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13-1

Chapter

13

Statement of
Cash Flows
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
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13-2

Study
Study Objectives
Objectives

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13-3

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.

Statement
Statement of
of Cash
Cash Flows
Flows

The Statement of
Cash Flows:
Usefulness and
Format

Preparing the
Statement of Cash
FlowsIndirect
Method

Usefulness
Classifications

Step 1: Operating
activities
Step 2: Investing and
financing activities
Step 3: Net change
in cash

Significant non-cash
activities
Format
Preparation
Indirect and direct
methods

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13-4

Using Cash Flows to


Evaluate a Company
Free cash flow

Usefulness
Usefulness and
and Format
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 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.

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

Usefulness
Usefulness and
and Format
Format
Classification of Cash Flows
Operating
Activities
Income
Statement
Items

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13-6

Investing
Activities
Generally
Non-Current
Asset Items

Financing
Activities
Generally NonCurrent
Liability and
Equity Items

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

Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows

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13-7

Illustration 13-1

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

Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows

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13-8

Illustration 13-1

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

Classification
Classification of
of Cash
Cash Flows
Flows
Types of Cash Inflows and Outflows
IFRS requires that the following amounts be disclosed:
Cash paid for taxes.
Cash received and paid from interest and dividends.
Illustration 13-2
Daimlers statement of
cash flows note

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13-9

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

Usefulness
Usefulness and
and Format
Format
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 these activities in either a separate note or
supplementary schedule to the financial statements.

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13-10

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

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13-11

Usefulness
Usefulness and
and Format
Format
Format of the Statement of Cash Flows
Order of Presentation:
1. Operating activities.
2. Investing activities.

Direct Method
Indirect Method

3. Financing activities.
The cash flows from operating activities section always
appears first, followed by the investing and financing sections.

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

Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 13-3

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13-13

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

Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
During its first week, Hu Na Company had these
transactions.
1. Issued 100,000 HK$50 par value ordinary shares
for HK$8,000,000 cash.

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13-14

Classification
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

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

Usefulness
Usefulness and
and Format
Format
Preparing the Statement of Cash Flows
Three Sources of Information:
1. Comparative statement of financial position
2. Current income statement
3. Additional information

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13-15

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

Usefulness
Usefulness and
and Format
Format
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.

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13-16

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

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Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration
Illustration 13-5

Indirect
Method

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13-18

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

Preparing
Preparing
the
the
Statement
Statement
of
of Cash
Cash
Flows
Flows
Indirect
Method
Illustration 13-5

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13-19

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

Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Additional information for 2011:
1. The company declared and paid a $29,000 cash dividend.
2. Issued $110,000 of long-term bonds in direct exchange for land.
3. A building costing $120,000 and equipment costing $25,000 were
purchased for cash.
4. The company sold equipment with a book value of $7,000 (cost
$8,000, less accumulated depreciation $1,000) for $4,000 cash.
5. Issued ordinary shares for $20,000 cash.
6. Depreciation expense was comprised of $6,000 for building and
$3,000 for equipment.

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

Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Step 1: Operating Activities

Indirect
Method

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 and
amortization expense).
Deduct gains and add losses that resulted from investing
and financing activities.

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Analyze changes in non-cash current assets and current


liabilities.

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

Operating
Operating Activities
Activities
Changes to Non-Cash Current Liability Accounts
Illustration 13-11

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

Step
Step 2:
2: Investing
Investing and
and Financing
Financing Activities
Activities
From the additional information, the company purchased land of
$110,000 by issuing long-term bonds. This is a significant
noncash investing and financing activity that merits disclosure in
a separate schedule.
Land
1/1/11

Balance
Issued bonds

12/31/11 Balance

20,000
110,000
130,000
Bonds Payable
1/1/11

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Balance
For land

20,000
110,000

12/31/11 Balance

130,000

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

Investing
Investing and
and Financing
Financing Activities
Activities
Partial statement

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Illustration 13-14

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

Investing
Investing and
and Financing
Financing Activities
Activities
Partial statement

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Illustration 13-14

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

Illustration 13-14

Statement
Statement
of
of Cash
Cash
Flows
Flows
Indirect
Method

Step 3: Net
Change in
Cash
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13-26

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

Using
Using Cash
Cash Flows
Flows to
to Evaluate
Evaluate aa Company
Company
Free Cash Flow

Free cash flow describes the cash remaining from


operations after adjustment for capital expenditures and
dividends.

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SO 4 Analyze the statement of cash flows.

