Statement of Cash Flows Page 136 Chapter 5
ACTIVITY 42 CROSSWORD PUZZLE FOR CHAPTER 5
Across
1. Ratio of 1.0 indicating each dollar of profit is supported
by a dollar of operating cash flow (3 words)
stock
10. Statement organized into operating, investing, and
financing activities (2 words)
Down
2. Organization that has a general partner and many
limited partners; not a corporation (2 words)
4. Free cash flow in a ratio format; Evaluates whether
5. Activities include cash paid to purchase property, plant,
and equipment
Statement of Cash Flows Page 137 Chapter 5
Southwest Airlines (LUV)
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in millions)
For the years ended December 31,
2011
2010
2009
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES
Net income (loss)
$
178
$
459
$
99
Depreciation expense
715
628
616
Net cash from operating activities (NCOA)
1,385
1,561
985
CASH FLOWS (FOR) INVESTING ACTIVITIES
Purchase of property, plant, and equipment, net
(968)
(493)
(585)
Purchase of investments
(5,362)
(5,624)
(6,106)
Proceeds from the sale of investments
Other investing changes, net
Net cash (for) investing activities
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES
Issuance of long-term debt
0
0
455
Issuance of capital stock
39
55
20
Repayment of long-term debt
(577)
(155)
(86)
Repurchase of capital stock
(225)
0
0
Payment of dividends
(14)
(13)
(13)
Other financing changes, net
11
(36)
(46)
Net cash from financing activities (NCFA)
(766)
(149)
330
Effect of exchange rate changes
–
–
–
Net change in cash
(432)
147
(254)
+ Beginning cash and cash equivalents
1,261
1,114
1,368
= Ending cash and cash equivalents
$
$
$
SUPPLEMENTAL INFORMATION
Cash interest paid
$
485
$
135
$
152
Cash taxes paid
13
274
5
Free cash flow
403
1,055
387
(Increase) decrease in accounts receivable
(26)
(26)
40
(Increase) decrease in other current assets
85
Increase (decrease)in payables
253
193
59
Other operating changes, net
200
258
86
Statement of Cash Flows Page 138 Chapter 5
ACTIVITY 43 UNDERSTANDING THE STATEMENT OF CASH FLOWS
Purpose: • Understand positive amounts indicate cash inflows and negative amounts
indicate cash outflows.
• Identify operating, investing, and financing activities.
The ongoing operation of any business depends on its ability to generate cash from operations. It is cash
that an organization needs to pay employees, suppliers, creditors, and investors … not profits. Therefore,
the real issue is cash. The statement of cash flows organizes cash inflows and cash outflows as operating
activities, investing activities, and financing activities because …
MANAGEMENT uses accounting information to make decisions regarding
Financing —> Investing —> Operating —>
FINANCING ACTIVITIES: Creditors lend and owners contribute $$$ to finance a company.
INVESTING ACTIVITIES: The $$$ obtained through financing is used to purchase revenue–
generating assets such as property, plant, and equipment (PPE) and
investment securities.
OPERATING ACTIVITIES: PPE and other revenue-producing assets are used to manufacture
goods, offer services, and generate dividends and interest, that in turn
result in $$$ profits.
FINANCING ACTIVITIES: $$$ profits are reinvested to internally finance the company.
INVESTING ACTIVITIES: $$$ obtained through financing are used to purchase revenue–
producing assets … and the cycle continues.
TRANSACTIONS REPORTED ON THE STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES (Direct Method)
CASH INFLOWS
Cash from customers
Cash from interest and dividends
Other operating cash receipts
CASH OUTFLOWS
Cash paid to suppliers
Cash paid to employees
Interest paid
Other operating cash payments
INVESTING ACTIVITIES
CASH INFLOWS
Sell property, plant, equipment
Sell investment securities
Receive loan repayments
CASH OUTFLOWS
Purchase property, plant, equipment
Purchase securities
Make loans
FINANCING ACTIVITIES
CASH INFLOWS
Borrow cash from creditors
Issue debt securities (bonds)
Issue equity securities (capital stock)
CASH OUTFLOWS
Repay amounts borrowed (debt principal)
Repurchase equity shares (treasury stock)
Pay cash dividends
Statement of Cash Flows Page 139 Chapter 5
Q2 Identify the following transactions as Operating, Investing, or Financing activities.
Q3 Refer to the cash flow information displayed below to answer the following questions.
Southwest Airlines STATEMENT OF CASH FLOWS ($ in millions)
2011
2010
2009
Net cash from operating activities
$
1,385
$
1,561
$
985
Net cash from investing activities
(1,051)
(1,265)
(1,569)
Net cash from financing activities
(766)
(149)
330
depends).
c. Borrowing funds, issuing stock, and paying dividends are reported as
During 2009, borrowing and repaying debt are the primary financing activities. During 2009,
During 2011, issuing and repurchasing common stock are the primary financing activities.
Statement of Cash Flows Page 140 Chapter 5
Statement of Cash Flows Page 141 Chapter 5
ACTIVITY 44 OPERATING ACTIVITIES
Purpose: • Understand operating activities on the statement of cash flows.
OPERATING ACTIVITIES (Direct Method)
CASH INFLOWS
Cash from customers
Cash from interest and dividends
Other operating cash receipts
CASH OUTFLOWS
Cash paid to suppliers
Cash paid to employees
Interest paid
Other operating cash payments
The operating activity section on the face of the statement of cash flows can be reported using the direct
or the indirect method. The direct method reports sources and uses of cash during the accounting period.
