WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
13-1 Westmont College

PREVIEW OF CHAPTER 13

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
13-2
 CHAPTER

13 Statement of Cash Flows

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
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.

13-3

Statement of Cash Flows: Usefulness and

Format
Learning Objective 1
Indicate the usefulness of
Provides information to help assess: the statement of cash flows.

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and meet 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.

13-4 LO 1
 Learning Objective 2
Classification of Cash Flows Distinguish among
operating, investing, and
financing activities.

Operating Investing Financing

Activities Activities Activities

Income Changes in Changes in

Statement Items Investments and Non-current
Non-current Liabilities and
Assets Equity

13-5 LO 2

Classification of Cash Flows

Operating activities—Income statement items

Cash inflows: Illustration 13-1
Typical receipt and payment
classifications
From sale of goods or services.
From interest received and dividends received.
Cash outflows:
To suppliers for inventory.
To employees for wages.
To government for taxes.
To lenders for interest.
To others for expenses.

13-6 LO 2
 Classification of Cash Flows

Investing activities—Changes in investments and non-

current assets Illustration 13-1
Typical receipt and payment
Cash inflows: classifications

From sale of property, plant, and equipment.

From sale of investments in debt or equity securities of
other entities.
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 of
other entities.
To make loans to other entities.
13-7 LO 2

Classification of Cash Flows

Financing activities—Changes in non-current liabilities

and equity Illustration 13-1
Typical receipt and payment
Cash inflows: classifications

From sale of ordinary shares.

From issuance of long-debt (bonds and notes).
Cash outflows:
To shareholders as dividends.
To redeem long-term debt or reacquire
ordinary shares (treasury shares).

13-8 LO 2
 Significant Non-Cash Activities

1. Direct issuance of ordinary shares to purchase assets.

2. Conversion of bonds into ordinary shares.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.

Companies report non-cash activities in either a

 separate schedule (bottom of the statement) or

 separate note to the financial statements.

13-9 LO 2

Accounting Across the Organization

Net What?
Net income is not the same as net cash provided by operating
activities. Below are some results from recent annual reports
(currencies in millions). Note the wide disparity among these
companies, all of which engage in retail merchandising.

13-10 LO 2
 Format of the Statement of Cash Flows

Order of Presentation:
Direct Method
1. Operating activities.
Indirect Method
2. Investing activities.

3. Financing activities.

13-11 LO 2

Illustration 13-3
Format of statement of cash flows

13-12 LO 2
 Preparing the Statement of Cash Flows

Three sources of information:

1. Comparative statements of financial position

2. Current income statement

3. Additional information

13-13 LO 2

Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

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 Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

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Preparing the Statement of Cash Flows

Three Major Steps:

Illustration 13-4
Three major steps in preparing
the statement of cash flows

13-16 LO 2
 Indirect And Direct Methods

Companies favor the indirect method for two reasons:

1. Easier and less costly to prepare.

2. Focuses on differences between net income and net cash

flow from operating activities.

13-17 LO 2

Learning Objective 3
Statement of Cash Flows: Prepare a statement of cash
flows using the indirect
—Indirect Method method.

Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company
13-18 LO 3
Illustration 13-5
Comparative statements of financial position, income statement,
and additional information for Computer Services Company

13-19 LO 3

Change in
2017 2016 Account Balance

Illustration 13-5
Additional information for 2017:
1. Depreciation expense was comprised of €6,000 for building and €3,000 for
equipment.
2. The company sold equipment with a book value of €7,000 (cost €8,000, less
accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment costing €25,000
was also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-20 LO 3
 Step 1: Operating Activities

DETERMINE NET CASH PROVIDED/USED BY

OPERATING ACTIVITIES BY CONVERTING NET
INCOME FROM ACCRUAL BASIS TO CASH BASIS.

Common adjustments to Net Income (Loss):

 Add back non-cash expenses (depreciation, amortization,
or depletion expense).

 Deduct gains and add losses.

 Analyze changes to non-cash current asset and current

liability accounts.
13-21 LO 3

Step 1: Operating Activities

Depreciation Expense
Although depreciation expense reduces net income, it does
not reduce cash. The company must add it back to net
income.
Illustration 13-7

Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities € 154,000

13-22 LO 3
 Step 1: Operating Activities

LOSS ON DISPOSAL OF PLANT ASSETS

Companies should report cash received from the sale
(disposal) of plant assets in the investing activities section.
Because of this,

 any loss on sale is added to net income in the

operating section.

 any gain on sale is deducted from net income in the

operating section.

13-23 LO 3

Step 1: Operating Activities

LOSS ON DISPOSAL OF PLANT ASSETS

Illustration 13-8

Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Net cash provided by operating activities € 157,000

13-24 LO 3
 Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual
basis.
Illustration 13-9
Accounts Receivable

1/1/017 Balance 30,000 Receipts from customers 517,000

Sales revenue 507,000

12/31/17 Balance 20,000

Company adds to net income the amount of the decrease in

accounts receivable.
13-25 LO 3

Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
Illustration 13-10

Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Net cash provided by operating activities € 167,000

13-26 LO 3
 Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.

Inventory

1/1/17 Balance 10,000 Cost of goods sold 150,000

Purchases 155,000

12/31/17 Balance 15,000

Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.
13-27 LO 3

Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
Illustration 13-10
Cash flows from operating activities:
Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Net cash provided by operating activities € 162,000

13-28 LO 3
 Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual basis.
The company deducts the increase from net income to arrive at
net cash provided by operating activities.

If prepaid expenses decrease, reported expenses are higher

than the expenses paid.

13-29 LO 3

Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT ASSET

ACCOUNTS
Illustration 13-10

Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Net cash provided by operating activities € 158,000

13-30 LO 3
 Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT LIABILITY

ACCOUNTS
When Accounts Payable increases, the company received more in
goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.

When Income Taxes Payable decreases, the income tax expense

reported on the income statement was less than the amount of
taxes paid during the period. The decrease is subtracted from net
income to determine net cash provided by operating activities.

13-31 LO 3

Step 1: Operating Activities

CHANGES TO NON-CASH CURRENT LIABILITY

ACCOUNTS Illustration 13-11

Cash flows from operating activities:

Net income € 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
Net cash provided by operating activities € 172,000
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LO 3
 Step 1: Operating Activities

Summary of Conversion to Net Cash Provided by

Operating Activities—Indirect Method

Illustration 13-12
Adjustments required to convert net income to net cash provided by operating activities
13-33 LO 3

Step 2: Investing and Financing Activities

Company purchased land of €110,000 by issuing long-term

bonds. This is a significant non-cash investing and financing
activity that merits disclosure in a separate schedule.

Land
1/1/17 Balance 20,000
Issued bonds 110,000
12/31/17 Balance 130,000

Bonds Payable
1/1/17 Balance 20,000
For land 110,000
12/31/17 Balance 130,000

13-34 LO 3
 Step 2: Investing and Financing Activities
Partial statement Illustration 13-14

Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000

Disclosure: Issuance of bonds to purchase land € 110,000

13-35 LO 3

Step 2: Investing and Financing Activities

From the additional information, the company acquired an office

building for €120,000 cash. This is a cash outflow reported in
the investing section.

Building

1/1/17 Balance 40,000

Office building 120,000

12/31/17 Balance 160,000

13-36 LO 3
 Step 2: Investing and Financing Activities
Partial statement Illustration 13-14

Net cash provided by operating activities 172,000

Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000

Disclosure: Issuance of bonds to purchase land € 110,000

13-37 LO 3

Step 2: Investing and Financing Activities

The additional information explains that the equipment increase

resulted from two transactions: (1) a purchase of equipment of
€25,000, and (2) the sale for €4,000 of equipment costing €8,000.
Illustration 13-13

Equipment

1/1/17 Balance 10,000 Cost of equipment sold 8,000

Purchase 25,000

12/31/17 Balance 27,000

Cash 4,000
Journal
Accumulated Depreciation 1,000
Entry
Loss on Disposal of Plant Assets 3,000
Equipment 8,000

13-38 LO 3
 Illustration 13-14
Statement ofCash flows from operating activities:
Net income € 145,000
Cash Flows Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Indirect Increase in accounts payable 16,000
Method Decrease in income taxes payable (2,000)
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000
13-39

Step 2: Investing and Financing Activities

The increase in ordinary shares resulted from the issuance of
new shares.

Share Capital - Ordinary

1/1/17 Balance 50,000

Shares sold 20,000

12/31/17 Balance 70,000

13-40 LO 3
 Step 2: Investing and Financing Activities
Illustration 13-14
Partial statement
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000

Disclosure: Issuance of bonds to purchase land € 110,000

13-41 LO 3

Step 2: Investing and Financing Activities

Retained earnings increased €116,000 during the year. This
increase can be explained by two factors: (1) Net income of
€145,000 increased retained earnings, and (2) Dividends of
€29,000 decreased retained earnings.

Retained Earnings

1/1/17 Balance 48,000

Dividends 29,000 Net income 145,000
12/31/17 Balance 164,000

13-42 LO 3
 Illustration 13-14
Statement of Cash flows from operating activities:
Net income € 145,000
Cash Flows Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Indirect Increase in accounts payable 16,000
Method Decrease in income taxes payable (2,000)
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Disposal of plant assets 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of ordinary shares 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period € 55,000
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LO 3

Step 3: Net Change in Cash Illustration 13-5

COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH

FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.

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LO 3
 Using Cash Flow to Evaluate a Company
Learning Objective 4
Analyze the statement of
Free cash flow describes the cash cash flows.
remaining from operations after adjustment
for capital expenditures and dividends.

Illustration 13-15
Free cash flow

13-45 LO 4

Free Cash Flow Illustration 13-16

Anheuser-Busch InBev cash
flow information ($ in millions)

Required:
Calculate
free cash
flow.

Cash provided by operating activities $17,451

Less: Expenditures on property and equipment 3,869
Dividends paid 6,253
Free cash flow $7,329
Illustration 13-17
13-46 Calculation of Anheuser-Busch InBev’s free cash flow ($ in millions) LO 4
 APPENDIX 13A Consolidated Financial Statements
Learning Objective 5
1. Compute net cash provided by Prepare a statement of cash
flows using the direct method.
operating activities by adjusting
each item in the income statement from the accrual
basis to the cash basis.

2. 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.

13-47 LO 5

Step 1: Operating Activities

Illustration 13A-2
13-48 Major classes of cash receipts and payments LO 5
 Direct Method

Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company

13-49 LO 5

Illustration 13A-1
Comparative statements of financial position, income statement,
and additional information for Computer Services Company

13-50 LO 5
 Change in
2017 2016 Account Balance

Additional information for 2017: Illustration 13A-1

1. Depreciation expense was comprised of €6,000 for building and €3,000 for
equipment.
2. The company sold equipment with a book value of €7,000 (cost €8,000, less
accumulated depreciation €1,000) for €4,000 cash.
3. Issued €110,000 of long-term bonds in direct exchange for land.
4. A building costing €120,000 was purchased for cash. Equipment costing €25,000
was also purchased for cash.
5. Issued ordinary shares for €20,000 cash.
6. The company declared and paid a €29,000 cash dividend.
13-51 LO 5

Step 1: Operating Activities

CASH RECEIPTS FROM CUSTOMERS

For Computer Services, accounts receivable decreased
€10,000. Illustration 13A-4
Analysis of accounts receivable
Accounts Receivable
1/1/017 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000

12/31/17 Balance 20,000

Illustration 13A-5
Formula to compute cash receipts from customers—direct method

13-52 LO 5
 Step 1: Operating Activities

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.
Inventory
1/1/17 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000

12/31/17 Balance 15,000

Accounts Payable
Payment to suppliers 139,000 1/1/17 Balance 12,000
Purchases 155,000

12/31/17 Balance 28,000

Illustration 13A-8
13-53 Analysis of accounts payable LO 5

Step 1: Operating Activities

CASH PAYMENTS TO SUPPLIERS

In 2017, Computer Services Company’s inventory increased
€5,000 and cash payments to suppliers were €139,000.

Illustration 13A-9
Formula to compute cash payments to suppliers—direct method

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 Step 1: Operating Activities

CASH PAYMENTS FOR OPERATING EXPENSES

Cash payments for operating expenses were €115,000.

Illustration 13A-10
Computation of cash payments for operating expenses

Illustration 13A-11
Formula to compute cash payments for operating expenses—direct method
13-55 LO 5

Step 1: Operating Activities

CASH PAYMENTS FOR INTEREST

In 2017, Computer Services’ had interest expense of €42,000.

Interest Payable
Cash paid for interest 42,000 1/1/17 Balance 0
Interest expense 42,000

12/31/17 Balance 0

13-56 LO 5
 Step 1: Operating Activities

CASH PAYMENTS FOR INCOME TAXES

Cash payments for income taxes were €49,000.

Income Tax Payable

Cash paid for taxes 49,000 1/1/17 Balance 8,000
Income tax expense 47,000

12/31/17 Balance 6,000

Illustration 13A-13
Formula to compute cash payments for income taxes—direct method

13-57 LO 5

Step 1: Operating Activities

Illustration 13A-14
Operating activities section of the statement of cash flows

13-58 LO 5
 Step 2: Investing and Financing Activities

Increase in Equipment. (1) Equipment purchased for €25,000,

and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.
Illustration 13A-15
Analysis of equipment
Equipment
1/1/17 Balance 10,000 Cost of equipment sold 8,000
Purchases 25,000
12/31/17 Balance 27,000

Accumulated Depreciation
Equipment sold 1,000 1/1/17 Balance 1,000
Depreciation expense 3,000
12/31/17 Balance 3,000

13-59 LO 5

Step 2: Investing and Financing Activities

Increase in Equipment. (1) Equipment purchased for €25,000,

and (2) equipment sold for €4,000, cost €8,000, book value
€7,000.

Cash 4,000
Accumulated Depreciation—Equipment 1,000
Loss on Disposal of Plant Assets 3,000
Equipment 8,000

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 Step 2: Investing and Financing Activities

Increase in Land. Land increased Significant non-cash

€110,000. The company purchased investing and financing
land of €110,000 by issuing bonds. transaction.

Increase in Building. Acquired Investing transaction.

building for €120,000 cash.

Increase in Bonds Payable. Bonds

Significant non-cash
Payable increased €110,000. The
investing and financing
company acquired land by exchanging
transaction.
bonds for land.

13-61 LO 5

Step 2: Investing and Financing Activities

Increase in Share Capital—Ordinary.

Financing
Increase in Share Capital—Ordinary of
transaction.
€20,000. Increase resulted from the
issuance of new shares.

Increase in Retained Earnings. The

€116,000 net increase in Retained Financing
transaction
Earnings resulted from net income of
(cash dividend)
€145,000 and the declaration and
payment of a cash dividend of €29,000.

13-62 LO 5
 Illustration 13A-16
Statement of cash flows,
2017—direct method

13-63 LO 5

Step 3: Net Change in Cash Illustration 13A-1

COMPARE THE NET CHANGE IN CASH ON THE STATEMENT OF CASH

FLOWS WITH THE CHANGE IN THE CASH ACCOUNT REPORTED ON
THE STATEMENT OF FINANCIAL POSITIONS TO MAKE SURE THE
AMOUNTS AGREE.

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LO 5