12-1
CHAPTER 12
REPORTING CASH FLOWS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA and
BTN
describe how noncash
investing and financing
activities are disclosed.
Analytical objectives:
A1. Analyze the statement
of cash flows and apply the
cash flow on total assets
ratio.
1, 9, 12, 13
12-19
12-11, 12-13
12-3,
GL 12-1
AA 12-1, AA 12-2,
BTN 12-1, BTN 12-3,
BTN 12-4, BTN 12-5,
BTN 12-6
P1. Prepare a statement of cash
flows.
12-2
12-7,
GL12-1,
GL12-3, ES
the indirect method.
12-5, 12-6,
12-7, 12-17,
12-18
12-6, 12-7,
12-11,
12-6, SP,
GL 12-1,
GL 12-2,
financing activities.
12-12, 12-13,
12-14, 12-15,
12-16, 12-18
GL 12-3
P4.AIllustrate use of a
spreadsheet to prepare a
statement of cash flows.
(Appendix 12A)
12-20
12-14
12-4, 12-7
P5.BCompute cash flows from
operating activities using
the direct method.
(Appendix 12B)
4, 5
12-21, 12-22,
12-23, 12-24,
12-25, 12-26,
12-27
12-15, 12-16,
12-17, 12-18,
12-19, 12-20
12-2, 12-5,
12-8
BTN 12-4
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
Guided Example included
Prepare a statement of cash flows.
Format of the Statement of Cash Flows
1:04
Preparing the Statement of Cash Flows
0:37
Analyzing the Cash Account
0:47
Analyzing Noncash Accounts
1:23
Information to Prepare the Statement
0:28
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
• General Ledger Problems
• Excel Simulations
• LearnSmart/SmartBook
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
the video and audio functions for the Guided Examples are also available in the Connect Instructor Library and Exercise
Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue bold font.
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
12-1
Classifying Cash Flows
2:04
12-2
Reporting Operating Cash Flows (Indirect)
3:15
12-3
Reporting Investing Cash Flows
3:02
12-4
Reporting Financing Cash Flows
1:35
Concept Overview Videos
LO
Title
Time
C1
Distinguish between operating, investing, and financing activities, and describe
how noncash investing and financing activities are disclosed.
Purpose of the Statement of Cash Flows
1:20
Measurement of Cash Flows
0:26
Classification of Cash Flows
0:22
Operating Activities
0:48
Investing Activities
1:03
Financing Activities
1:07
Noncash Investing and Financing
1:02
A1
Analyze the statement of cash flows and apply the cash flow on total assets ratio.
Analyzing Cash Sources and Uses
1:31
Cash Flow on Total Assets
0:40
Cash Flow on Total Assets – Illustration
1:28
12-3
P2
Compute cash flows from operating activities using the indirect method.
Indirect and Direct Methods of Reporting
1:16
Applying the Indirect Method
0:55
Adjustments for Income Statement Items Not Affecting Cash
1:55
Adjustments for Changes in Current Assets
1:38
Adjustments for Changes in Current Liabilities
1:36
Summary Adjustments for Operating Activities – Indirect Method
0:20
P3
Determine cash flows from both investing and financing activities.
Three-Step Analysis – Cash Flows from Investing
0:38
Analyzing Noncurrent Assets – Cash Flows from Investing
2:29
0:52
Analyzing Noncurrent Liabilities and Equity – Cash Flows from Financing
2:12
P4
Illustrate use of a spreadsheet to prepare a statement of cash flows.
(Appendix 12A)
Illustration of Spreadsheet
1:45
P5
Compute cash flows from operating activities using the direct method.
(Appendix 12B)
Direct Method
1:39
Operating Cash Receipts – Customers
1:29
Operating Cash Receipts – Other Cash Receipts
0:32
Operating Cash Payments – Inventory
1:42
Operating Cash Payments – Purchases
0:47
Operating Cash Payments – Operating Expenses and Wages
1:49
Synopsis of Chapter Revisions
NEW opener—Vera Bradley and entrepreneurial assignment.
New box on Tesla’s cash outflows and growing market value.
Slightly revised infographics on cash flows from operating, investing, and financing.
Streamlined sections on analyzing the cash account and noncash accounts.
New presentation to aid learning of indirect adjustments to income.
Simplified T-accounts to reconstruct cash flows.
12-4
Chapter Outline
I. Basics of Cash Flow Reporting
A. Purpose of the Statement of Cash Flows
Reports cash receipts (inflows) and cash payments (outflows) for a period. This report classifies
cash flows into operating, investing, and financing activities. It answers important questions such as:
1. How does a company obtain its cash?
2. Where does a company spend its cash?
3. What explains the change in the cash balance?
4. Why do income and cash flows differ?
helps managers plan day-to–day operations and make long-term investment decisions.
The phrase cash flows refers to both cash and cash equivalents. A cash equivalent must satisfy two
criteria:
2. Be sufficiently close to its maturity date so its market value is unaffected by interest rate
changes.
D. Classification of Cash Flows
Cash receipts and cash payments are classified and reported in one of three categories:
1. Operating Activities—include transactions and events that affect net income (with some
exceptions such as unusual gains and losses). Specific examples:
a. Cash inflows from cash sales, collections on credit sales, receipts of dividend and interest
revenue.
b. Cash outflows for payments to suppliers for goods and services, to employees for salaries
and wages, for interest owed, to pay taxes and fines, and to pay operating expenses.
2. Investing Activities—include transactions and events that come from the purchase or sale of
long-term assets. Specific examples:
a. Cash inflows from selling intangible assets, selling plant assets, collecting principal on notes
receivable, selling long-term and short-term investments, and selling notes receivable.
b. Cash outflows to buy intangible assets, buy plant assets, loan money in return for notes
receivable, and to buy short-term and long-term investments.
