually significantly larger than net income.
In general, why do differences exist between net income and net cash provided
by operating activities?
1. The cash flows from operating activities section always appears first,
followed by the investing activities and then the financing activities
sections.
2. Companies report the individual inflows and outflows from investing and
financing activities separately.
cash balance.
E. Preparing the Statement of Cash Flows.
1. Companies prepare the statement of cash flows differently from the three
other basic financial statements. It is not prepared from an adjusted trial
balance because the trial balance will not provide the necessary data.
from three sources:
