Chapter 13 - Statement of Cash Flows

13-1
Chapter 13
Statement of Cash Flows
Learning Objectives
After studying this chapter, you should be able to:
1.
Indicate the usefulness of the statement of cash flows.
2.
Distinguish among operating, investing, and financing activities.
3.
Prepare a statement of cash flows using the indirect method.
4.
Analyze the statement of cash flows.
13-2
Preview of Chapter 13
Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
13-3
Usefulness and Format

Usefulness of the Statement of Cash Flows
Provides information to help assess:
1. Entitys ability to generate future cash flows.
2. Entitys ability to pay dividends and meet obligations.
3. Reasons for difference between net income and net cash
provided (used) by operating activities.
4. Cash investing and financing transactions during the period.
13-4
LO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows
Operating
Activities
Investing
Activities
Financing
Activities
Income
Changes in
Investments and
Non-Current
Asset
Changes in
Non-Current
Liabilities and
Equity
Statement Items
13-5
LO 2 Distinguish among operating, investing, and financing activities.

13-6
Illustration 13-1
Typical receipt and
payment
classifications

13-7
Illustration 13-1
Typical receipt and
payment
classifications

Significant Non-Cash Activities
1. Direct issuance of ordinary shares to purchase assets.
2. Conversion of bonds into ordinary shares.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report non-cash activities in either a
13-8
separate note or
supplementary schedule to the financial statements.
13-9

Format of the Statement of Cash Flows
Order of Presentation:
1. Operating activities.
2. Investing activities.
Direct Method
Indirect Method
3. Financing activities.
13-10
Format of the Statement of Cash Flows

Illustration 13-3
13-11
Illustration: Classify each of these transactions by type of cash

flow activity.
1. Issued 100,000 shares of HK$50 par value ordinary
shares for HK$800,000 cash.
Financing
2. Borrowed HK$2,000,000 from Castle Bank, signing

a 5-year note bearing 8% interest.
Financing
3. Purchased two semi-trailer trucks for HK$1,700,000

cash.
Investing
4. Paid employees HK$120,000 for salaries and

wages.
Operating
5. Collected HK$200,000 cash for services provided.
Operating
13-12

Preparing the Statement of Cash Flows
Three Sources of Information:
1. Comparative statements of financial position
2. Current income statement
3. Additional information
13-13

Three Major Steps:
Illustration 13-4
13-14

Three Major Steps:
13-15
Illustration 13-4

Indirect and Direct Methods
Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare, and
2. Focuses on the differences between net income and net
cash flow from operating activities.
13-16

Illustration Indirect Method
Illustration 13-5
13-17
LO 3 Prepare a statement of cash flows using the indirect method.

Illustration 13-5
13-18

Illustration 13-5
Additional information for 2014:

1. Depreciation expense was comprised of 6,000 for building and 3,000 for equipment.
2. The company sold equipment with a book value of 7,000 (cost 8,000, less
accumulated depreciation 1,000) for 4,000 cash.
3. Issued 110,000 of long-term bonds in direct exchange for land.
4. A building costing 120,000 was purchased for cash. Equipment costing 25,000 was
also purchased for cash.
5. Issued ordinary shares for 20,000 cash.
6. The company declared and paid a 29,000 cash dividend.
13-19
LO 3

Step 1: Operating Activities
Determine net cash provided/used by operating activities by
converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):
13-20
Add back non-cash expenses (depreciation, amortization,

or depletion expense).
Deduct gains and add losses.
Changes in non-cash current asset and current liability

accounts.

Question
Which is an example of a cash flow from an operating
activity?
13-21
a.
Payment of cash to lenders for interest.
b.
Receipt of cash from the sale of ordinary shares.
c.
Payment of cash dividends to the companys

shareholders.
d.
None of the above.

Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 13-7
13-22

Loss on Disposal of Plant Assets
Companies should report cash received from the sale
(disposal) of plant assets in the investing activities section.
Because of this,
13-23
any loss on sale is added to net income in the

operating section.
any gain on sale is deducted from net income in the

operating section.

