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CHAPTER THIRTEEN
The Statement of Cash Flows
This chapter presents an in-depth discussion of the preparation and use of the
statement of cash flows. Although it is used primarily by those external to the
Key Concepts
• The statement of cash flows is viewed by many as the most important
financial statement because it provides evidence of the company’s
ability to meet its short-term obligations
(liability) accounts during the year must be deducted from net income.
When asset (liability) accounts decrease (increase) during the year,
the amount of decrease or increase must be added to net income in
arriving at net cash provided by operating activities.
Learning Objectives
LO1— Recognize the purpose of a statement of cash flows and the activities
making up a cash flow statement
Instructor’s Manual
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Lecture Outline
A. Introduction
o The statement of cash flows reports the impact of a firm’s
B. The Statement of Cash Flows (LO1)
o The statement of cash flows provides information to decision
Key Concept
Key Concept
The statement of cash flows is viewed by many as the most important
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o The statement of cash flows should be viewed as an
1. Operating Activities
o Operating activities include acquiring and selling products in
the normal course of business.
2. Investing Activities
o Cash inflows from investing activities include the sale of
3. Financing Activities
o Cash inflows from financing activities include selling stock or
4. The Definition of Cash: Cash and Cash Equivalents
o A cash equivalent is an item that can be readily converted to
a known amount of cash and has an original maturity to the
investor of three months or less.
Instructor’s Manual
5. Noncash Transactions
o Organizations will have transactions that do not directly
C. Direct Method vs. Indirect Method (LO2)
o The direct method reports major classes of gross cash
o
1. Direct Method
o Sales revenue + Beginning accounts receivable – Ending
accounts receivable = Cash collections from customers
Key Concept
The only difference between the direct and indirect reporting methods
Key Concept
An understanding of the effects of different types of transactions on a
MAKING IT REAL:
Exactly What Is Cash?
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2. Indirect Method
3. The Statement of Cash Flows and Accounting Equation
o Assets = Liabilities + Owner’s Equity
D. Preparing the Statement of Cash Flows (LO3)
a. Compute the Net Change in Cash
b. Compute Net Cash Provided or Used by Operating Activities
o The Direct Method
Key Concept
When using the indirect method, increases (decreases) in asset
Instructor’s Manual
o The Indirect Method
Net income
f. Report Any Significant Noncash Investing and/or Financing
Activities in a Separate Schedule or a Footnote.
End-of-Chapter Material
The problem material in this chapter is focused on preparing the statement of
cash flows and the differences between the direct and indirect methods.