Chapter 12 – Statement of Cash Flows
12–14
LO 7 – Understand the format of the cash flow statement and additional cash flow disclosures.
V. Completing the Statement and Additional Disclosures
A. Statement Structure
Net increase or decrease in cash and cash equivalents + Cash
and cash equivalents at beginning of period = Cash and cash
equivalents at end of period
Illustrated in Exhibit 12.7
B. Supplemental Cash Flow Information
1. Two additional required cash flow disclosures are
2. Cash Paid for Interest and Income taxes
a. Companies that use the indirect method of presenting
VI. Chapter Supplement A: Reporting Cash Flows from Operating Activities – Direct Method
A. Direct method—presents a summary of all operating
transactions that result in either a debit or a credit to cash
B. Prepared by adjusting each revenue and expense on the
income statement from the accrual basis to the cash basis
C. The following adjustments must commonly be made to
convert income statement items to the related operating cash
flow amounts:
Illustrated in Exhibit 12.8
Decrease in Inventory (A)) – Increase in Accounts
1. Converting Sales Revenues to Cash Inflows:
Sales Revenue + Decrease in Accounts Receivable (A)
Chapter 12 – Statement of Cash Flows
12–15
VII. Chapter Supplement B: Adjustments for Gains and Losses on Sale of Long-Term Assets –
Indirect Method
A. Whenever a company sells property, plant, and equipment
(PPE), it records three things:
2. An increase in the Cash account for the cash received on
the book value of the assets sold)
B. The only part of this transaction that qualifies for the
statement of cash flows is the cash received on disposal
like the original equipment purchase
1. This cash inflow is classified as an investing activity, just
inflow in the investing activities section
VIII. Chapter Supplement C: T-account Approach (Indirect Method)
A. Changes in cash must equal the sum of the changes in all
other balance sheet accounts
1. The following three steps can be used to prepare the
statement of cash flows:
a. Determine the change in each balance sheet account.
2. Instead of creating separate schedules for each section of
the statement, many accountants prefer to prepare a single
Illustrated in Panel A of
Exhibit 12.9
Chapter 12 – Statement of Cash Flows
12–16
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 12-1
Use Handout 12-1 for an in-class activity designed to review the reporting of various items in the
2. Handout 12-2
Use Handout 12-2 for an in-class activity designed to review the preparation of the statement of cash
3. Handout 12-3
Use Handout 12-3 for an in-class activity designed to review the preparation of the statement of cash
Chapter 12 – Statement of Cash Flows
12–17
HANDOUT 12 – 1
CASH FLOW CATEGORIES
Maya Corporation reports the following items in its statement of cash flows prepared using the direct
method. Indicate whether each item is disclosed in the operating, investing, or financing activities section
of the statement.
Operating
Investing
Cash paid for salaries and wages
Cash paid to purchase property, plant, and equipment
Cash received from issuing stock to owners
Cash paid for income taxes
Cash paid to purchase investments in securities
Dividends paid to owners
Cash received from sale of property, plant, and equipment
Cash used for repaying principal to lenders
Cash used to repurchase stock from owners
Cash provided by dividends and interest on investments
Cash received from customers
Chapter 12 – Statement of Cash Flows
12–18
HANDOUT 12 – 1 SOLUTION
CASH FLOW CATEGORIES
Maya Corporation reports the following items in its statement of cash flows prepared using the direct
method. Indicate whether each item is disclosed in the operating, investing, or financing activities section
of the statement.
Operating
Investing
Cash paid for salaries and wages
X
Cash paid to purchase property, plant, and equipment
X
Cash received from issuing stock to owners
Cash paid for income taxes
X
Cash paid to purchase investments in securities
X
Dividends paid to owners
Cash received from sale of property, plant, and equipment
X
Cash used for repaying principal to lenders
Cash used to repurchase stock from owners
Cash provided by dividends and interest on investments
X
Cash received from customers
X
Chapter 12 – Statement of Cash Flows
12–19
HANDOUT 12 – 2
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Dec. 31,
Year 2
Dec. 31,
Year 1
ASSETS
Current assets:
Cash and cash equivalents
$ 92,069
$ 72,634
Accounts receivables, net
Inventories
Prepaid expenses
12,112
Total current assets
Equipment
Less: Accumulated depreciation
Total assets
$305,841
$311,935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$ 25,466
$ 34,879
Accrued liabilities
40,574
40,722
Total current liabilities
66,040
75,601
Long-term debt
10,422
10,206
Contributed capital
Retained earnings
227,717
224,844
229,379
226,128
Total liabilities and stockholders’ equity
$305,841
$311,935
Consolidated Statement of Income
(in thousands)
Year 2
Net sales
$130,896
Cost of sales
74,040
Gross profit
56,856
Operating expenses:
Selling, general & administrative expenses
Depreciation expense
Total operating expenses
Operating income
Interest income
239
Income before income taxes
Income tax expense
3,621
Net income
$ 6,437
Chapter 12 – Statement of Cash Flows
12–20
HANDOUT 12 – 2, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Then, compute the net cash flow for each category by completing the following table:
Year 2
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Chapter 12 – Statement of Cash Flows
12–21
HANDOUT 12 – 2 SOLUTION
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
Dec. 31,
Year 2
Dec. 31,
Year 1
Change
ASSETS
Current assets:
Cash and cash equivalents
$92,069
$72,634
+ $19,435
O
Accounts receivables, net
– 19,545
O
Inventories
50,784
53,129
O
Prepaid expenses
Total current assets
210,912
214,312
Equipment
145,444
134,312
O
Less: Accumulated depreciation
(50,515)
(36,689)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
O
Accounts payable
$25,466
$34,879
– $9,413
O
Accrued liabilities
40,574
40,722
– 148
Total current liabilities
Long-term debt
10,422
10,206
Contributed capital
Retained earnings
227,717
224,844
229,379
226,128
Total Liabilities and Stockholders’ Equity
Consolidated Statement of Income
(in thousands)
Year 2
Net sales
$130,896
Cost of sales
74,040
Gross profit
56,856
Selling, general & administrative expenses
33,211
Depreciation expense
13,826
Total operating expenses
47,037
Operating income
Interest income
Income before income taxes
10,058
Income tax expense
Net income
Chapter 12 – Statement of Cash Flows
12–22
HANDOUT 12 – 2 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Year 2. The company declared and paid dividends in the amount of $3,564 during the year ended
December 31, Year 2.
Using the information provided above, compute the net cash flow provided by (used in) operating
activities using the indirect method.
Net Income
$6,437
Depreciation
13,826
Changes in assets and liabilities:
Accounts receivable
19,545
Inventories
Prepaid expenses
Accounts payable
Accrued liabilities
Net cash provided by operations
$33,537
Adjustments to reconcile net income to cash flow
Compute total net cash flows and their effect on cash at the end of the period.
Year 2
Net cash provided by operating activities (see above)
$33,537
Net cash used in investing activities (1)
Net cash used in financing activities (2)
Net increase (decrease) in cash
Cash and cash equivalents, beginning of quarter
72,634
Cash and cash equivalents, end of quarter
$92,069
(1) Attributable to purchases of equipment (that is, the increase in the equipment account). There were no
other investing activities.
(2) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
$ 216
Proceeds from issuance of stock
Payment of dividends
Net cash used in financing activities
Chapter 12 – Statement of Cash Flows
12–23
HANDOUT 12 – 3
STATEMENT OF CASH FLOWS (DIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
Dec. 31,
Year 2
Dec. 31,
Year 1
Change
ASSETS
Current assets:
Cash and cash equivalents
$92,069
$72,634
+ $19,435
O
Accounts receivables, net
– 19,545
O
Inventories
50,784
53,129
O
Prepaid expenses
Total current assets
210,912
214,312
Equipment
145,444
134,312
O
Less: Accumulated depreciation
(50,515)
(36,689)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
O
Accounts payable
$25,466
$34,879
– $9,413
O
Accrued liabilities
40,574
40,722
– 148
Total current liabilities
Long-term debt
10,422
10,206
Contributed capital
Retained earnings
227,717
224,844
229,379
226,128
Total Liabilities and Stockholders’ Equity
Consolidated Statement of Income
(in thousands)
Year 2
Net sales
$130,896
Cost of sales
74,040
Gross profit
56,856
Selling, general & administrative expenses
33,211
Depreciation expense
13,826
Total operating expenses
47,037
Operating income
Interest income
Income before income taxes
10,058
Income tax expense
Net income
Chapter 12 – Statement of Cash Flows
12–24
HANDOUT 12 – 3, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Then, compute the net cash flow for each category by completing the following table:
Year 2
Net cash flow provided by (used in) operating activities
Net cash flow provided by (used in) investing activities
Net increase (decrease) in cash
Cash and cash equivalents, end of the quarter
Chapter 12 – Statement of Cash Flows
12–25
HANDOUT 12 – 3 SOLUTION
STATEMENT OF CASH FLOWS (DIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
Dec. 31,
Year 2
Dec. 31,
Year 1
Change
ASSETS
Current assets:
Cash and cash equivalents
$92,069
$72,634
+ $19,435
O
Accounts receivables, net
– 19,545
Inventories
O
Prepaid expenses
Total current assets
210,912
214,312
Equipment
145,444
134,312
Less: Accumulated depreciation
(50,515)
(36,689)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
O
Accounts payable
$25,466
$34,879
– $9,413
Accrued liabilities
Total current liabilities
Long-term debt
Contributed capital
Retained earnings
227,717
224,844
Total stockholders’ equity
229,379
226,128
Total liabilities and stockholders’ equity
Consolidated Statement of Income
(in thousands)
Year 2
Net sales
$130,896
Cost of sales
74,040
Gross profit
56,856
Selling, general & administrative expenses
33,211
Depreciation expense
13,826
Total operating expenses
47,037
Operating income
Interest income
Income before income taxes
10,058
Income tax expense
Net income
$ 6,437
Chapter 12 – Statement of Cash Flows
HANDOUT 12 – 3 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Year 2. The company declared and paid dividends in the amount of $3,564 during the year ended
December 31, Year 2.
Using the information provided above, compute the net cash provided by (used in) operating activities
using the direct method.
Cash collected from customers (1)
$150,441
Cash payments to suppliers (2)
Cash payments for operating expenses (3)
Cash received for interest (4)
Cash payments for income tax expense (5)
Net cash provided by operating activities
Compute total net cash flows and their effect on cash at the end of the period.
Year 2
Net cash provided by operating activities (see above)
$33,537
Net cash used in investing activities (6)
Net cash used in financing activities (7)
Net increase (decrease) in cash
Cash and cash equivalent, beginning of quarter
Cash and cash equivalents, end of quarter
$92,069
(6) Attributable to purchases of equipment (that is, the increase in the equipment account). There were
no other investing activities.
(7) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
$ 216
Proceeds from issuance of stock
Payment of dividends
Net cash used in financing activities