Loss on Disposal of Plant Assets
Illustration 13-8
13-24

Changes to Non-Cash Current Asset Accounts
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 13-9
Accounts Receivable
1/1/014
Balance
Sales revenue
12/31/14 Balance
30,000
507,000
Receipts from customers 517,000
20,000
Company adds to net income the amount of the decrease in

accounts receivable.
13-25

Illustration 13-10
13-26

When the Inventory balance increases, the cost of
merchandise purchased exceeds the cost of goods sold.
Inventory
1/1/14
Balance
Purchases
12/31/14 Balance
10,000
155,000
Cost of goods sold
150,000
15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
13-27

Illustration 13-10
13-28

When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual
basis. The company deducts the decrease from net income
to arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher
than the expenses paid.
13-29

Illustration 13-10
13-30

Changes to Non-Cash Current Liability Accounts
When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Taxes Payable decreases, the income tax
expense reported on the income statement was less than the
amount of taxes paid during the period. The decrease is
subtracted from net income to determine net cash provided by
operating activities.
13-31

Changes to Non-Cash Current Liability Accounts
Illustration 13-11
13-32
LO 3

Summary of Conversion to Net Cash Provided
by Operating ActivitiesIndirect Method
Illustration 13-12
13-33
LO 3
13-34
Step 2: Investing and Financing Activities

Company purchased land of 110,000 by issuing long-term
bonds. This is a significant non-cash investing and financing
activity that merits disclosure in a separate schedule.
Land
1/1/14
Balance
Issued bonds
12/31/14 Balance
20,000
110,000
130,000
Bonds Payable
1/1/14
13-35
Balance
For land
20,000
110,000
12/31/14 Balance
130,000

Partial statement
13-36
Illustration 13-14
LO 3

From the additional information, the company acquired an
office building for 120,000 cash. This is a cash outflow
reported in the investing section.
Building
1/1/14
Balance
40,000
Office building 120,000
12/31/14 Balance
13-37
160,000

Partial statement
13-38
Illustration 13-14
LO 3

The additional information explains that the equipment increase
resulted from two transactions: (1) a purchase of equipment of
25,000, and (2) the sale for 4,000 of equipment costing 8,000.
Illustration 13-12
Equipment
1/1/14
Balance
Purchase
12/31/14 Balance
Journal
Entry
13-39
10,000
25,000
Cost of equipment sold
8,000
27,000
Cash
Accumulated depreciation
Loss on disposal of plant assets
Equipment
4,000
1,000
3,000
8,000
Statement
of Cash
Flows
Illustration 13-14
Indirect
Method
13-40
LO 3

The increase in ordinary shares resulted from the issuance of
new shares.
Share Capital - Ordinary
1/1/14
Balance
Shares sold
12/31/14 Balance
13-41
50,000
20,000
70,000

Partial statement
13-42
Illustration 13-14
LO 3

Retained earnings increased 116,000 during the year. This
increase can be explained by two factors: (1) Net income of
145,000 increased retained earnings, and (2) Dividends of
29,000 decreased retained earnings.
Retained Earnings
1/1/14
Dividends
29,000
Balance
Net income
12/31/14 Balance
13-43
48,000
145,000
164,000

Question
Which is an example of a cash flow from an investing
activity?
13-44
a.
Receipt of cash from the issuance of bonds payable.
b.
Payment of cash to repurchase ordinary shares.
c.
Receipt of cash from the sale of equipment.
d.
Payment of cash to suppliers for inventory.
Statement
of Cash
Flows
Illustration 13-14
Indirect
Method
13-45
LO 3
Step 3: Net Change in Cash

Illustration 13-5
Compare The Net Change In Cash On The Statement Of Cash Flows With
The Change In The Cash Account Reported On The Statement Of
Financial Positions To Make Sure The Amounts Agree.
13-46
13-47
Using Cash Flows to Evaluate a Company

Free Cash Flow
Illustration 13-15
Free cash flow describes the cash remaining from operations

after adjustment for capital expenditures and dividends.
13-48
LO 4 Analyze the statement of cash flows.
Using Cash Flows to Evaluate a Company

Illustration 13-16
Illustration
Required:
Calculate free
cash flow.
Cash provided by operating activities
4,189
Less: Expenditures on property and equipment
1,794
Dividends paid
2,088
Free cash flow

307
13-49
LO 4 Analyze the statement of cash flows.
APPENDIX 13A
USING A WORKSHEET INDIRECT METHOD
Using a
Worksheet to
Prepare the
Statement of Cash
Flows-Indirect
Method
Illustration 13A-1
13-50
LO 5
APPENDIX 13A
USING A WORKSHEET INDIRECT METHOD
Preparing a Worksheet
1. Enter in the statement of financial position accounts section the
statement of financial position accounts and their beginning and
ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the statement of financial position
accounts other than cash and their effects on the statement of
cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
13-51
LO 5 Explain how to use a worksheet to prepare the

statement of cash flows using the indirect method.
APPENDIX 13A
Using a Worksheet
to Prepare the
Statement of Cash
Flows-Indirect
Method
13-52
Illustration 13A-3
Completed worksheet
indirect method
LO 5
APPENDIX 13B
STATEMENT OF CASH FLOWS DIRECT METHOD
Statement of Cash Flows-Direct Method

