Chapter Twelve
Statement of Cash
Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
LO 1
LO 1
Name and define the
four primary sections
of a statement of
cash flows.
12-2
Reporting Format for the
Statement of Cash Flows
The Statement of Cash Flows must include
the following three sections:
Operating
Activities
Investing
Activities
Financing
Activities
12-3
Cash Flows from Operating
Activities
Inflows (Receipts)
Receipts from sales
 Commissions and fees
 Interest and dividends
received

Outflows (Payments)
Payments for inventory
 Salaries and wages
 Operating expenses
 Interest on liabilities
 Taxes

Cash
Flows
from
Operating
Activities
12-4
Cash Flows from Investing
Activities
Inflows (Receipts)



Selling property, plant, and
equipment
Selling investment securities
Collecting loans
Outflows (Payments)



Purchasing property, plant, and
equipment
Purchasing investment
securities
Lending to others
Cash
Flows
from
Investing
Activities
12-5
Cash Flows from Financing
Activities
Inflows (Receipts)


Borrowing
Issuing stock
Outflows (Payments)



Repaying debt (excluding
interest)
Purchasing treasury stock
Paying dividends
Cash
Flows
from
Financing
Activities
12-6
Noncash Investing and
Financing Transactions
Significant noncash investing and
financing transactions must be reported
separately.
 Example: issuing common stock in
exchange for land.

12-7
Statement of Cash Flows
12-8
LO 2
LO
1
Distinguish between
the direct and
indirect methods of
presenting the
operating activities
section of a
statement of cash
flows.
12-9
Cash Flow: Operating Activities
Cash flows from
operating
activities can be
prepared using
either the direct
method or the
indirect method.
12-10
Operating Activities: Direct Method
• Assume in 2007, New South Company
 earns revenue on account of $500 and
collects $400 from customers
 Incurs $390 of expenses on account and pays
$350 to settle accounts payable
• Let’s look at the operating activities
section of the statement of cash flows
under the direct method:
12-11
Operating Activities: Direct Method
12-12
Operating Activities: Indirect Method
Changes in current assets and current liabilities
as shown on the following table.
Cash Flows from
Operating
Activities
Net
Income
+ Losses and Gains
+ Noncash expenses
such as depreciation
and amortization.
12-13
Operating Activities: Indirect Method
12-14
Operating Activities: Indirect Method
Incur expenses
on account –
paid 350
$390
-350
40
$500
-400
$100
Earned revenue
on account—
collected $400
12-15
Operating Activities: Compare Methods
Revenue $500
Expenses $390
Net Inc.
$110
$390 -$350 = $40 exp. owed
$500 - $400 = $100 rev. owed to us
12-16
Operating Activities: Compare Methods
• The direct method is easy to understand
and is recommended by the FASB.
• However, most companies use the indirect
method since they use accrual accounting
systems and it’s easier and less expensive
for them to prepare.
12-17
Operating Activities: Indirect Method
12-18
Operating Activities: Indirect Method
12-19
Operating Activities: Indirect Method
12-20
Indirect Method Rules
12-21
Operating Activities: Indirect Method
12-22
LO 4
LO 1
Prepare the investing
activities section of a
statement of cash
flows.
12-23
Cash Flows from Investing
Activities
Inflows (Receipts)



Selling property, plant, and
equipment
Selling investment securities
Collecting loans
Outflows (Payments)



Purchasing property, plant, and
equipment
Purchasing investment
securities
Lending to others
Cash
Flows
from
Investing
Activities
12-24
Investing Activities
Let’s look at New South’s financial statements
to determine cash flow from investing activities.
12-25
Investing Activities
Because there were no purchases of marketable
securities, the $1,600 increase was due to the
purchase of additional securities.
12-26
Investing Activities
New South sold fixtures costing $1,700 that had a
book value of $400. The income statement shows
a gain of $600 on the sale.
Cash inflow =
How
book
much
value
cash
+ gain
was=received?
$400 + $600 = $1,000
12-27
Investing Activities
New South must have also purchased new store
fixtures for $2,300 to balance the account.
12-28
Investing Activities
New South purchased land, but used a mortgage
note instead of cash.
The purchase is shown on the Schedule
of Noncash Investing and Financing Activities.
12-29
Investing Activities
12-30
LO 5
LO 1
Prepare the
financing activities
section of a
statement of cash
flows.
12-31
Cash Flows from Financing
Activities
Inflows (Receipts)


Borrowing
Issuing stock
Outflows (Payments)



Repaying debt (excluding
interest)
Purchasing treasury stock
Paying dividends
Cash
Flows
from
Financing
Activities
12-32
Financing activities
The financing activities section of the
statement of cash flows shows
changes in three areas.
Debt
Capital
Accounts
Retained
Earnings
Notes or
Bonds
Stock or Treasury
Stock
Dividends
12-33
Financing activities
Look on the balance sheet for changes in
the balances of debt and equity accounts
Examine each account to determine the
cause of changes.
12-34
Financing Activities
Let’s examine the financial statements of the
New South Company to determine net cash flow
from financing activities.
12-35
Financing Activities
A mortgage issued to purchase land does not
involve a cash flow.
12-36
Financing Activities
Assuming not new bonds were issued, the
$3,000 decrease in the bonds payable
account must have been the result of a cash
outflow to pay off bonds.
12-37
Financing Activities
New South must have issued $2,000 of
additional common stock.
12-38
Financing Activities
A $1,500 decrease is required to
balance the retained earnings account.
We assume this decrease is due to the
payment of dividends.
12-39
Financing Activities
Because there was no indication that
any treasury stock was reissued, New
South must have purchased $600 of
additional treasury stock.
This is a cash outflow for financing activities.
12-40
Financing Activities
12-41
The Completed Statement
12-42
LO 6
LO 1
Explain how the
statement of cash
flows could mislead
decision makers.
12-43
The Financial Analyst
Ability to generate cash
from its operations.
Management of current
assets and current liabilities.
The statement focuses
attention on:
Expenditures for
long-term assets.
Amount received from
external financing.
12-44
LO 7
LO 1
Prepare the
operating activities
section of a
statement of cash
flows under the
direct method.
12-45
Operating Activities: Direct
Method (Appendix)
The operating activities section of the
statement of cash flows can also be
shown under the direct approach.
Shows specific
sources and
uses of cash
associated
with operating
activities.
Only the
operating
activities
section is
affected by the
difference.
12-46
Operating Activities: Direct
Method (Appendix)
12-47
Operating Activities: Direct
Method (Appendix)
12-48
Operating Activities: Direct
Method (Appendix)
12-49
End of Chapter Twelve
12-50