2. Chapter 12: Key Concepts
 Identify and explain the purposes and content in the
Statement of Cash Flows.
 Discuss the usefulness of the Statement of Cash Flows.
 Prepare a Statement of Cash Flows.
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3. Information in Statement of
Cash Flows
 Three-fold:
1. Where does the cash come from?
2. What does the cash get spent on?
3. What explains the change in cash between periods?
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4. Usefulness of Statement of
Cash Flows
 Helps predict future cash flows.
 Investments today should generate operating cash flows
tomorrow.
 Financing should help spur investment.
 Useful tool for evaluating managers’ decisions.
 Are those investments from the past few years paying off?
 Helps to determine whether interest and dividends
payments can be made.
 Provides insight about profitability and cash generation.
 Are the sales turning into cash?
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5. Summary of Statement of Cash
Flows
 Classifies cash inflows and outflows as follows:
 Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities
 Reported for a period of time
 What other financial statements are reported over a period of
time?
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6. Statement of Cash Flows
Categories
 Operating
 Transactions resulting from day-to-day activities.
 Production & Selling
 Examples:
 Investing
 Transactions for purchases or sales of long-term assets.
 Also includes investments in securities & non-trade receivables
 Examples:
 Financing
 Debt & equity transactions that affect “cash”.
 Includes non-trade short-term debt, all long-term debt, and
stockholders’ equity.
 Examples:
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7. Statement of Cash Flows:
Other Disclosures
 Disclosures Relating to Noncash Investing &
Financing
 If transactions that relate to investing or financing
are material, have to disclose even if no cash is
involved!
 Buying long-term assets with a long-term note
 Retiring debt by issuing equity securities
 Converting preferred stock to common stock
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8. Cash Flows: Relationship to
the Balance Sheet
Operating Operating
cash flows Current assets Current liabilities cash flows
Long-term liabilities
Financing
Investing Long-term assets cash flows
cash flows
Owners’ equity
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9. Statement of Cash Flows:
 Interest payments
FAQs
 Included as an __________ activity, even though the proceeds
from selling the related instruments are included as a
____________ activity.
 Dividend payments
 Included in ______________ activity, consistent with the
placement of proceeds from selling stock.
 Interest and dividends received
 Both included as an ____________ activity, even though the
related outflows may have been included as an __________
activity.
 Tax payments/refunds
 Included as an __________ activity, regardless of whether
underlying taxable income relates to operations or not (e.g. if a
firm has a taxable capital gain on the sale of equipment).
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10. Statement of Cash Flows:
Preparation
 What information do you need to prepare the SoCF?
 Comparative (BOY & EOY) Balance Sheet
 Current Year Income Statement
 Other Information (Transaction Details)
 Preparing the SoCF involves 4 general steps
1. Calculate the cash flows from operating activities
 Direct or Indirect Method
2. Calculate the cash flows from investing activities
3. Calculate the cash flows from financing activities
4. Calculate net cash flows (use items 1-3 above).
 This should tie to the change in cash on the Balance Sheet.
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11. Statement of Cash Flows:
Preparation
 Two Ways to approach preparation of the SoCF
 By Analyzing the Cash Account
 By Analyzing Noncash Accounts
 Analyzing the Cash Accounts:
 Look at cash account & categorize each transaction as
operating, investing, or financing.
 Then classify into sub-categories like “cash receipts from
customers”, “cash from issuing stock”, etc.
 Big drawback of this approach is how time consuming it is
and small errors could add up.
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12. Statement of Cash Flows:
Preparation
 Two Ways to approach preparation of the SoCF
 By Analyzing the Cash Account
 By Analyzing Noncash Accounts
 Analyzing the Non-Cash Accounts:
 Based on how double-entry accounting works
 Debits = Credits
 Any transaction that affects the cash account ALSO affects a non-
cash account.
Noncash
Cash + = Liabilities + Equity
Assets
Cash = Noncash Accounts
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13. Cash Flows from Operating
Activities
 Cash Flows from Operating Activities can be calculated using
either the Direct Method or the Indirect Method.
 Direct Method
 Reconcile based on major income statement categories.
 “Cash Received From…” / “Cash Paid To…”.
 Recommended by FASB / Required by IASB.