3. Financing Activities—include transactions and events that affect long-term liabilities and
equity:
payable).
purchase of long-term assets by issuing a note or bond; exchange of noncash assets for other noncash
assets; and purchase of noncash assets by issuing equity or debt.
F. Format of the Statement of Cash Flows
1. Lists cash flows by categories (operating, financing and investing) and identifies the net cash
inflow or outflow in each category.
2. Combines the net cash flow in each of the three categories and identifies the net change in cash
for the period.
3. Combines the net change in cash with the prior period ending cash to prove the current period
ending cash.
4. Contains a separate schedule or note disclosure of any noncash financing and investing
activities.
G. Preparing the Statement of Cash Flows
1. There are five steps in preparing a statement of cash flows:
Note: Noncash investing and financing activities are disclosed in either a note or in a
separate schedule to the statement.
2. Sources of information for preparing the statement of cash flows:
a. Comparative balance sheets
b. The current income statement
c. Additional information
3. Alternative approaches to preparing the statement:
a. Analyzing the cash account
b. Analyzing noncash accounts
II. Cash Flows from Operating
A. Indirect and Direct Methods of Reporting—Two ways of reporting that apply only to the operating
activities section.
and indirect method.
B. Applying the Indirect Method
1. Reports net income using accrual accounting, and then adjusts net income to get net cash
provided or used by operating activities.
2. The types of adjustments are:
a. Adjustments to income statement items that do not impact cash. Includes:
i. Depreciation expense, loss on sale of plant assets, and gain on retirement of notes.
b. Adjustments for changes in current assets and current liabilities (linked to operating
activities).
i. Changes in accounts receivable, inventory, prepaid expenses, accounts payable, interest
payable, and income taxes payable.
ii. Increases in noncash current assets are subtracted from net income.
iii. Increases in current liabilities are added to net income.
iv. Decreases in current liabilities are subtracted from net income
C. Summary Adjustments for Indirect method—see Exhibit 12.12 in text.
III. Cash Flows from Investing—identical under direct and indirect methods.
A. Three-step process to determine cash provided (used) by investing activities:
IV. Cash Flows from Financing— identical under direct and indirect methods.
A. Three-step process to determine cash provided (used) by financing activities:
1. Identify changes in financing-related accounts (all noncurrent liabilities—including current
portion of any notes and bonds, and the equity accounts).
2. Explain these changes using T-accounts and reconstructed entries.
3. Report the cash flow effects.
B. Proving Cash Balances
V. Decision Analysis—Cash Flow Analysis
A. Analyzing Cash Sources and Uses
1. Managers review cash flows for business decisions.
2. Creditor evaluate a company’s ability to generate enough cash flow to pay debt.
3. Investors assess cash flows before buying and selling stock.
VI. Spreadsheet Preparation of the Statement of Cash Flows (Appendix 12A)
A spreadsheet approach may be used to help us prepare a statement of cash flows.
A. The spreadsheet has four columns containing dollar amounts.
1. Columns one and four contain the beginning and ending balances of each balance sheet account.
2. Columns two and three are for reconciling the changes in each balance sheet account.
12-7
2. By eliminating from net income the effects of all noncash revenues and expenses. This begins
the reconciliation of noncurrent assets.
3. By eliminating from net income any gains or losses from investing and financing activities. This
involves the reconciliation of noncurrent assets and noncurrent liabilities and perhaps the
recording of disclosures in sections (c)-(g).
4. By entering any remaining items, such as dividend payments, which are necessary to reconcile
the changes in all balance sheet accounts.
VII. Direct Method of Reporting Operating Cash Flows
(Appendix 12B)
A. Separately list each major item or class of operating cash receipts and cash payments.
B. Classes of operating cash receipts include cash received from customers, renters, interest, and
dividends.
C. Classes of operating cash payments include cash paid to suppliers, to employees and other operating
expense, interest, and income taxes.
D. Subtract the cash payments from cash receipts to determine the net cash provided (used) by
operating activities.
12-8
Chapter 12 Alternate Demonstration Problem
The Carpet Company’s 2019 and 2020 balance sheets included the following items:
December 31
2020
2019
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
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
Totals ………………………………………………………….
$57,500
$46,000
The Carpet Company’s income statement was as follows:
CARPET COMPANY
Income Statement
For the Year Ended December 31, 2020
Sales ……………………………………………………………………
$61,000
Cost of goods sold ……………………………………………….
$40,000
Wages and other operating expenses……………………
6,300
4,200
Depreciation expense …………………………………………..
Net income …………………………………………………………..
$ 9,000
12-9
Required:
Prepare the statement of cash flows under both the direct method and the indirect
method for the year ended December 31, 2020. Additional information includes the
following:
a. Equipment costing $3,500 was purchased during the year.
12-10
Chapter 12 Solution: Alternate Demonstration Problem
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2020
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 ………………..
)
Cash flows from financing activities:
Cash received from issuing stock ……………………..
Cash paid for dividends …………………………………….
( 2,500
)
Net cash provided by financing activities ………….
500
Net increase in cash ……………………………………………….
$ 6,500
Cash balance at end of 2019 …………………………………..
4,000
Cash balance at end of 2020 …………………………………..
$10,500
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2020
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 ……………….
)
Net cash used by investing activities ………………..
)
Cash flows from financing activities:
Cash received from issuing stock ……………………..
3,000
Cash paid for dividends …………………………………….
)
Net cash provided by financing activities ………….
Net increase in cash ……………………………………………….
Cash balance at end of 2019 …………………………………..
Cash balance at end of 2020 …………………………………..