Using
Using Cash
Cash Flows
Flows to
to Evaluate
Evaluate aa Company
Company

Illustration 13-16

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SO 4 Analyze the statement of cash flows.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Statement of Cash Flows

Companies preparing financial statements under both IFRS and


GAAP 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
financingalong with changes in cash and cash equivalents.
Similar to IFRS, the cash flow statement can be prepared using
either the indirect or direct method under GAAP. In both U.S.
and international settings, most companies choose the indirect
method for reporting net cash flows from operating activities.
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Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Statement of Cash Flows

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.

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IFRS requires that non-cash investing and financing activities


be excluded from the statement of cash flows. Non-cash
investing and financing activities should be disclosed in the
notes instead of in the financial statements. Under GAAP,
companies may present this information at the bottom of the
cash flow statement.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future

Statement of Cash Flows

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 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
continued
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Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future

Statement of Cash Flows

liquid, low-risk investments. 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. So, the two Boards will have to resolve their differences
in this area in order to issue a converged standard for the statement
of cash flows.

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Using
Using aa Worksheet
Worksheet to
to Prepare
Prepare the
the Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect Method
Method
Appendix A

Illustration 13A-1
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13-33

SO 5 Explain how to use a worksheet to prepare the statement of cash flows


using the indirect method.

Using
Using aa Worksheet
Worksheet to
to Prepare
Prepare the
the Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect Method
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 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.
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SO 5 Explain how to use a worksheet to prepare the statement of cash flows


using the indirect method.

Using
Using aa Worksheet
Worksheet
to
to Prepare
Prepare the
the
Statement
Statement of
of Cash
Cash
Flows-Indirect
Flows-Indirect
Method
Method

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Illustration 13A-3
Completed worksheet
indirect method

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Appendix B
1. Under the direct method, companies compute net cash
provided by operating activities by adjusting each item in the
income statement from the accrual basis to the cash basis.
2. To simplify and condense the operating activities section,
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.

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 1: Operating Activities
Illustration 13B-2

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Illustration 13B-1

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Illustration 13B-1

Additional information:
1. In 2011, the company declared and paid a $32,000 cash dividend.
2. Bonds were issued at face value for $130,000 in cash.
3. Equipment costing $180,000 was purchased for cash.
4. Equipment costing $20,000 was sold for $17,000 cash when the book value of the
equipment was $18,000.
5. Ordinary shares of $60,000 were issued to acquire land.
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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Receipts from Customers
For Juarez Company, accounts receivable decreased $3,000.
Illustration 13B-3

Illustration 13B-5

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments to Suppliers
In 2011, Juarez Companys inventory increased $10,000
and cash payments to suppliers were $678,000.
Illustration 13B-6

Illustration 13B-7

Illustration 13B-9

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments for Operating Expenses
Cash payments for operating expenses were $179,000,
Illustration 13B-10

Illustration 13B-11

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Cash Payments for Income Taxes
Cash payments for income taxes were $24,000,
Illustration 13B-12

Illustration 13B-13

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2: Investing and Financing Activities
Increase in Equipment. (1) Juarez purchased for cash equipment
costing $180,000. And (2) it sold for $17,000 cash equipment
costing $20,000, whose book value was $18,000.
Illustration 13B-15

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SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2: Investing and Financing Activities

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Increase in Land. Juarezs land


increased $60,000. The additional
information section indicates that the
company issued ordinary shares to
purchase the land.

Significant non-cash
investing and financing
transaction.

Increase in Bonds Payable. Bonds


Payable increased $130,000. The
additional information indicated that
Juarez issued, for $130,000 cash,
bonds with a face value of $130,000.

Financing activity.

SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2: Investing and Financing Activities
Increase in Share Capital - Ordinary.
The Share Capital - Ordinary account
increased $60,000. The additional
information indicated that Juarez
acquired land from the issuance of
ordinary shares.
Increase in Retained Earnings. The
$52,000 net increase in Retained
Earnings resulted from net income of
$84,000 and the declaration and
payment of a cash dividend
of $32,000.
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Significant non-cash
investing and financing
transaction.

Financing activity (cash


dividend).

SO 6 Prepare a statement of cash flows using the direct method.

Statement
Statement of
of Cash
Cash Flows-Direct
Flows-Direct Method
Method
Step 2:
Investing
and
Financing
Activities

Step 3: Net
Change in
Cash
Illustration 13B-16
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SO 6 Prepare a statement of cash flows using the direct method.

Copyright
Copyright
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