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Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-1
CHAPTER 16
REPORTING THE STATEMENT OF CASH FLOWS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Distinguish between operating,
investing, and financing
activities, and describe how
noncash investing and financing
activities are disclosed
1, 2, 3, 5, 7,
8, 9,14
16-1, 16-20
16-1, 16-14
16-3, 16-4,
16-6, 16-8,
16-7, 16-8,
16-9, 16-10
Analytical objectives:
A1. Analyze the statement
of cash flows and apply the
cash flow on total assets ratio.
1, 9, 12, 13
16-17
16-10, 16-11
16-3,
GL 16-1
16-1, 16-2,
16-3, 16-5,
16-6, 16-7,
16-8
Procedural objectives:
P1. Prepare a statement of cash
flows.
16-2, 16-9,
16-19
16-9, 16-11,
16-12, 16-17,
16-3, 16-4,
16-5, 16-6,
GL16-3, ES
P2. Compute cash flows from
operating activities using
the indirect method.
6, 10, 11
16-3, 16-4,
16-5, 16-6,
16-11, 16-19
16-2, 16-3,
16-4, 16-5,
16-6, 16-11
16-1, 16-3,
16-4, 16-6,
16-7, SP,
GL 16-1,
GL 16-2,
16-6
P3. Determine cash flows from
both investing and financing
activities.
2, 3, 7, 8, 9,
15
16-7, 16-8,
16-9, 16-10,
16-12, 16-13,
16-19
16-7, 16-8,
16-11, 16-12,
16-17, 16-18
16-3, 16-4,
16-5, 16-6,
16-7, 16-8,
SP,GL16-1,
GL 16-3
P4A.Illustrate use of a spreadsheet to
prepare a statement of
cash flows (Appendix 16A)
16-18
16-13
16-4, 16-7
P5B.Compute cash flows from
operating activities using
the direct method.
(Appendix 16B)
4, 5
16-14, 16-15,
16-16
16-12, 16-14,
16-15, 16-16,
16-17, 16-18
16-2, 16-5,
16-8
16-6
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
GL refers to the General Ledger Problems
ES refers to the Excel Simulations
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—Amazon and entrepreneurial assignment.
Continued infographics on examples of operating, investing, and financing cash flows.
Kept 5-step process for preparing statement of cash flows.
New graphic on use of Indirect vs Direct methods.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-3
Chapter Outline
Notes
I. Basics of Cash Flow Reporting
A. Purpose of a Statement of Cash Flows
To report all major cash receipts (inflows) and cash payments
(outflows) during 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. How much is paid in cash dividends?
B. Importance of Cash Flows
Information about cash flows, and its sources and uses, can
influence decision makers in important ways.
C. Measurement of Cash Flows
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. Classifications 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
determine 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 dividends and interest, sale of trading
securities, and settlements of lawsuits.
b. Cash outflows for payments to suppliers for goods and
services, to employees for wages, to lenders for interest, to
government for taxes, to charities, and to purchase trading
securities.
2. Investing activities include transactions and events that affect
long-term assets, namely the purchase or sale of these assets.
Specific examples:
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-4
Chapter Outline
Notes
3. Financing activities include transactions and events that affect
long-term liabilities and equity:
a. Cash inflows from owner contributions, from issuing
company’s own stock, from issuing bonds and notes and
from issuing short and long-term debt.
b. Cash outflows from repaying cash loans, owner’s
withdrawals, paying shareholder’s cash dividend and
purchasing treasury stock.
E. Noncash Investing and Financing Activities
Activities that do not affect cash receipts or payments but because
of their importance and the full disclosure principle they are
disclosed at the bottom of the statement of cash flows or in a note
to the statement.
F. Format of the Statement of Cash Flows
1. Lists cash flows by categories (operating, financing and
2. Combines the net cash flow in each of the three categories and
identifies the net change in cash for the period.
4. Contains a separate schedule or note disclosure of any noncash
financing and investing activities.
G. Preparing the Statement of Cash Flow
1. Five steps:
a. Compute the net increase or decrease in cash (bottom line
or target number).
b. Compute and report net cash provided (used) by operating
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-5
Chapter Outline
Notes
2. Sources of information for preparing the statement of cash
flows
3. Alternative approaches to preparing the statement:
a. Analyzing the cash account.
b. Analyzing noncash accounts.
II. Cash Flows from Operating Activities
A. Indirect and Direct Methods of Reporting—Two ways of reporting
that apply only to the operating activities section.
1. Direct Method—separately lists each major item of operating
2. Indirect Method—reports net income and then adjusts it for
3. Note that the net cash provided (used) by operating activities
is identical under both the direct and indirect method.
B. Applying the Indirect Method
1. Reports net income using accrual accounting, and then adjusts
2. The types of adjustments are:
a. to income statement items involving operating activities
that do not affect
i. Revenues and gains are deducted from net income.
ii. Expenses and losses are added back to net income.
b. for changes in current assets (other than cash) and current
liabilities
i.Decreases in noncash current assets are added to net
income.
C. Summary Adjustments for the Indirect method—see Exhibit
16-12 in text.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-6
Chapter Outline
Notes
III. Cash Flows from Investing—identical under direct and indirect
methods. Three-stage process of analysis to determine cash provided
(used) by investing activities:
A. Identify changes in investing-related accounts (all non-current
assets, and the current accounts for both notes receivable and
investments in securities—excluding trading securities).
