Cash Flow STMT

CHAPTER
CHAPTER 14
14
STATEMENT OF CASH FLOWS
Managerial Accounting, Fourth Edition

Chapter
13-1
Wiley & Richard McDermott
Study
Study Objectives
Objectives
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.
Chapter
13-2
Statement
Statement of
of Cash
Cash Flows
Flows
The Statement of
Cash Flows:
Usefulness and
Format
Usefulness
Classifications
Significant
noncash activities
Format
Preparation
Indirect and direct
methods
Chapter
13-3
Preparing the
Statement of
Cash Flows
Indirect Method
Step 1: Operating
activities
Step 2: Investing
and financing
activities
Step 3: Net
change in cash
Using Cash
Flows to Evaluate
a Company
Free cash flow
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
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.
Chapter
13-4
LO 1 Indicate the usefulness of the statement of cash flows.
Classification
Classification of
of Cash
Cash Flows
Flows
Operating
Activities
Income
Statement
Items
Chapter
13-5
Investing
Activities
Generally
Investments
and Long-Term
Assets
Financing
Activities
Generally
Long-Term
Liability
and
Stockholders
Equity
LO 2 Distinguish among operating, investing, and financing activities.
Classification
Classification of
of Cash
Cash Flows
Flows
Classification of Typical Inflows and Outflows
Illustration 13-1
Operating activities - Income statement items
Cash inflows:
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
Note: Current asset
To employees for services.
To government for taxes.
To lenders for interest.
Note: Not financing
To others for expenses.
Chapter
13-6
Classification
Classification of
of Cash
Cash Flows
Flows
Illustration 13-1
Investing activities - Changes in investments and longterm assets

Cash inflows:
From sale of property, plant, and equipment.
From sale of
in debt or equity securities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities.
Chapter
13-7
LO loans
2 Distinguish
among
operating,
To make
to other
entities.
investing, and financing activities.
Classification
Classification of
of Cash
Cash Flows
Flows
Illustration 13-1
Financing activities - Changes in long-term liabilities
and stockholders equity

Cash inflows:
From sale of common stock.
From issuance of long-term debt (bonds and notes).
Cash outflows:
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock
(treasury stock).
Chapter
13-8
Classification
Classification of
of Cash
Cash Flows
Flows
Significant Noncash Activities
1. Issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report these activities in either a separate
schedule at the bottom of the statement of cash flows
or in a separate note or supplementary schedule to the
financial statements.
Chapter
13-9
Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Order of Presentation:
1.
Operating activities.
2.
Investing activities.
3.
Financing activities.
Direct Method
Indirect Method
We wont learn direct method
in this class
The cash flows from operating activities section

always appears first, followed by the investing
and financing sections.
Chapter
13-10
Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 13-2
Chapter
13-11
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Three Sources of Information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
Chapter
13-12
Preparing
Preparing the
the Statement
Statement of
of Cash
Cash Flows
Flows
Indirect and Direct Methods
Companies favor the indirect
method for two reasons:
1. It is easier and less costly
to prepare, and
2. It focuses on the
differences between net
income and net cash flow
from operating activities.
Chapter
13-13
LO 3 Prepare a statement of cash flows using the indirect method.
Note from Dr. McDermott

I
have never seen the method for preparing cash

flow statements used by the author.
I have looked at probably a dozen textbooks.
It is hard enough to teach cash flow statements
with traditional methods.
For a beginner, the authors method is more
difficult.
I will teach the traditional method.
Chapter
13-14
Step 1: Set up a
memorize the
worksheet like this,

column headings!
Statement of Cash Flow Worksheet
(3+4)
(1)
(2)
Source
2007
2008
Assets Except Cash &

Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
Accumulated depreciation
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
Contra Assets, Liabilities

and Stockholder Equity
Change
or Use
(3)
(4)
Cash Flow
Effect
Adjusted
Adjustmts
Net Income
Dividends
Chapter
13-15
Effect
(6)
Classification
There are several important things to notice:

1.We did not list a row for cash or cash equivalents.
2.We listed accounts that are increased with a debit
balance in the top section (Assets Except Cash and
Cash Equivalents) and accounts that are increased
with credits on the bottom (Contra Assets,
Liabilities and Stockholder Equity.
3.Since Accumulated Depreciation is increased
with a credit, it goes in the second section.
Retained earnings
Additional Entries
(5)
We will get to this section later.
Step 1: Set up a
memorize the
worksheet like this,

column headings!
(3+4)
(1)
(2)
Source
2007
2008

Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
Change
or Use
(3)
(4)
Cash Flow
Effect
(5)
Adjusted
Adjustmts
Effect

Retained earnings
Net Income
Dividends
Additional Entries
Chapter
13-16
One more important thing to mention, we will

break retained earnings into net income and
dividends on this worksheet.
(6)
Classification
Step 2: Subtract the figures in the 2007 row from

the figures in the 2008 row to get the change
(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
Change
or Use
(3)
(4)
Cash Flow
Effect
(5)
Adjusted
Adjustmts
Effect
9,000.00
$ (19,000.00)
$ (25,000.00)
$ 60,000.00

$ 34,000.00
$
(8,000.00)
$ (50,000.00)
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Dividends
$ (45,000.00)
Additional Entries
Chapter
13-17
This a good time to put in the net

income and dividends paid during
the year in lieu of retained
earnings.
(6)
Classification
Step 3: Now determine if each transaction

is a source or use of cash
(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
Change
or Use
9,000.00
Use
$ (19,000.00)
Source
$ (25,000.00)
Source
$ 60,000.00
Use
(3)
(4)
Cash Flow
Effect
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
(8,000.00)
Use
$ (50,000.00)
Use
$ 42,000.00
Source
Retained earnings
Net Income
$ 103,000.00
Source
Dividends
$ (45,000.00)
Use
Additional Entries
Chapter
13-18
Rule: positive numbers

using this format are
uses of cash in the Cash
Equivalents Section,
negative numbers are
sources of cash.
The opposite is true in

the Contra Asset
section.
(6)
Classification
Step 4: In column 3, make all sources of

cash positive and all uses negative
(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect
(6)
Classification

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-19
Shortcut, change the sign

of the numbers in column
1 in the Assets . . . section
and leave them as is in the
Contra Assets . . . section
Step 5: Make Adjustments

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-20
Now we are going to

focus on the adjustments
column. The easiest was
to make these and get
the sign (positive or
negative) straight is to
create an Additional
Entries section at the
bottom of the form.
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-21
In the adjustments
column, debits to the
accounts being adjusted
from 2007 to 2008 will
be shown as positive
numbers and credits will
be shown as negative
numbers.
What does this mean?
Lets wait until the next
slide to find out!
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-22
Where do we get the

information for the
adjustments? From the
Additional Information
given in the problem.
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect
(6)
Classification

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-23
The easiest way to enter

this data is to pretend you
are making a journal entry.

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-24
If the account is shown

above, debit or credit that
account the same as you
would in a journal entry
for that transaction.
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-25
If it is not shown, it
probably relates to cash
and is listed here.
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Change
or Use
(3)
Cash Flow
Effect

Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-26
(4)
(5)
(6)
Adjusted
Adjustmts
Effect
Classification
Remember, we did not list

a row for cash using this
methodology.

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect
(6)
Classification

$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$ 42,000.00
The first adjustment given

is that bonds amounting to
$50,000 were redeemed
for cash of $50,000.
The journal entry would be
to credit cash (that is the
first entry under the
Additional Entries
section).
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Cash used to redeem bonds
Chapter
13-27
($50,000)

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(4)
Remember
when we
redeem a
bond we debit
the account.

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$50,000
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
$ 103,000.00
Dividends
$ (45,000.00)
Use
$ (45,000.00)
Additional Entries
Chapter
13-28
(5)
Where does
Adjusted
Classithe
debit
go?
Adjustmts Effect
fication
To bonds
payable.
($50,000)
(6)

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$ 42,000.00
Source
$50,000
$ 42,000.00
Retained earnings
Net Income
$ 103,000.00
Source
Dividends
$ (45,000.00)
Use
Debit &
Credit
Additional Entries
Chapter
13-29
($50,000)
(6)
Classification

(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
Cash Flow
Change
or Use
Effect
9,000.00
Use
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
(5)
Adjusted
Adjustmts
Effect

$ 34,000.00
$
Source
$ 34,000.00
(8,000.00)
Use
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00)
$50,000
$ 42,000.00
($42,000)
$ 42,000.00
Source
Retained earnings
Net Income
$ 103,000.00
Source
Dividends
$ (45,000.00)
Use
The next adjustment is

common stock being sold
for $42,000 in cash.
Additional Entries
Common stock issued
Chapter
13-30
($50,000)
$42,000
(6)
Classification
Step 6: Add columns 3 and 4 to get the

total adjusted affect
(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
(5)
Cash Flow
Adjusted
Change
or Use
Effect
Adjustmts
Effect
9,000.00
Use
$ (9,000.00)
$ (9,000.00)
$ (19,000.00)
Source
$ 19,000.00
$ 19,000.00
$ (25,000.00)
Source
$ 25,000.00
$ 25,000.00
$ 60,000.00
Use
$ (60,000.00)
$ (60,000.00)
$ 34,000.00
$ 34,000.00

$ 34,000.00
$
Source
(8,000.00)
Use
$ (8,000.00)
$ (8,000.00)
$ (50,000.00)
Use
$ (50,000.00) $ 50,000.00
$ 42,000.00 $ (42,000.00)
$ 42,000.00
Source
Retained earnings
Net Income
$ 103,000.00
Source
Dividends
$ (45,000.00)
Use
Additional Entries
$ (50,000.00)
$ (50,000.00)
Common stock issued
$ 42,000.00
$ 42,000.00
Chapter
13-31
(6)
Classification
Step 7: Classify each

where it will appear on
transaction on
the statement
(3+4)
(1)
(2)
Source
2007
2008
Cash Equivalents
Accounts Receivable
$ 76,000.00
$ 85,000.00
Inventories
$ 189,000.00
$ 170,000.00
Land
$ 100,000.00
$ 75,000.00
Equipment
$ 200,000.00
$ 260,000.00
$ 32,000.00
$ 66,000.00
Accounts payable
$ 47,000.00
$ 39,000.00
Bonds payable
$ 200,000.00
$ 150,000.00
Common stock
$ 174,000.00
$ 216,000.00
(3)
(4)
(5)
Cash Flow
Adjusted
Adjustmts
Effect
(6)
Classi-
Change
or Use
Effect
fication
9,000.00
Use
$ (9,000.00)
$ (9,000.00)
Operating
$ (19,000.00)
Source
$ 19,000.00
$ 19,000.00
Operating
$ (25,000.00)
Source
$ 25,000.00
$ 25,000.00
Investing
$ 60,000.00
Use
$ (60,000.00)
$ (60,000.00)
Investing
$ 34,000.00
$ 34,000.00
Operating

$ 34,000.00
$
Source
(8,000.00)
Use
$ (8,000.00)
$ (8,000.00)
Operating
$ (50,000.00)
Use
$ (50,000.00) $ 50,000.00
Financing
$ 42,000.00 $ (42,000.00)
Financing
$ 42,000.00
Source
Retained earnings
Net Income
$ 103,000.00
Source
Operating
Dividends
$ (45,000.00)
Use
Financing
Additional Entries
$ (50,000.00)
$ (50,000.00)
Financing
Common stock issued
$ 42,000.00
$ 42,000.00
Financing
Chapter
13-32
Step 8: Take the information from the

worksheet and begin the Cash Flow
Statement
Chapter
13-33
Statement of Cash Flows

Cash flow from Operating Activities
Net Income
$ 103,000.00
Remember there are three sections to the Statement of Cash

Flows. We start with Cash flow from Operating Activities.
The first entry should be net income.
Chapter
13-34

Net Income
Adjustments to Net Income
Depreciation
$ 103,000.00
$ 34,000.00
We want to adjust income to cash flow. The first adjustment

most authors like to see is to add back deprecation.
Remember depreciation is a non-cash expense. Add it to income
to get cash flow. Lets follow this format in this class.
Now we go to our worksheet, and start from the top, selecting
each item listed as an Operating item.
Chapter
13-35

Net Income
Depreciation
Increase in AR
$ 103,000.00
$ 34,000.00
$ (9,000.00)
The first item on the worksheet is Accounts Receivables.

We have already:
Classified it as operating
Shown that it was an increase in amount.
Figured out that an increase in this accounts is a use
rather than source of cash.
See! All of our thinking has already been done. We
concentrate on one thing at a time, less chance to make
stupid mistakes on an exam.
Chapter
13-36

Net Income
Depreciation
Increase in AR
Decrease in Inventory
Decrease in AP
Total change
Net Cash Provided Op Activities
$ 103,000.00
$
$
$
$
34,000.00
(9,000.00)
19,000.00
(8,000.00)
$ 36,000.00
$ 139,000.00
We will continue down the worksheet, doing essentially

the same thing. Selecting Operating items and looking
to see if they are uses or sources of cash.
We will then sum all changes ($36,000) and add that to
income to get Net Cash Provided by Operating
Activities.
Chapter
13-37

Net Income
Depreciation
Increase in AR
Decrease in AP
Total change
$ 103,000.00
$
$
$
$
34,000.00
(9,000.00)
19,000.00
(8,000.00)
$ 36,000.00
$ 139,000.00
Cash Flow Investing

Sale of land
Purchase of Equipment
Cash Used Investing
$ 25,000.00
$ (60,000.00)
$ (35,000.00)
Cash Flow Financing

Purchase of Bonds
Issuance of Stock
Payment of Dividends
Cash Used Financing
$
$
$
$
(50,000.00)
42,000.00
(45,000.00)
(53,000.00)
Lets use the worksheet to identify items for Investing and

Financing. Total cash source or use from each section.
Chapter
13-38

Net Income
Depreciation
Increase in AR
Decrease in AP
Total change
Cash Flow Investing
Sale of land
Cash Used Investing
Cash Flow Financing
The
last ofthing
Purchase
Bondswe do
Issuance ofinStock
Increase
Cash
Cash Used Financing
Net Increase in Cash
Chapter
13-39
$ 103,000.00
$
$
$
$
34,000.00
(9,000.00)
19,000.00
(8,000.00)
$ 36,000.00
$ 139,000.00
$ 25,000.00
$ (60,000.00)
$ (35,000.00)
is total the three sections to get Net

$ (50,000.00)
$ 42,000.00
$ (45,000.00)
$ (53,000.00)
$ 51,000.00

Net Income
Depreciation
Increase in AR
Decrease in AP
Total change
Cash Flow Investing
Sale of land
Cash Used Investing
$ 103,000.00
$
$
$
$
34,000.00
(9,000.00)
19,000.00
(8,000.00)
$ 36,000.00
$ 139,000.00
$ 25,000.00
$ (60,000.00)
$ (35,000.00)
To the increase in cash add the beginning cash

$ (50,000.00)
balance taken for the balance sheet (2007). $ 42,000.00
Chapter
13-40
Cash Flow Financing

Purchase of Bonds
Issuance of Stock
Cash Used Financing
$ (45,000.00)
$ (53,000.00)

Cash at beginning of period
$ 51,000.00
$ 22,000.00

Net Income
Depreciation
Increase in AR
Decrease in AP
Total change
Cash Flow Investing
Sale of land
Cash Used Investing
$ 103,000.00
$
$
$
$
34,000.00
(9,000.00)
19,000.00
(8,000.00)
$ 36,000.00
$ 139,000.00
$ 25,000.00
$ (60,000.00)
$ (35,000.00)
Add Increase in Cash to Cash at Beginning of$ (50,000.00)

Period and it should given you Cash at End of$ 42,000.00
$ (45,000.00)
Period taken from the 2008 balance sheet. $ (53,000.00)
Cash Flow Financing

Purchase of Bonds
Issuance of Stock
Cash Used Financing

Cash at beginning of period
Cash at end of period
Chapter
13-41
$ 51,000.00
$ 22,000.00
$ 73,000.00
Simple Right?
So
how do I get an A on the exam?

Memorize the columns in the worksheet.
Enter numbers one column at a time.
Concentrate
Use
on one concept at a time.
the worksheet as the format for the

Statement of Cash Flows which you will also
have memorized.
Recheck your work!
Chapter
13-42
E13-9
We will
work in class on the board.

Download Excel file from hyperlink on Acc
2020 Web Page
(http://faculty.weber.edu/rmcdermott)
Chapter
13-43

Cash Flow STMT

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CHAPTER

Managerial Accounting, Fourth Edition

Wiley & Richard McDermott

Indicate the usefulness of the statement of

Distinguish among operating, investing, and

Prepare a statement of cash flows using the

Analyze the statement of cash flows.

net cash provided (used) by operating activities.

4. Cash investing and financing transactions during

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

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

Operating activities - Income statement items

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

Investing activities - Changes in investments and longterm assets

investing, and financing activities.

Financing activities - Changes in long-term liabilities

and stockholders equity

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

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

The cash flows from operating activities section

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

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

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

Note from Dr. McDermott

have never seen the method for preparing cash

worksheet like this,

Statement of Cash Flow Worksheet

Assets Except Cash &

Contra Assets, Liabilities

There are several important things to notice:

We will get to this section later.

worksheet like this,

Statement of Cash Flow Worksheet

Assets Except Cash &

Contra Assets, Liabilities

One more important thing to mention, we will

Step 2: Subtract the figures in the 2007 row from

Assets Except Cash &

Contra Assets, Liabilities

This a good time to put in the net

Step 3: Now determine if each transaction

Assets Except Cash &

Contra Assets, Liabilities

Rule: positive numbers

The opposite is true in

Step 4: In column 3, make all sources of

Assets Except Cash &

Contra Assets, Liabilities

Shortcut, change the sign

Step 5: Make Adjustments

Assets Except Cash &

Contra Assets, Liabilities

Now we are going to

Step 5: Make Adjustments

Assets Except Cash &

Contra Assets, Liabilities

Step 5: Make Adjustments

Assets Except Cash &

Contra Assets, Liabilities

Where do we get the

Step 5: Make Adjustments

Assets Except Cash &

Contra Assets, Liabilities