 Indirect Method
 Start with Net Income and reconcile based on the type of account
affected.
 Used more often due to simplicity.
 Either way, net cash flows from operating activities will be the
same.
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14. Cash Flows from Operating
Activities: Indirect Method
 What you need from the Income Statement:
 What you need from the comparative Balance Sheets:
 And “other” information, such as:
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15. Indirect Method: Types of
Adjustments
 Income Statement Adjustments
 __________ Gains on sales of PP&E.
 __________ Losses on sales of PP&E
 Why make these adjustments?
 Expenses without cash outflows are added to
Net Income
 Examples?
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16. Indirect Method: Types of
Adjustments
 Changes in current assets (NOT CASH!!)
 Accounts Receivable, Prepaid Accounts
 Decreases are added to Net Income
 If A/R decreases, you’ve collected more cash than
the amount reflected in sales.
 Changes in current liabilities (for operations)
 Accounts Payable, Interest Payable
 Decreases are subtracted from Net Income
 If A/P decreases, you’ve paid more cash out to
suppliers than you actually purchased.
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17. Operating Activities
 It can be challenging to keep straight whether a
balance should be added or subtracted from
Net Income.
Change in Account Balance During the Year
Increase Decrease
Current Assets
Current Liabilities
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18. Indirect Method Format
Net Income
+
-
+
+
-
+
-
=
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19. Step 2: Cash Flows From
Investing Activities
 Transactions you will encounter most often:
Balance Sheet Investing Activity Cash Flow
Account(s) Effect
Plant Assets, Purchase of Plant Assets or
Intangibles Intangibles for cash
Sale of Plant Assets or
Intangibles for cash
Short- or Long-term Purchase of Investment
Investments Securities for cash
(stocks & bonds from Sale (maturity) or investment
other companies) securities for cash
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20. Sales of Assets: Calculating
Cash Received
 Based on: Cash - (Cos - A/D) = Gain/<Loss>
t
 Use t-account to determine Cost and/or
Accumulated Depreciation at the time of the
sale.
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21. Step 3: Cash Flows From Financing
Activities
 Transactions you will encounter most often:
Balance Sheet Financing Activity Cash Flow
Account(s) Effect
Short-Term Debt Borrowing Cash from bank
(Notes Payable) Repayment of Loan Principal
Long-Term Debt Issuance of Bonds for Cash
Repayment of Bond Principal
Common Stock & Issuance of Stock for Cash
Contributed Capital Repurchase (Retirement) of
Stock with Cash
Retained Earnings Payment of Cash Dividends
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22. Calculating Cash Flows from
Financing Activities: Examples
Long-Term Debt
Beginning balance
Payments of debt
Issuance of new debt
Ending balance
Retained Earnings
Beginning balance
Dividends declared
Net income
Ending balance
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23. Step 4: Proving the Cash
Balance
 Finally!
Cash flows from Operating Activities
+ Cash flows from Investing Activities
+ Cash flows from Financing Activities
Net Increase in Cash
+ Cash Balance, Beginning of Year This amount must tie
Cash Balance, End of Year to the amount on the
Balance Sheet
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24. Other Disclosures
 Remember, still need to disclose non-cash investing and
financing transactions. Example:
 Acquisition of building by issuing common stock
 Acquisition of land by issuing note payable
 Payment of long-term debt by issuing stock
 Bonds converted into common stock
 Stock dividends distributed
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25. Chapter 12: Key Concepts
 Identify and explain the usefulness and content in the
Statement of Cash Flows.
 Know how to classify items as Operating, Investing,
Financing, or Non-cash investing and financing.
 Be able to prepare a Statement of Cash Flows.
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26. Financial Accounting-Eiler 25

27. Statement of Cash Flows:
Noncash Accounts (cont.)
Assets = Liabilities + Equity
Noncash
Cash +
Assets = Liabilities + Equity
Noncash
Cash +
Assets = Liabilities + Equity
Cash = Liabilities + Noncash
Equity -
Assets
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28. Statement of Cash Flows:
Noncash Accounts (cont.)
Assets = Liabilities + Equity
Noncash
Cash +
Assets = Liabilities + Equity
Noncash
Cash +
Assets = Liabilities + Equity
Cash = Noncash Accounts
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