Learning Outcomes. The Statement of Cash Flows. Chapter 4: The Income Statement, Comprehensive Income and The Statement of Cash Flows: Part 2

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classifications appearing on the Statement of Cash Flows The steps involved in preparing a Statement of Cash Flows using the indirect method.

1 Chapter 4: The Income Statement, Comprehensive Income and The Statement of Cash Flows: Part 2 The Statement of Cash Flows Dr. Chula King Intermediate Accounting 1 Learning Outcomes After completing this Part, you should understand The uses of the Statement of Cash Flows The cash flow classifications appearing on the Statement of Cash Flows The steps involved in preparing a Statement of Cash Flows using the indirect method. The Statement of Cash Flows Provides information about cash receipts and disbursements during the period, including cash equivalents Bridge between income statement and balance sheet Useful in assessing future profitability, liquidity and solvency. 1

2 Classifying Cash Flows Operating Activities inflows and outflows of cash related to transactions involving the income statement Investing Activities acquisition and disposal of long term assets used in the business nonoperating investment assets Financing Activities inflows and outflows of cash related to transactions with creditors and owners Non cash Investing/Financing Activities Investing and financing activities not involving cash. Direct versus Indirect Method Relates only to cash flow from operating activities Direct Method Details cash inflows and cash outflows from operating activities Reports income components on cash basis Indirect Method Starts with accrual basis net income Adds back/deducts non cash expenses and revenues Increases/decrease cash for changes in operating assets and liabilities. Analysis Focal point is on changes in balance sheet accounts between beginning and ending balances Change in cash is the answer! Change in non cash accounts Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Non cash investing/financing activities. 2

3 Balance Sheet Assets Current Long term Liabilities Current Long term Equity Paid in capital Retained Earnings. Cash Flow: Operating Activities Is the balance sheet account related to the income statement? In the process of debiting/crediting the account, is an income statement account involved? Change in current assets, except for Marketable Securities Change in accumulated depreciation and intangibles from depreciation and amortization Change in current liabilities, except for short term notes payable used for financing Change in Retained Earnings from Net Income. Cash Flow: Investing Activities All other assets Never involves liabilities or equity. 3

4 Cash Flow: Financing Activities All other liabilities All Paid in capital Retained earnings change other than net income Never involves assets. Examples Marketable Securities (CA) Investing activities Accounts Receivable (CA) Operating activities Allowance for Doubtful Accounts (Contra) Operating activities Interest Receivable (CA) Operating activities Inventory (CA) Operating activities Prepaid Expenses (CA) Operating activities Long term Investments (NCA) Investing activities PPE (NCA) Investing activities. Examples (Continued) Accumulated Depreciation (Contra) Operating activities Intangibles (NCA) Operating activities for amortization; otherwise Investing activities Accounts Payable (CL) Operating activities Notes Payable (CL) Operating or financing activities, depending on the reason Accrued Liabilities (CL) Operating activities. 4

5 Examples (Continued) Unearned Revenues (CL) Operating activities Bonds Payable, LT Notes Payable, Mortgage Payable, etc., (LTL) Financing activities Stock and Additional i Paid in i Capital l( (Equity) Financing activities Retained Earnings (Equity) Net Income Operating activities Dividends Financing activities. Form of Statement Name of Company Statement of Cash Flows Heading Period Covered Cash Flow from Operating Activities Net Income ± Adjustments for non cash effects ± Changes in operating assets and liabilities Net Cash Flow from Operating Activities. Form of Statement (Continued) Net Cash Flow from Operating Activities Cash Flow from Investing Activities ± Changes in Investing Assets Net Cash Flow from Investing Activities Cash Flow from Financing Activities ± Changes in Financing Liabilities and Equity Net Cash Flow from Financing Activities Net Increase/(Decrease) in Cash + Beginning Balance = Ending Balance. 5

6 Concluding Comments The uses of the Statement of Cash Flows The cash flow classifications appearing on the Statement of Cash Flows The steps involved in preparing a Statement of Cash Flows using the indirect method. The Next Step Exercises 4 2, 4 4, 4 6, 4 11, 4 16, 4 18, 4 22 Problems 4 2, 4 3, 4 8 6

Spreadsheet versus T-Account

Chapter 21 The Statement of Cash Flows Part 2 The Mechanics of the T-Account Approach Intermediate Accounting II Dr. Chula King Spreadsheet versus T-Account Spreadsheet Approach Columns Balance Sheet: