CHAPTER 13
Statement of Cash Flows
LEARNING OBJECTIVES
1. DISCUSS THE USEFULNESS AND FORMAT OF THE
STATEMENT OF CASH FLOWS.
2. PREPARE A STATEMENT OF CASH FLOWS USING
THE INDIRECT METHOD.
3. ANALYZE THE STATEMENT OF CASH FLOWS.
CHAPTER REVIEW
Purpose of the Statement of Cash Flows
1. (L.O. 1) The fourth basic financial statement is the statement of cash flows. The primary purpose
of the statement is to provide information about an entity’s cash receipts and cash payments
during a period.
Classification of Cash Flows
3. The statement of cash flows classifies cash receipts and cash payments by:
a. Operating activities which include cash effects of transactions that create revenues and
4. Significant noncash transactions will include the conversion of bonds into common stock and
the acquisition of assets through the issuance of debt or capital stock. These transactions are
Format of the Statement of Cash Flows
5. The three classes of activities constitute the general format of the statement with the operating
activities section appearing first, followed by the investing activities and financing activities sections.
a. The net cash provided or used by each activity is totaled to show the net increase (decrease)
Preparing the Statement of Cash Flows Using the Indirect Method
6. (L.O. 2) The statement of cash flows is not prepared from the adjusted trial balance. The
information to prepare this statement usually comes from three sources: (a) comparative balance
sheets (b) the current income statement, and (c) additional information.
The Major Steps
7. The major steps in preparing the statement are:
Step 1: Determine net cash provided/used by operating activities. This step involves analyzing
not only the current year’s income statement, but also comparative balance sheets and
8. In performing step 1, the operating activities section must be converted from an accrual basis to
a cash basis. This may be done by either the indirect method or the direct method.
a. Both methods arrive at the same total amount for “net cash provided by operations” but they
The First Step—Indirect
9. The first step is to determine net cash provided/used by operating activities.
a. Under generally accepted accounting principles the accrual basis of accounting is used
10. The operating section of the statement of cash flows should (a) begin with net income, (b) add
(or deduct) items not affecting cash, and (c) show net cash provided by operating activities.
11. In determining net cash provided by operating activities,
a. increases in specific current assets other than cash are deducted from net income, and
The Second Step—Indirect
12. The second step, net cash provided/used by investing and financing activities is generally
determined from changes in noncurrent accounts reported in the comparative balance sheets and
13. The redemption of debt and the retirement or reacquisition of capital stock are cash outflows from
financing activities.
The Third Step—Indirect
Analysis of the Statement of Cash Flows
Preparing the Statement of Cash Flows Using the Direct Method
*16. (L.O. 4) The following points 18 through 25 explain and illustrate the direct method.
The First Step—Direct
*17. The first step is to determine net cash provided/used by operating activities by adjusting each item
in the income statement from the accrual basis to the cash basis.
*18. In the operating activities section, only major classes of cash receipts and cash payments are reported
as follows:
*19. The formula for computing cash receipts from customers is:
*20. The formula for computing cash payments to suppliers is:
*21. The formula for computing cash payments for operating expenses is:
*22. The formula for computing cash payments for income taxes is:
The Second Step—Direct
Use of a Work Sheet
*25. (L.O. 5) A worksheet may be used to assemble and classify the data that will appear on the
statement of cash flows. The worksheet is divided into two parts:
consists of the operating, investing, and financing sections.
*26. The following guidelines are important in using a worksheet.
*27. The steps in preparing a worksheet are:
*28. The statement of cash flows is prepared entirely from the data that appears in the worksheet
under Statement of Cash Flows Effects.
Use the T-Account Approach to Prepare a Statement of Cash Flows
Compare the Procedures for the Statement of Cash Flows Under GAAP and IFRS
*30. (L.O. 7) The following are the key similarities and differences between GAAP and IFRS as related
to the statement of cash flows.
a. Similarities
b. Differences
(1) IFRS requires that noncash investing and financing activities be disclosed in the notes
and not the face of the statement of cash flows.
LECTURE OUTLINE
A. Usefulness of the Statement of Cash Flows.
2. The information in a statement of cash flows should help investors,
creditors, and others assess:
B. Classification of Cash Flows.
1. The statement of cash flows classifies cash receipts and cash payments
as operating, investing, and financing activities.
2. Note that (1) operating activities involve income statement items, (2) invest–
C. Significant Noncash Activities.
1. Companies do not report in the body of the statement of cash flows
significant financing and investing activities that do not affect cash.
ACCOUNTING ACROSS THE ORGANIZATION
Net income is not the same as net cash provided by operating activities. Net cash
provided by operating activities is usually significantly larger than net income.
In general, why do differences exist between net income and net cash provided
by operating activities?
