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The Statementof Cash Flows

Section 2: Cash Flows

from Operating Activities

Chapter

25

Section Objectives2. Compute cash flows from

operating activities.

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To prepare the statement of cash flows, you need

four items.

Income statement Schedule of operating expenses

Statement of retained earnings

Comparative balance sheet

Statement of Cash Flows

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The schedule of operating expenses

is a schedule that supplements the

income statement.

ANSWER:

It shows the selling and general and administrative

expenses in greater detail.

QUESTION:

What is the schedule of operating

expenses?

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Objective 2.

Compute Cash Flows From Operating

Activities.

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Reconciles the beginning and ending cash balances.

Ties together:

income statement,

changes in the noncash items on the balance sheet,

changes in the noncash items on the statement of

retained earnings.

Can be prepared in two different ways:directmethod

indirectmethod

Statement of Cash Flows

This chapter illustrates the indirectmethod.

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The ind i rect methodof preparing the

statement of cash flows treats net

income as the primary source of cashfrom operating activities and adjusts net

income for changes in noncash items.

ANSWER:

QUESTION:

What is the ind i rect methodof preparing

the statement of cash flows?

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Cash Flows from Operating Activities

Net income

+ or Adjustments for noncash items onincome statement

+ Decreases in current assets

Increases in current assets

+ Increases in current liabilities Decreases in current liabilities

Indirect Method

= Net cash provided by operating

activities

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Depreciation expense.

Amortization of premium on bonds payable. Gain or loss on sale of equipment.

Adjustments forNoncashItems

on the Income Statement

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On the income statement.

Not a cash outflow.Added back to net income on the statement

of cash flows.

Depreciation Expense

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Amortization of Premium

on Bonds Payable

The amount of interest expense on the

income statement is less than the actual

cash outflow.

On the statement of cash flows, the

difference is subtracted from net income.

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Gain on Sale of Equipment

Equipment was sold for a greater amount

than its book value so the company

recorded a gain on the disposal.

On the statement of cash flows, the gain

must be subtracted from net income

because it did not provide cash.

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Operating assets and liabilities are

current assets and current liabilities.

ANSWER:

QUESTION:

What are operating assets and liabilities?

Changes are usually related to routine business

operations and are reflected in net income.

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Increase in Accounts Receivable

More sales on account were recorded than

were collected.

Sales were included in net income but cashhas not been received.

To obtain cash flows from operating

activities, the increase in accounts receivable

is subtracted from net income.

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Decreases in Prepaid Expenses

Less was paid for prepaid expenses than was

charged to expense in arriving at net income.

Net income does not reflect cash paid forprepaid expenses.

To obtain cash flows from operating

activities, the decrease in prepaid expenses

is added to net income.

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More supplies were paid for than were used.

Net income does not reflect all cash paid for supplies.

To obtain cash flows from operating activities, theincrease in supplies is deducted from net income.

Increase in Supplies

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Decreases in noncash current assets are added tonet income to arrive at cash flows from operating

activities.

Inventory is an example of a noncash currentasset.

Decrease in Noncash Current

Assets

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More inventory was sold than was purchased.

Sale of inventory was reflected in net income as cost of

goods sold, but cash was not paid to replace the

inventory.

Net income reflects higher costs than actual cash

outflows.

To obtain cash flows from operating activities, a decreasein inventory is added to net income.

Decrease in Merchandise Inventory

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Increases in Current Liabilities

Increases in current liabilities are added to net

income to obtain the cash flows from operating

activities.

Increase in sales tax payable

Increase in payroll taxes payable

Increase in interest payable

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More sales tax was owed than was paid to the state

taxing authority.

To obtain cash flows from operating activities, the

increase in sales tax payable is added to net income.

Increase in Sales Tax Payable

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More payroll taxes were owed than were paid to the

government.

To obtain cash flows from operating activities, the

increase in payroll taxes payable is added to net income.

Increase in Payroll Taxes Payable

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More interest was recorded as expense than was paid in

cash.

To obtain cash flows from operating activities, the

increase in interest payable is added to net income.

Increase in Interest Payable

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Decreases in current liabilities are subtracted from net

income.

If current liabilities decrease as a result of operations,

some of the net income reported was not a cash flow.

Decrease in Current Liabilities

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More cash was paid on account than purchases were

recorded on account.

To obtain cash flows from operating activities, the

decrease in accounts payable is subtracted from net

income.

Decrease in Accounts Payable

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Summary of Effects of Changes in

Current Assets and Current Liabilities.

Add to Deduct from

Net Income Net Income

Increase in current asset x

Decrease in current asset x

Increase in current liability x

Decrease in current liability x

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California Products, Inc.

Statement of Cash Flows (Partial)

Year Ended December 31, 2008

Cash Flows from Operating ActivitiesNet income after taxes (per income statement) 56,578.00

Adjustments to reconcile net income to net cash

provided by operating activities

Depreciation expense 7,680.00

Amortization of premium on bonds payable ( 500.00)

Gain on sale of equipment (4,000.00)

Changes in noncash current assets and currentliabilities:

Increase in accounts receivable (32,150.00)

Decrease in merchandise inventory 20,000.00

Decrease in prepaid expenses 300.00

Increase in supplies (250.00)

Decrease in accounts payable (21,769.00)

Increase in sales tax payable 1,000.00

Increase in payroll taxes payable 120.00

Increase in interest payable 645.00

Total adjustments (28,924.00)

Net cash provided by operating activities 27,654.00

C l t th f ll i tSECTION

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R

E

V

I

E

W

The two ways to prepare the statement of

cash flows are the ____________ and the______________.

The indirect method treats __________ asthe primary source of cash from operating

activities.

___________ expense does not reflect a

cash outlay so it must be __________ to

net income.Depreciation

net income

direct method

Complete the following sentences:

indirect method

added back

SECTION

Complete the follo ing sentencesSECTION

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R

E

V

I

E

W

Changes in _______ assets and liabilities

are shown in the _________________

section of the statement of cash flows.

Increases in current assets are______________ net income to calculate

net cash from operating activities.

Increases in current liabilities are ________

__________ to calculate net cash from

operating activities.net income

subtracted from

current

Complete the following sentences:

Operating Activities

added to

SECTION

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Thank Youfor using

College Accounting, 11th Edition

Price Haddock Brock