1. Compute net cash provided by operating activities by
adjusting each item in the income statement from the
accrual basis to the cash basis.
2. Companies report only major classes of operating cash
receipts and cash payments.
3. For these major classes, the difference between cash
receipts and cash payments is the net cash provided by
operating activities.
13-53
LO 6 Prepare a statement of cash flows using the direct method.
APPENDIX 13B
13-54
Illustration 13B-2
LO 6
APPENDIX 13B
Illustration 13B-1
13-55
LO 6
APPENDIX 13B
Illustration 13B-1
13-56
APPENDIX 13B
Illustration 13B-1
13-57
LO 6
APPENDIX 13B
Cash Receipts from Customers

For Computer Services Company, accounts receivable decreased
10,000.
Illustration 13B-4
Illustration 13B-5
13-58
APPENDIX 13B
Cash Payments to Suppliers

In 2014, Computer Services Companys inventory increased
5,000 and cash payments to suppliers were 139,000.
Illustration 13B-6
Illustration 13B-7
Illustration 13B-9
13-59
APPENDIX 13B
Cash Payments for Operating Expenses

Cash payments for operating expenses were 115,000.
Illustration 13B-10
Illustration 13B-11
13-60
APPENDIX 13B
Cash Payments for Income Taxes

Cash payments for income taxes were 49,000.
Illustration 13B-12
Illustration 13B-13
13-61
APPENDIX 13B
Step 1:
Operating
Activities
Illustration 13B-16
13-62
APPENDIX 13B

Increase in Equipment. (1) Computer Services purchased for
cash equipment costing 25,000. And (2) it sold for 4,000 cash
equipment costing 8,000, whose book value was 7,000.
Illustration 13B-15
13-63
APPENDIX 13B

Increase in Building. From the additional information, the
company acquired an office building for 120,000 cash. This is a
cash outflow reported in the investing section.
Building
1/1/14
Balance
40,000
Office building 120,000
12/31/14 Balance
13-64
160,000
APPENDIX 13B

Increase in Land. Computer Services
purchased land of 110,000 by directly
exchanging bonds for land.
Increase in Bonds Payable. Bonds
Payable increased 110,000. The
additional information indicated that
Computer Services issued 110,000 of
long-term bonds in direct exchange for
land.
13-65
Significant non-cash
investing and financing
transaction.
Significant non-cash
investing and financing
transaction.
APPENDIX 13B

Increase in Share Capital - Ordinary.
The Share Capital - Ordinary account
increased 20,000. The additional
information indicated that Computer
Services issued ordinary shares for cash.
Increase in Retained Earnings. The
116,000 net increase in Retained
Earnings resulted from net income of
145,000 and the declaration and
payment of a cash dividend
of 29,000.
13-66
Financing activity.
Financing activity
(cash dividend).
APPENDIX 13B
Step 2:
Investing
and
Financing
Activities
Illustration 13B-16
13-67
APPENDIX 13B
Step 3: Net Change in Cash

Compare the net change in cash on the Statement of Cash Flows
with the change in the cash account reported on the Statement of
Financial Position to make sure the amounts agree.
13-68
APPENDIX 13C
T-ACCOUNT APPROACH
What this means is that the change in cash is equal to the

change in all of the other statement of financial position
accounts.
Another way to think about this is that if we analyze the
changes in all of the non-cash statement of financial position
accounts, we will explain the change in the cash account.
13-69
Illustration 13C-1
APPENDIX
13C
13-70
Another Perspective
Key Points
13-71
Companies preparing financial statements under both GAAP and