D. Format of the Statement of Cash Flows.
2. Companies report the individual inflows and outflows from investing and
financing activities separately.
E. Preparing the Statement of Cash Flows.
1. Companies prepare the statement of cash flows differently from the three
other basic financial statements. It is not prepared from an adjusted trial
balance because the trial balance will not provide the necessary data.
The information to prepare the statement of cash flows usually comes
from three sources:
2. Preparing the statement of cash flows from these data sources involves
three major steps:
3. A company must convert net income from an accrual basis to a cash
basis to determine net cash provided/used by operating activities by
using either (1) the indirect method or (2) the direct method.
F. Preparing the Statement of Cash Flows—Indirect Method.
1. Step 1: Determine net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis.
2. Step 2: Analyze changes in noncurrent asset and liability accounts and
record as investing and financing activities, or as noncash investing and
financing activities.
3. Step 3: Compare the net change in cash on the statement of cash flows
with the change in the cash account reported on the balance sheet to
make sure the amounts agree.
G. Using Cash Flows to Evaluate a Company.
1. In the statement of cash flows, cash provided by operating activities is
intended to indicate the cash-generating capability of the company.
*H. Statement of Cash Flows—Direct Method.
Step 1: Determine the net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis.
a. Companies compute net cash provided by operating activities by
adjusting each item in the income statement from the accrual basis
to the cash basis.
*I. Preparing the Worksheet—Indirect Method.
1. Step 1:
2. Step 2: Analyze changes in noncurrent asset and liability accounts and
record as investing and financing activities, or as significant noncash
activities.
3. Step 3: Compare the net change in cash on the statement of cash flows
with the change in the cash account reported on the balance sheet to
make sure the amounts agree.
*J. Using the T-Account Approach
1. Prepare a large Cash T-account with Operating, Investing and Financing
sections.
IFRS
A Look at IFRS
As in GAAP, the statement of cash flows is a required statement for IFRS. In
addition, the content and presentation of an IFRS statement of cash flows is
similar to the one used for GAAP. However, the disclosure requirements related
to the statement of cash flows are more extensive under GAAP IAS 7 (Cash Flow
Statements) provides the overall requirements for cash flow information.
KEY POINTS
SIMILARITIES
• Companies preparing financial statements under IFRS must also prepare a
statement of cash flows as an integral part of the financial statements.
DIFFERENCES
• IFRS requires that noncash investing and financing activities be excluded from
the statement of cash flows. Instead, these noncash activities should be
reported elsewhere. This requirement is ininvesting and financing activities
should be disclosed in the notes to the financial statements instead of in the
• Under IFRS, some companies present the operating section in a single line item, with a
full reconciliation provided in the notes to the financial statements. This presentation is
not seen under GAAP.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Inflows and outflows from investing and financing activities should be reported separately
on the statement of cash flows.
True False
2. In addition to the adjusted trial balance, information for the statement of cash flows is taken
from comparative balance sheets and the current income statement.
True False
3. The purchase of inventory and investments in property, plant, and equipment are considered
cash outflows from operations.
True False
4. An increase in equipment will increase net cash provided by operating activities.
True False
5. When accounts receivable increases during the year, revenues on a cash basis are
higher than revenues on an accrual basis.
True False
6. Cash outflows to purchase property, plant, and equipment would be reported in the investing
section of the statement of cash flows.
True False
7. A statement of cash flows starts with net income and adds (or deducts) items that did not
affect cash to arrive at net cash provided by operating activities if the indirect method is
used.
True False
8. The only use of a statement of cash flows is to help investors, creditors, and others assess
the reasons for the difference between net income and net cash provided by operating
activities.
True False
9. The amortization of a patent is added back to net income to arrive at net cash provided
by operating activities.
True False
10. The issuance of shares of stock for plant assets is a significant noncash transaction.
True False
Multiple Choice
1. A company has credit sales of $900,000 and cash sales of $540,000 during the same
year that the Accounts Receivable account decreased by $120,000. What was the total
of cash receipts from sales?
a. $1,320,000.
b. $1,560,000.
c. $1,020,000.
d. $780,000.
2. Cash inflows from investing activities include
a. sale of common stock.
b. purchase of equipment.
c. sale of land.
d. issuance of long-term debt.
3. Operating activities do not include cash
a. inflows from revenue.
b. inflows from sale of equipment.
c. outflows for income taxes.
d. outflows for wages.
4. Which of the following would decrease net cash provided by operating activities?
a. Decrease in short-term notes payable.
b. Depreciation expense.
c. Decrease in inventory.
d. Loss on sale of equipment.
5. Noncash investing and financing activities
a. may represent significant investing and financing activities.
b. do not involve cash receipts or cash payments.
c. are disclosed on a separate schedule.
d. all of the above.
ANSWERS TO QUIZ
True/False
Multiple Choice