IV. Cash Flows from Financing— identical under direct and indirect
methods. Three-stage process of analysis to determine cash provided
(used) by financing activities:
A. Identify changes in financing-related accounts (all non-current
liabilities—including current portion of any notes and bonds, and
the equity accounts).
B. Explain these changes to identify their cash flows effects using
reconstruction analysis (reconstructed entries—not the actual
entries by the preparer).
C. Report their cash flow effects.
V. Proving Cash Balances
Last step in preparing the statement is to report the beginning and
ending cash balances and provide that the net change in cash is
explained by operating, investing and financing cash flows. Exhibit
16-13 in text.
VI. Decision Analysis—Cash Flow Analysis
A. Analyzing Cash Sources and Uses
2. Creditor and investor decisions are also based on a company's
cash flow evaluations.
3. Operating cash flows are generally considered to be most
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-7
Chapter Outline
Notes
B. Cash Flow on Total Assets
2. Computed by dividing cash flow from operations by average
total assets.
VIII. Spreadsheet Preparation of the Statement of Cash Flows
(Appendix 16A)
A spreadsheet approach may be used to organize and analyze the
information to prepare a statement of cash flows by the indirect
method, including the supplemental disclosures of noncash investing
and financing activities.
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.
B. Separate sections on the working paper present (a) balance
sheet items with debit balances; (b) balance sheet items with
credit balances; (c) cash flows from operating activities,
starting with net income; (d) cash flows from investing
activities; (e) cash flows from financing activities; and (f)
noncash investing and financing activities.
C. Information for sections (c) - (f) is developed in four steps in
the Analysis of Changes columns:
1. By adjusting net income for the changes in all noncash
2. By eliminating from net income the effects of all noncash
3. By eliminating from net income any gains or losses from
investing and financing activities. This involves the
4. By entering any remaining items, such as dividend
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
IX. Direct Method of Reporting Operating Cash Flows (Appendix
16B)
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.
E. The items to be listed are determined by adjusting individual
F. Exhibit 16B.6 summarizes the common adjustments for the
items making up net income to arrive at net cash provided
(used) by operating activities under the direct method.
G. This is the method recommended (but not required) by the
FASB.
H. When the direct method is used, the FASB requires a
reconciliation of net income to net cash provided (used) by
operating activities. This is operating cash flows computed
using the indirect method.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-9
VISUAL #16-1
CLASSIFYING ACTIVITIES IN THE STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Cash inflows from
Cash outflows to
• Customers for cash sales
• Collections on credit sales
• Borrowers for interest
• Salaries and wages
• Lenders for interest
• Charities
INVESTING ACTIVITIES
Cash inflows from
Cash outflows to
• Selling investments in securities
• Selling (discounting) notes
• Make loans to others
• Purchase long-term productive assets
FINANCING ACTIVITIES
Cash inflows from
Cash outflows to
• Contributions by owners
• Issuing notes and bonds
• Repay cash loans
• Pay withdrawals by owners
NONCASH INVESTING AND FINANCING ACTIVITIES
• Retirement of debt by issuing equity stock
• Conversion of preferred stock to common stock
• Leasing of assets in a capital lease transaction
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-10
VISUAL #16-2
STEPS TO DETERMINE INFORMATION
STATEMENT OF CASH FLOWS
1. Find change in Cash—This is the target number.
2. Find cash flow from operations
(Using direct or indirect method)
3. Find Cash Flow from A. Financing and
B. Investing
Procedure:
4. Combine cash flows from all three activities (from 2 and 3) to find
net cash flow and prove change in cash. (Target number
determined in Step 1).
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-11
VISUAL #16-3
Determining Cash Flows from Operating Activities
Direct Method
(Need income statement and balance sheet data)
1. Cash = Sales + Decrease in
Receipts Accounts
2. Cash = Cost of + Increase in + Decrease in
Payments Goods Sold Inventory Accounts
3. Cash = Operating + Increase in + Decrease in - Depreciation
Payments Expenses Prepaid Accrued and Other
4. Cash = Income + Decrease in
Payments Taxes Income
for Expense Taxes
5. Cash = Interest + Decreases in
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-12
VISUAL #16-4
START WITH
NET INCOME OR (NET LOSS)
Add Subtract
2. Losses 3. Decreases in current
4. Increases in current
liabilities.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-13
Chapter 16 Alternate Demonstration Problem
The Carpet Company’s 2017 and 2018 balance sheets included the
following items:
December 31
2018
2017
Debits
Credits
Accumulated depreciation, equipment ......................
$ 4,000
$ 3,000
The Carpet Company’s income statement was as follows:
CARPET COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales ..............................................................................
$61,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-14
Required:
Prepare the statement of cash flows under both the direct method and the
indirect method for the year ended December 31, 2018. Additional
information includes the following:
a. Equipment costing $3,500 was purchased during the year.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-15
Chapter 16 Solution: Alternate Demonstration Problem
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2018
Cash flows from operating activities:
Cash received from customers ...............................
$ 62,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
16-16
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2018
Cash flows from operating activities:
Net income ......................................................................
$ 9,000
Adjustments to reconcile net income to net cash
provided by operating activities:
