Download Statement of Cash Flows

Fundamental Cornerstones of
Managerial Accounting
Chapter Thirteen
Statement of Cash Flows
Heitger/Mowen/Hansen
Copyright © 2008 Cengage Learning South-Western.
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Statement of Cash Flows
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Details the sources and uses of cash
Provides information not shown on the other
three financial statements
Required for all firms registered with the U.S.
Securities and Exchange Commission (SEC)
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Definition of Cash
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Currency
Cash equivalents
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Highly liquid investments
Examples:
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Treasury bills
Money market funds
Commercial paper
Treated as cash for the statement of cash
flows
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Sources and Uses of Cash
Sources of
Cash
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Activities which increase cash
Referred to as “Cash Inflows”
Uses of
Cash
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Activities which decrease cash
Referred to as “Cash Outflows”
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Classification of Cash Flows
Sources of Cash
Collection of
sales revenue
Sale of long-term
assets
Uses of Cash
Operating Activities
Payment of
operating expenses
Investing Activities
Purchase long-term
assets
Retirement of longterm debt
Issuance of longterm debt or stock
Financing Activities
Treasury stock
purchases
Payment of dividends
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Noncash Exchanges
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Investing and financing activities that do not
involve cash
Called “Noncash investing and financing
activities”
Must be disclosed as a supplementary
schedule attached to the statement of cash
flows
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Methods for Calculating Operating
Cash Flows
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Only difference in methods is in how they
compute operating cash flows:
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Direct Method
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Computes operating cash flows by adjusting each line
on the income statement to reflect cash flows
Must attach a supplemental schedule showing the
reconciliation of net income to operating cash flows
Indirect Method
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Computes operating cash flows by adjusting net income
for items that do not affect cash flows
No supplemental schedules needed
Most widely used method
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Statement of Cash Flows Preparation
5 Basic Steps
1. Compute the change in cash for the period.
2. Compute the cash flows from operating
activities.
3. Identify the cash flows from investing activities.
4. Identify the cash flows from financing activities.
5. Prepare the statement of cash flows.
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Computing Change in Cash Flow
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Difference between ending and beginning
cash balance
Used as a control figure in the statement of
cash flows
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Must equal the sum of the operating, investing,
and financing cash flows
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Definition
Change in Cash Flow
= Ending Cash balance – Beginning Cash Balance
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Definition
Four types of adjustments:
a. Add to net income any increases in current
liabilities and decreases in noncash current
assets.
b. Deduct from net income any decreases in
current liabilities and increases in noncash
current assets.
c. Add to or deduct from net income the
remaining net income items that do not affect
cash flows.
d. Eliminate any income items that belong in
either the investing or financing section.
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Direct Method
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Computes operating cash flows as the
difference between:
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Operating cash inflows
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Operating cash outflows
Operating cash inflows and outflows are
computed by adjusting each item on the
income statement
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Worksheet Approach
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Minimizes confusion
Allows careful consideration of all details
underlying an analysis of cash flows
Created using spreadsheet software
Does not replace statement of cash flows
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Statement can easily be prepared from worksheet
data
Two major sections:
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Balance sheet classifications
Statement of cash flows classifications
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