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CHAPTER 23
2. Prepare a statement of cash flows.
4. Discuss special problems in preparing a statement of cash flows.
1. Corporate investors and potential investors seek information about the financial position,
results of operations, and cash flow. The required presentation of the statement of cash
2. (L.O. 1) The information in a statement of cash flows should help investors, creditors,
and others to assess: (1) the entity’s ability to generate future cash flows; (2) the entity’s
3. The statement of cash flows classifies cash receipts and cash payments by operating,
investing, and financing activities. Operating activities include all transactions and events
that are not investing and financing activities. Operating activities include cash effects of
4. The typical cash receipts and cash payments of a business entity classified according to
operating, investing, and financing activities are shown below.
Operating Activities
Investing Activities
Cash inflows
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
5. IFRS permits flexibility regarding certain payments. For example, interest and dividends
paid can be classified as either operating or financing and interest and dividends received
can be classified as either operating or investing. Companies classify some cash flows
6. (L.O. 2) The information used to prepare the statement of cash flows generally comes
(1) Determine the change in cash. This procedure is straightforward because the
(2) Determine the net cash flow from operating activities. This procedure is complex;
(3) Determine cash flows from investing and financing activities. All other changes
7. The textbook includes three comprehensive illustrations that provide a detailed
8. To compute net cash flows from operating activities it is necessary to report revenues and
expenses on a cash basis. This is done by eliminating the effects of income statement
9. Once cash from (used by) operating activities has been determined, cash flows from
10. Important points to remember in the preparation of the statement of cash flows: (1)
Comparative statements of financial position provide the basic information needed. (2)
23-17 presents a more complete set of adjustments needed to determine net cash flow
11. (L.O. 3) While the IASB encourages the use of the direct method when preparing the
statement of cash flows, use of the indirect method is also permitted. Under the direct
method, cash revenues and expenses are determined. The difference between these two
amounts represents net cash flows from operating activities. In essence, the direct
without a corresponding decrease in cash. Thus, the increase in accrued wages would
have to be added back to net income to arrive at cash provided by operations. Both the
direct method and the indirect method have distinct advantages that should be
considered when deciding on the method to be used in presenting the statement of cash
12. (L.O. 4) Five items, described as special problems related to preparing the statement of
cash flows, are presented in the text material. These items relate to various aspects of
the statement of cash flows and should be understood for accurate preparation of the
statement.
a. Adjustments to net income
v. Gains and losses are reported in income; however, the cash flow from these
transactions should be reported as part of either investing or financing activities.
The gain or loss is removed from cash flow from operating activities, and the entire
cash flow is reported as either investing or financing.
vi. Unrealized gains and losses are removed from net income since they do not result
c. Other working capital changes—some changes in working capital, although they
affect cash, do not affect net income. Generally, these are investing or financing activities
of a current nature such as the purchase of short-term non-trading investments or short-
term non-trade notes payable.
d. Net losses—if an enterprise reports a net loss instead of net income, the net loss must
13. (L.O. 5) Near the end of Chapter 23, a comprehensive illustration of the statement of
LECTURE OUTLINE
The material in this chapter can be covered in three class sessions. Students often have
1. Purposes of the statement.
a. To provide information about the cash receipts and cash payments of an entity
2. Uses of the statement.
a. Assessing the entity’s ability to generate positive future cash flows.
1. Operating activities: transactions related to the calculation of net income.
3. Financing activities: transactions related to liabilities and equity.
1. Sources of information.
2. Steps.
a. Determine the change in cash.
1. Step 1: Determine the change in cash.
2. Step 2: Determine net cash flow from operating activities—indirect method.
1. Net cash flow from operating activities is equal to difference between revenues and
expenses determined on a cash basis.
2. Convert accrual basis net income to a cash basis by eliminating those transactions that
1. Cash flows from investing activities include:
2. Cash flows from financing activities include:
a. Issuance/repayment of long-term debt.
3. The statement includes all changes that have passed through cash.
1. Compute net cash from operating activities by adjusting each item on the income statement
from the accrual basis to the cash basis.
2. Compute cash flows from investing and financing activities.
I. Calculating the Net Cash Flow from Operating Activities.
1. Direct method or income statement method.
a. Net cash flow from operating activities = cash receipts – cash disbursements.
3. The net cash flow from operating activities is the same under both the direct and indirect
1. Direct method has the advantage of showing operating cash receipts and payments.
2. Indirect method has the advantage of reconciling net income with net cash flow from
operating activities.
1. Adjustments to net income:
a. Depreciation and amortization.
2. Accounts receivable.
a. Indirect method: increase/decrease in the Allowance for Doubtful Accounts should be
3. Other working capital changes, investing or financing activities of a current nature such
4. Net losses: after adjustments, may result in either a positive or a negative net cash
flow from operating activities.
5. Disclosures:
a. Significant noncash investing and financing activities cannot be incorporated in the
1. Basic format:
a. In the statement of financial position accounts section, debit balance accounts are
2. Analyzing and entering transactions.
