Chapter 21
Statement of Cash Flows
Chapter Overview
In addition to the income statement, balance sheet, and the statement of equity; there is a fourth financial
statement – a statement of cash flows. This chapter discusses that financial statement. It consists of three
main sections to help the reader understand how the company received or used cash for operating,
investing, and financing activities. Operating activities are those activities that occur naturally in the
functioning of the business. Investing activities are those activities involved in buying or selling non-
Learning Objectives
After studying Chapter 21, your students should gain proficiency in the following:
2. Prepare a Statement of Cash Flows by the Direct Method.
Chapter 21 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Sections of Statement of Cash Flows 1 5 Easy
2 Indirect Method 1 5 Easy
3 Direct Method 2 5 Easy
4 Investing Activities 1 5 Easy
Concept Checks
1 Operating Activities – Indirect Method 1 15 Easy
2 Operating Activities – Indirect Method 1 20 Medium
3 Operating Activities – Direct Method 2 30 Medium
4 Cash Flows from Financing 1, 2 15 Easy
5 Change in Cash 1, 2 15 Easy
Exercises (Set A)
21A-1 Operating Activities – Indirect Method 1 45 Easy
Exercises (Set B)
21B-1 Operating Activities – Indirect Method 1 45 Easy
21B-2 Operating Activities – Indirect Method 1 45 Medium
21B-3 Operating Activities – Direct Method 2 45 Medium
21B-4 Cash Flows Sections 2 10 Easy
Problems (Set A)
Learning Unit 21-1: Preparing a Statement of Cash Flows by the
Indirect Method
Summary: In this chapter we turn our attention to a fourth major financial statement that is used to better
understand the operating, investing, and financing activities of a company. The Statement of Cash Flows
The statement of cash flows consists of three main sections: (1) net cash flows from operating activities,
(2) net cash flows from investing activities, and (3) net cash flows from financing activities.
Operating activities include selling products or services to customers. Cash inflows from operating
activities include cash collected from customers. Cash outflows from operating activities include paying
Key Concepts: Comparative balance sheet, operating activities, cash inflow, cash outflow, investing
activities, financing activities, noncash investing and financing activities, indirect method.
Lecture Outline:
The statement of cash flows is the fourth financial statement:
1. Summarizes the sources and use of cash by a company during an accounting period.
3. Presents cash flow as affected by three sections:
a. Cash flows from operating activities.
i) These are activities most closely related to conducting the business for which the enterprise
was established.
ii) These activities usually involve changes in current assets and current liabilities.
b. Cash flows from investing activities.
c. Cash flows from financing activities.
i) These are activities related to raising and repaying funds borrowed from investors and
creditors such as the issuance of stocks and bonds and long-term notes.
ii) It also involves the repurchase of outstanding stock and retiring bonds and notes as well as
paying dividends.
iii) These activities usually involve changes in non-current liabilities and changes in equity.
There are three main sections of the statement of cash flows (indirect method):
1. Net cash flows from Operating Activities:
a. Begins with the income per the income statement
b. Depreciation is added to net income. Net income has already been reduced by depreciation
2. Net cash flows from Investing Activities typically include non-current assets, investing activities such
as:
3. Net cash flows from Financing Activities typically include non-current liabilities along with equity
accounts affected by cash flows such as:
4. The final calculation of cash flows is the total of the cash provided (cash increases) or cash used (cash
decreases) in all three activities.
Teaching Tips/Strategy:
Examine and present the “layout of a Cash Flows Statement” (Table 21-8) to explain and introduce the
format and elements of the statements. Use the Discussion Questions #1, #2, #4, #6, and #7 to analyze the
different cash flow categories.
Learning Unit 21-2: Preparing a Statement of Cash Flows by the
Direct Method
Summary: An alternative way of preparing the net cash from operating activities section of the statement
is called the direct method. The direct method requires listing separately the major categories of cash
inflows and outflows. The major cash inflow for most firms is the cash received from customers, which is
computed by adjusting the sales figure by the change in Accounts Receivable. Cash outflows under the
Key Concepts: Direct method
Lecture Outline:
The direct method requires listing major groups of operating cash receipts and cash payments.
Teaching Tips/Strategy:
Use Concept Check #3 to review the net cash flows operating activities section (direct method). Review
Name Date Section
CHAPTER 21
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Which of the following is an operating activity?
a. payment of dividends b. payment of utilities
c. purchase of equipment d. issuance of stock
2. Which of the following is an investing activity?
a. purchase of vehicle b. issuance of treasury stock
c. issuance of bonds d. purchase of inventory
3. Which of the following is a financing activity?
a. purchase of vehicle b. purchase of inventory
c. payment of dividends d. payment of utilities
4. The indirect method
a. expands the cash from financing activities
b. focuses on cash from investing activities
c. lists all cash receipts and payments
d. reconciles net income to net cash from operating activities
5. The direct method
a. expands the cash from financing activities
b. focuses on cash from investing activities
c. lists all cash receipts and payments
d. reconciles net income to net cash from operating activities
6. Depreciation is added to net income
a. in the operating section of the direct method
b. in the operating section of the indirect method
c. in the financing activity section
d. in the investing activity section
7. If accounts receivable has increased,
a. the change is subtracted from net income in the indirect method
b. the change is added to net income in the indirect method
c. the change is subtracted from net income in the direct method
d. the change is added to net income in the direct method
8. If accounts payable has increased,
a. the change is subtracted from net income in the indirect method
b. the change is added to net income in the indirect method
c. the change is subtracted from net income in the direct method
d. the change is added to net income in the direct method
9. Which of the following is a financing activity?
a. purchase of inventory
b. purchase of vehicle
c. issuance of bonds
d. payment of utilities
10. Which of the following is an investing activity?
a. payment of dividends
b. purchase of equipment
c. payment of utilities
d. purchase of inventory
Answer Key to Chapter 21 Quiz
1. b