The indirect method reconciles accrual-based “Net Income” to cash-based “Net Cash from Operating
Activities.”
Southwest Airlines (LUV)
STATEMENT OF CASH FLOWS—Operating Activities
($ in millions)
2011
2010
2009
Net income (loss)
$
178
$
459
$
99
Depreciation expense
715
628
616
(Increase) decrease in accounts receivable
(26)
(26)
(Increase) decrease in other current assets
Increase (decrease)in payables
253
193
Other operating changes, net
200
258
Refer to the information immediately above to answer the following questions.
Statement of Cash Flows Page 142 Chapter 5
Statement of Cash Flows Page 143 Chapter 5
ACTIVITY 45 OPERATING ACTIVITIES—DIRECT AND INDIRECT METHODS
Purpose: • Understand the direct and indirect method of reporting operating activities
STATEMENT OF CASH FLOWS—Operating activities
STATEMENT A Adapted from COCA-COLA
($ in millions)
Cash received from customers
Cash paid to suppliers
Cash paid for operating expenses
Other expenses paid
$ 20,457
(6,160)
(8,050)
(1,788)
Net cash from operating activities
$ 4,459
STATEMENT B Adapted from COCA-COLA
($ in millions)
Net income (loss)
Depreciation expense
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses
$ 3,751
863
(37)
(21)
80
(177)
Net cash from operating activities
$ 4,459
Refer to the information immediately above to answer the following questions.
Statement of Cash Flows Page 144 Chapter 5
Direct Method
Q6 Decision makers compare “net income” to “net cash from operating activities.” To make these two
amounts more comparable, it is preferable to report the same accounts on both the income
statement and the operating activity section of the statement of cash flows.
Which of the following accounts are used to compute net income?
Q7 IFRS allows more flexibility in reporting interest revenue, interest expense, dividend revenue, and
dividends paid.
Under IFRS:
Statement of Cash Flows Page 145 Chapter 5
ACTIVITY 46 INVESTING ACTIVITIES
Purpose: • Understand investing activities on the statement of cash flows.
INVESTING ACTIVITIES
CASH INFLOWS
Sell property, plant, equipment
Sell investment securities
Receive loan repayments
CASH OUTFLOWS
Purchase property, plant, equipment
Purchase securities
Make loans
Q1 Investing activities include cash transactions that primarily affect the purchasing and selling of
equity). (Circle all that apply)
Q2 Identify the transactions that are recorded in the investing section of the statement of cash flows.
loss is reported.
Southwest Airlines (LUV)
STATEMENT OF CASH FLOWS—Investing Activities
($ in millions)
2011
2010
2009
Purchase of PPE, net
$
(968)
$
(493)
$
(585)
Purchase of investments
Other investing changes, net
Net cash from investing activities (NCIA)
$
$
$
Q5 Refer to the accounting information immediately above to answer the following questions.
Statement of Cash Flows Page 146 Chapter 5
Statement of Cash Flows Page 147 Chapter 5
ACTIVITY 47 FINANCING ACTIVITIES
Purpose: • Understand financing activities on the statement of cash flows.
FINANCING ACTIVITIES
CASH INFLOWS
Borrow cash from creditors
Issue debt securities (bonds)
Issue equity securities (capital stock)
CASH OUTFLOWS
Repay amounts borrowed (debt principal)
Repurchase equity shares (treasury stock)
Pay cash dividends
Q1 Financing activities include cash transactions that primarily affect (current asset / long-term asset /
Southwest Airlines (LUV)
STATEMENT OF CASH FLOWS—Financing Activities
($ in millions)
2011
2010
2009
Issuance of long-term debt
$
0
$
0
$
455
Issuance of capital stock
39
55
20
Repayment of long-term debt
Repurchase of capital stock
0
0
Payment of dividends
Other financing changes, net
Net cash from financing activities (NCFA)
$
$
$
Refer to the accounting information immediately above to answer the following questions.
Statement of Cash Flows Page 148 Chapter 5
Statement of Cash Flows Page 149 Chapter 5
ACTIVITY 48 OPERATING, INVESTING, OR FINANCING?
Purpose: • Identify operating, investing, and financing activities.
• Identify cash inflows and outflows.
• Understand the difference between cash-based and accrual-based accounting.
Kristin Incorporated is preparing her financial statements.
• For each transaction, record the effect on the financial statements, including the amount of change
and the title of the account. Record increases as a positive amount and decreases as a negative.
• For the Statement of Cash Flows, also identify whether the amount would be reported as an
Operating, Investing, or Financing activity by circling O, I, or F. A portion of Q1 is completed for you.
Kristin Incorporated
Financial Statement
Amount
Account Title
Q1 Sell $2,000 of inventory to customers for $5,000 cash.
Q2 Sell equipment with a book value (carrying value) of $65,000 for $50,000 cash.
Statement of cash flows
Income statement
Q3 Borrow $100,000 from a bank at an annual interest rate of 7%. The note is due in three years.
Statement of cash flows
Income statement
Balance sheet
Q4 Issue 1,000 shares of $100 par, 6%, preferred stock for $180 per share.
Statement of cash flows
Income statement
Balance sheet
Balance sheet
Q5 Receive a bill for $60,000 from a supplier. Pay $6,000.
Statement of cash flows
Income statement
Balance sheet
Q6 Sell 500 shares of Microsoft common stock for $12,000 cash, originally acquired for $5,000.
Income statement
Q7 Purchase equipment for $50,000 cash down and a $150,000 long-term note payable.
Income statement
Balance sheet
Statement of cash flows
Income statement
Income statement
Income statement