Statement of Cash Flows
A. The statement of cash flows is
one of the three primary
financial statements that must
be issued by publicly traded
corporations in the USA.
B. The purpose is to provide
detailed cash flow information
not available from other sources.
William F. Bentz
STRUCTURE
C. The statement is divided into
three major sections for
purposes of reporting cash
flows. These are
1. Operating activities
2. Investing activities
3. Financing activities
William F. Bentz
OPERATIONS
D. The cash flow from operating
activities is primarily the cash
received from customers less
the cash paid for the expenses,
including interest and taxes,
associated with those revenues
or the reporting period.
William F. Bentz
INVESTING
E. The cash flows associated with
investing activities include the
purchase and sale of assets
used in the business or held as
investments. Investing
activities are usually reflected in
the noncurrent assets of a
company.
William F. Bentz
FINANCING
F. Financing activities include
borrowing transactions with
lenders and transactions with
stockholders. Borrowing
activities and transactions
involving the company’s own
securities are financing
activities.
William F. Bentz
OTHER FEATURES
G. Other features of the statement
of cash flows include the
reconciliation of the beginning
and ending balances of cash
and cash equivalents as
reported on the beginning and
ending statements of financial
position.
William F. Bentz
OTHER FEATURES
A second such feature is the
reconciliation of net income with the
cash flow from operations. Third, we
report any major transactions that
normally would involve cash
payments, but were structured so
that the reporting company did not
make a cash payment directly.
William F. Bentz
Differing Perspectives
There are two different perspectives of the
purpose of the statement of cash flows.
One perspective is that investors would
benefit from having information about
the major sources and uses of cash.
This includes the major sources and
uses of cash for operations. The so-
called direct method reflects this view.
William F. Bentz
Differing Perspectives
The other view is that the main
purpose of the statement of cash
flows is to reconcile the total cash
flows from operations with net
income, as well as providing cash
flows from investments and
financing, to explain the difference
between cash flows and income.
William F. Bentz
Differing Perspectives
This latter perspective leads to the
reconciliation view. In my opinion,
the reconciliation focuses on
explaining what happened, while
the direct view better supports
forecasts of future cash flows.
Each method has its strengths.
William F. Bentz
EAST - WEST INDUSTRIES
Statement of Cash Flows
For the twelve-month period ended June 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 97,000
Adjustments for noncash accrual items:
Depreciation expense $ 48,000
Amortization of patents 4,000
Depletion of natural resources 6,000
Deferred income taxes 17,000
Noncash interest expense charges 19,000
Gain on sale of land ( 47,000)
Loss on sales of property, plant & equipment 12,000
Gain on retirement of debt ( 40,000) 19,000
Decrease in accounts receivable 9,000
Increase in allowance for bad debts 3,000
Increase in inventory ( 60,000)
Decrease in accounts payable ( 30,000)
Decrease in wages payable ( 12,000)
Increase in utilities payable 4,000
Net cash flow from operations $ 30,000
William F. Bentz
EAST - WEST INDUSTRIES
Statement of Cash Flows
For the twelve-month period ended June 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Collections from customers $ 200,000
Payments to vendors (for inventory and supplies) ( 60,000)
Payments to employees (for labor services) ( 40,000)
Payments to creditors (of interest) ( 20,000)
Payments to utilities (for services) ( 20,000)
Payments to government agencies (net of taxes and fees) ( 30,000)
Cash flow from operations $ 30,000
William F. Bentz
PREPARING STATEMENTS
A. Companies have access to all the
details needed to prepare a
statement of cash flows.
B. We are using only reported
information to create statements
of cash flow, so ours are less
accurate.
William F. Bentz
ASSUMPTIONS
For problem and exam purposes,
assume merchandise purchase
transactions are the only ones
affecting accounts payable. Thus,
accounts payable is assumed to
related to the cost of sales, but no
other expenses.
William F. Bentz
How-to-do-it
Read the supplementary
information to learn what has been
provided in the problem or case.
Work in SOE order, and find the
related SFP accounts (e.g., Sales,
Accounts receivable, Allowance for
uncollectible accounts, etc.)
William F. Bentz
More How-to-do-it
Check-off the information you have
used to avoid double counting.
Analyze any changes in every SFP
account to be sure you have
considered all likely transactions.
When every item is checked off,
you should be finished!
William F. Bentz
More How-to-do-it
Reason through all the amounts to
see if they make sense for the
account information provided.
Check your overall answer against
the change in cash to see if you
missed anything or made a
calculation mistake.
William F. Bentz