Accounting : Statement Of Cash Flow

 Classification Of Cash Flow

Operating Activities

(income staement items)

Investing Activities

( Changes in investments and long term assets items)

Financing Activities

(Changes in long term liabilities and stockholders equity items)

Operating activities—Income statement items

Cash inflows:

From sale of goods or services

From interest received and dividends received

Cash outflows:

• To suppliers for inventory
• To employees for wages
• To government for taxes
• To lenders for interest
• To others for expenses

Investing activities—Changes in investments and long-term assets

Cash inflows:

• From sale of property, plant, and equipment
• From sale of investments in debt or equity securities
• From collection of principal on loans to other entities

Cash outflows:

• To purchase property, plant, and equipment
• To purchase investments in debt or equity securities
• To make loans to other entities

Financing activities—Changes in long-term liabilities and stockholders’ equity

Cash inflows:

• From sale of common stock
• From issuance of debt (bonds and notes)

Cash outflows:

• To stockholders as dividends
• To redeem long-term debt or reacquire capital stock (treasury stock)

Significant Noncash Activities 

• Direct issuance of common stock to purchase assets.
• Conversion of bonds into common stock.
• Issuance of debt to purchase assets.
• Exchanges of plant assets.

Companies report noncash activities in either a

• separate schedule (bottom of the statement) or
• separate note to the financial statements.

Format of Statement Of Cash flows

Order of Presentation:

1. Operating activities

1. Direct Method
2. Indirect Method

2. Investing activities

3. Financing activities

 Format Statement of Cash Flows

Indirect Method

Step 1: Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis.

Step involves analyzing the current year's income statement, comparative balance sheets, and selected additional data.

Step 2: Analyze changes in noncurrent asset and liability accounts and stockholders’ equity accounts and record as investing and financing activities, or disclose as noncash transactions.

Step involves analyzing comparative balance sheet data and selected additional information for their effects on cash.

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 a


gree.

Difference between beginning and ending cash balances can be easily computed from comparative balance sheets.

Companies favor the indirect method for two reasons:

1. Easier and less costly to prepare.
2. Focuses on differences between net income and net cash flow from operating activities.

Operating Activities 

Determine Net Cash Provided/Used by Operating Activities by Converting Net Income from an Accrual Basis to a Cash Basis

Common adjustments to Net Income (Loss):

• Add back non-cash expenses (depreciation, amortization, or depletion expense)
• Deduct gains and add losses
• Analyze changes in noncash current asset and current liability accounts

Depreciation Expense

Although depreciation expense reduces net income, it does not reduce cash. The company must add it back to net income.

Cash flows from operating activities
Net income		$145,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense	9,000	9,000
Net cash provided by operating activities		$154,000

Loss on Disposal of Plant Assets

Companies report as a source of cash in the investing activities section the actual amount of cash received from the sale.

• Any loss on disposal is added to net income in operating section.
• Any gain on disposal is deducted from net income in operating section.

Loss On Disposal Of plant Assets

Cash flows from operating activities
Net income		$145,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense	9,000
Loss on disposal of plant assets	3,000	12,000
Net cash provided by operating activities		$157,000

Changes to Noncash Current Asset

When Accounts Receivable balance decreases, cash receipts are higher than revenue earned under accrual basis.

1/1/20	Balance	30,000	Receipts from customers	517,000
	Sales revenue	507,000
12/31/20	Balance	20,000

Changes to Noncash Current Asset 

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

Investing and Financing Activities 

Increase in Land

Company purchased land of $110,000 by issuing long-term bonds.

land

1/1/20	Balance	20,000	Blank	Blank	Blank
	Issued bonds	110,000
12/31/20	Balance	130,000

Blank	Blank	Blank	1/1/20	Balance	20,000
				For land	110,000
			12/31/20	Balance	130,000