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Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

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Page 1: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Statement of Cash Flows

Chapter Twelve

McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Reporting Format for the Statement of Cash Flows

Operating Activities

Investing Activities

Financing Activities

The statement of cash flows must include the following three sections:

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Page 3: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Cash Flows from

Operating

Activities

Cash Flows from

Operating

Activities

Cash Flows from Operating Activities

Inflows (Receipts) Receipts from sales Commissions and fees Interest and dividends

received

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

Outflows (Payments) Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes

12-3

Page 4: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Cash Flows from

Investing Activities

Cash Flows from

Investing Activities

Cash Flows from InvestingActivities

Inflows (Receipts) Selling property, plant, and

equipment Selling investment securities Collecting loans

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

Outflows (Payments) Purchasing property, plant, and

equipment Purchasing investment securities Lending to others

12-4

Page 5: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Cash Flows from

Financing Activities

Cash Flows from

Financing Activities

Cash Flows from Financing Activities

Inflows (Receipts) Borrowing Issuing stock

Inflows (Receipts) Borrowing Issuing stock

Outflows (Payments) Repaying debt (excluding

interest) Purchasing treasury stock Paying dividends

Outflows (Payments) Repaying debt (excluding

interest) Purchasing treasury stock Paying dividends

12-5

Page 6: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Cash flows from operating

activities can be prepared using either the direct method or the

indirect method.

Cash flows from operating

activities can be prepared using either the direct method or the

indirect method.

Cash Flow: Operating Activities

12-6

Page 7: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Net Income

Net Income

Cash Flows from

Operating Activities

Cash Flows from

Operating Activities

Operating Activities: Indirect Method

Changes in current assets and current liabilities as shown on the following table.

Changes in current assets and current liabilities as shown on the following table.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.

12-7

Page 8: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Indirect Method – The Reconciliation Approach

This method examines the relationships between items reported on the

income statement and the related assets and

liabilities.

IncomeStatement

BalanceSheet

12-8

Page 9: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Cash Flows from Operating Activities – Indirect Approach

12-9

Page 10: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Indirect Method: Rules Approach

12-10

Page 11: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Indirect Method: Rules Approach

12-11

Page 12: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Operating Activities: Direct Method

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.

12-12

Page 13: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

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.

12-13

Page 14: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Investing Activities

12-14

Page 15: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

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

12-15

Page 16: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

Financing Activities

12-16

Page 17: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

The Completed Statement: Indirect Method

12-17

Page 18: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

The Completed Statement: Direct Method

12-18

Page 19: Statement of Cash Flows Chapter Twelve McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved

End of Chapter Twelve

12-19


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