1. Cash Flow Statement

2. Basic Concepts
•CFS Reports the entity’s cash
flows (cash receipts and cash
payments) during the period

3. Purposes of the Statement
of Cash Flows
•Predict future cash flows
•Evaluate management decisions
•Determine the ability to pay
dividends to stockholders and
payments to creditors
•Show the relationship of net income
to the business’s cash flows

4. What is Cash?
•Cash on hand
•Cash in the bank
•Cash equivalents - highly liquid,
short-term investments that can be
converted into cash with little delay
• Money-market investments
• Government Treasury bills

5. Statement of Cash Flows
Sections

6. Operating, Investing, and
Financing Activities
•Operating activities create
revenues, expenses, gains, and
losses.
•Investing activities increase and
decrease long-term assets.
•Financing activities obtain cash
from investors and creditors.

7. Two Formats for
Operating Activities
•Indirect method reconciles from net
income to net cash provided by
operating activities
•Direct method reports all cash
receipts and cash payments from
operating activities
•The two methods have no effect on
investing or financing activities.

8. Two Formats for
Operating Activities
Indirect Method
Net income
$XXX
Adjustments:
Depreciation, etc.
$XXX
Net income provided by operating activities
$XXX

9. Direct Method
Collection from customers
$XXX
Deductions:
Payment to suppliers, etc.
$ XXX
Net income provided by operating activities $XXX

10. The Indirect Operating
Section

11. Operating Activities
Indirect Method
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
+ Depreciation/amortization expense
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
Net cash provided by operating activities

12. Gain or Loss from
Long-Term Assets
•Changes to Long-term Assets
• Purchase or Sale
• Effect Cash
•They appear in the Investing Section
•But... When Sold Are Reported on the
Income Statement
• Thus, we need to reverse their effect
• Add back the Loss
• Subtract out the Gain

13. Operating Activities from
Indirect Method
•Changes in current assets and current liability
accounts
• Increase in current asset decreases cash
• E.g. Purchase of Inventory for cash
• Decrease in current asset increases cash
• E.g. Collections of Accounts Receivable
• Decrease in a current liability decreases cash
• E.g. Payment of Accounts Payable
• Increase in a current liability increases cash
• E.g.Non-Cash Expense (Accrued Expense)

14. Decrease in Current Assets
Increases Cash
•If Accounts Receivable decreases that
means we collected Cash
• That cash needs to be added back to
Net Income
•If Inventory, Supplies or other current
assets decrease that means we debited
an expense but did not credit Cash
• So we add back those decreases to Net
Income

15. The Indirect Method:
Operating Activities
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other
than cash
Increases in current liabilities
Net loss Negative Items
Gain on sale of long-term assets
Increases in current assets other
than cash
Decreases in current liabilities

16. The Indirect Method:
Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash
equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assets
Purchase of investments that are not cash
equivalents
Making loans to others

17. The Indirect Method:
Financing Activities
Positive Items
Issuing stock
Selling treasury stock
Borrowing money
Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of
debts

18. Proforma Of CFS
C.F.O.A.
$ XXX
C.F.F.A.
$ XXX
C.F.I.A.
$ XXX
Total $ XXX