IFRS must prepare a statement of cash flows as an integral part of
the financial statements.
Both IFRS and GAAP require that the statement of cash flows should
have three major sectionsoperating, investing, and financing
along with changes in cash and cash equivalents.
Similar to IFRS, the statement of cash flows can be prepared using

either the indirect or direct method under GAAP. Companies choose
for the most part to use the indirect method for reporting net cash
flows from operating activities.
Another Perspective
Key Points
13-72
The definition of cash equivalents used in GAAP is similar to that

used in IFRS. A major difference is that in certain situations, bank
overdrafts are considered part of cash and cash equivalents under
IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts
are classified as financing activities in the statement of cash flows
and are reported as liabilities on the statement of financial position.
IFRS requires that non-cash investing and financing activities be

excluded from the statement of cash flows. Instead, these non-cash
activities should be reported elsewhere. This requirement is
interpreted to mean that non-cash investing and financing activities
should be disclosed in the notes to the financial statements instead
of in the financial statements. Under GAAP, companies may present
this information on the face of the statement of cash flows.
Another Perspective
Key Points
13-73
One area where there can be substantial differences between IFRS

and GAAP relates to the classification of interest, dividends, and
taxes. The following table indicates the differences between the two
approaches.
Another Perspective
Key Points
13-74
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.
Similar to IFRS, under GAAP companies must disclose the amount

of taxes and interest paid. Under GAAP, companies disclose this in
the notes to the financial statements. Under IFRS, some companies
disclose this information in the notes, but others provide individual
line items on the face of the statement. In order to provide this
information on the face of the statement, companies first add back
the amount of interest expense and tax expense (similar to adding
back depreciation expense) and then further down the statement
they subtract the cash amount paid for interest and taxes.
Another Perspective
Looking to the Future
Presently, the FASB and the IASB are involved in a joint project on the presentation
and organization of information in the financial statements. One interesting approach,
revealed in a published proposal from that project, is that in the future the income
statement and statement of financial position (balance sheet) would adopt headings
similar to those of the statement of cash flows. That is, the income statement and
statement of financial position would be broken into operating, investing, and
financing sections.
With respect to the cash flow statement specifically, the notion of cash equivalents will
probably not be retained. That is, cash equivalents will not be combined with cash but
instead will be reported as a form of highly liquid, low-risk investment. The definition
of cash in the existing literature would be retained, and the statement of cash flows
would present information on changes in cash only. In addition, the FASB favors
presentation of operating cash flows using the direct method only. However, the
majority of IASB members express a preference for not requiring use of the direct
method of reporting operating cash flows.
13-75
Another Perspective
GAAP Self-Test Questions
Under GAAP interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
13-76
Another Perspective
IFRS requires that non-cash items:
a) be reported in the section to which they relate, that is, a noncash investing activity would be reported in the investing
section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
13-77
Another Perspective
In the future, it appears likely that:
a) the income statement and statement of financial position
(balance sheet) will have headings of operating, investing, and
financing, much like the statement of cash flows.
b) cash and cash equivalents will be combined in a single line
item.
c) the IASB will not allow companies to use the direct approach
to the statement of cash flows.
d) None of the above.
13-78
Copyright
Copyright 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for distribution
or resale. The Publisher assumes no responsibility for errors,
omissions, or damages, caused by the use of these programs or from
the use of the information contained herein.
13-79

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13-1

Statement of Cash Flows

Indicate the usefulness of the statement of cash flows.

Distinguish among operating, investing, and financing activities.

Prepare a statement of cash flows using the indirect method.

Analyze the statement of cash flows.

Usefulness and Format

LO 1 Indicate the usefulness of the statement of cash flows.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

supplementary schedule to the financial statements.

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows

LO 2 Distinguish among operating, investing, and financing activities.

Illustration: Classify each of these transactions by type of cash

2. Borrowed HK$2,000,000 from Castle Bank, signing

3. Purchased two semi-trailer trucks for HK$1,700,000

4. Paid employees HK$120,000 for salaries and

5. Collected HK$200,000 cash for services provided.

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format

LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows

LO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash Flows

LO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash Flows

Additional information for 2014:

Preparing the Statement of Cash Flows

Common adjustments to Net Income (Loss):

Add back non-cash expenses (depreciation, amortization,

Deduct gains and add losses.

Changes in non-cash current asset and current liability

Step 1: Operating Activities

Payment of cash to lenders for interest.

Receipt of cash from the sale of ordinary shares.

Payment of cash dividends to the companys

None of the above.

LO 3 Prepare a statement of cash flows using the indirect method.

Step 1: Operating Activities

LO 3 Prepare a statement of cash flows using the indirect method.

Step 1: Operating Activities

any loss on sale is added to net income in the

any gain on sale is deducted from net income in the

LO 3 Prepare a statement of cash flows using the indirect method.

Step 1: Operating Activities

LO 3 Prepare a statement of cash flows using the indirect method.