CH 17

Accounting Principles
Thirteenth Edition
Weygandt ● Kimmel ● Kieso
Chapter 17
Statement of Cash Flows

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Chapter Outline
Learning Objectives
LO 1 Discuss the usefulness and format of the statement of
cash flows.
LO 2 Prepare a statement of cash flows using the indirect
method.
LO 3 Analyze the statement of cash flows.
Copyright ©2018 John Wiley & Sons, Inc. 2

Usefulness of the Statement of Cash Flows
LEARNING OBJECTIVE 1
Discuss the usefulness and format of the statement of
cash flows.
Provides information to help assess:
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.
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Classification of Cash Flows (1 of 4)
Operating Investing Financing
Activities Activities Activities
Income Changes in Changes in
Statement Investments and Long-Term
Items Long-Term Asset Liabilities and
Items Stockholders’
Equity Items

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
To employees for wages
To government for taxes
To lenders for interest
To others for expenses
Investing activities—Changes in investments and long-term assets
Cash inflows:
From sale of property, plant, and equipment
From sale of investments 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
To make loans to other entities

Financing activities—Changes in long-term liabilities and
stockholders’ equity
Cash inflows:
From sale of common stock
From issuance of debt (bonds and notes)
Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital stock
(treasury stock)

Significant Noncash Activities
1. Direct 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 noncash activities in either a
• separate schedule (bottom of the statement) or
• separate note to the financial statements.

Format of the Statement of Cash Flows (1 of 2)
Order of Presentation:
1. Operating activities
Direct Method
Indirect Method
2. Investing activities
3. Financing activities

Format of the Statement of Cash Flows (2 of 2)

Do It! 1: Classification of Cash Flows
Illustration: Classify each transactions by type of cash flow activity.
1. Issued 100,000 shares of $5 par value common Financing
stock for $800,000 cash.
2. Borrowed $200,000 from Castle Bank, signing
a 5-year note bearing 8% interest. Financing
3. Purchased two semi-trailer trucks for $170,000

Investing
cash.
4. Paid employees $12,000 for salaries and wages. Operating
5. Collected $20,000 cash for services performed. Operating

Preparing the Statement of Cash Flows—Indirect Method
Prepare a statement of cash flows using the indirect
method.
Three sources of information:
1. Comparative balance sheets
2. Current income statement
3. Additional information

Indirect Method (1 of 7)
Step 1: Determine net cash provided/used by operating
activities by converting net income from an
accrual basis to a cash basis.
Step involves analyzing the current year's income
statement, comparative balance sheets, and selected
additional data.

Step 2: Analyze changes in noncurrent asset and liability
accounts and stockholders’ equity accounts and
record as investing and financing activities, or
disclose as noncash transactions.
Step involves analyzing comparative balance sheet data
and selected additional information for their effects on
cash.

Step 3: Compare the net change in cash on the statement
of cash flows with the change in the Cash account
reported on the balance sheet to make sure the
amounts agree.
Difference between beginning and ending cash balances
can be easily computed from comparative balance sheets.

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.




Additional information for 2020:
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 common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.

Step 1: Operating Activities (1 of 26)
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,
amortization, or depletion expense)
• Deduct gains and add losses
• Analyze changes in noncash current asset and current
liability accounts

Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest
b. Receipt of cash from the sale of capital stock
c. Payment of cash dividends to the company’s
stockholders
d. None of the above

Which is an example of a cash flow from an operating
activity?
a. Answer: Payment of cash to lenders for interest
b. Receipt of cash from the sale of capital stock
c. Payment of cash dividends to the company’s
stockholders
d. None of the above

Depreciation Expense
Although depreciation expense reduces net income, it
does not reduce cash. The company must add it back to
net income.
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 9,000
Net cash provided by operating activities $154,000

Loss on Disposal of Plant Assets
Companies report as a source of cash in the investing
activities section the actual amount of cash received
from the sale.
• Any loss on disposal is added to net income in
operating section.
• Any gain on disposal is deducted from net income
in operating section.

Loss on Disposal of Plant Assets
Net income $145,000
Depreciation expense 9,000
Loss on disposal of plant assets 3,000 12,000

Changes to Noncash Current Asset
When Accounts Receivable balance decreases, cash receipts
are higher than revenue earned under accrual basis.
Accounts Receivable
1/1/20 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000
12/31/20 Balance 20,000
Company adds to net income amount of decrease in accounts

receivable.

Net income $145,000
Loss on disposal of plant assets 3,000
Decrease in accounts receivable 10,000 22,000

When Inventory balance increases, cost of merchandise
purchased exceeds cost of goods sold.
Inventory
1/1/20 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
12/31/20 Balance 15,000
Company deducts increase in inventory from net income.

Net income $145,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000) 17,000

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.

Net income $145,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000) 13,000

Changes in Current Liabilities
When Accounts Payable increases, company received more
in goods than it actually paid for. Increase is added to net
income to determine net cash provided by operating
activities.
When Income Tax Payable decreases, income tax expense
reported on the income statement was less than amount of
taxes paid during period. Decrease is subtracted from net
income to determine net cash provided by operating
activities.

Changes in Current Liabilities
Net income $145,000
Increase in inventory (5,000)
Increase in prepaid expenses (4,000)
Increase in accounts payable 16,000
Decrease in income taxes payable (2,000) 27,000

Summary of Conversion to Net Cash Provided by Operating
Activities—Indirect Method

Do It! 2a: Cash from Operating
Activities (1 of 2)
Josh’s PhotoPlus reported net income of $73,000 for 2020.
Included in the income statement were depreciation expense
of $7,000 and a gain on disposal of plant assets of $2,500.
Josh’s comparative balance sheets show the following balances.
12/31/19 12/31/20
Accounts receivable $17,000 $21,000
Accounts payable 6,000 2,200
Calculate net cash provided by operating activities for Josh’s

PhotoPlus.

Do It! 2a: Cash from Operating Activities
(2 of 2)
Calculate net cash provided by operating activities.
Net income $73,000
Depreciation expense $7,000
Gain on disposal of plant assets (2,500)
Increase in accounts receivable (4,000)
Decrease in accounts payable  3,800   3,300 
Net cash provided by operating activities 69,700

Step 2: Investing and Financing Activities
(1 of 18)
Increase in Land
Company purchased land of $110,000 by issuing long-term bonds.
Land
1/1/20 Balance 20,000 Blank Blank Blank
Issued bonds 110,000
12/31/20 Balance 130,000
Bonds Payable
Blank Blank Blank 1/1/20 Balance 20,000
For land 110,000
12/31/20 Balance 130,000

(2 of 18)

Cash flows from investing activities:
Purchase of building $(120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash provided by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash provided 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

Step 2: Investing and Financing
Activities (3 of 18)
Increase in Building
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
1/1/20 Balance 40,000 Blank Blank Blank
Purchase 120,000
12/31/20 Balance 160,000


(5 of 18)
Increase in Equipment
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.
Equipment
1/1/20 Balance 10,000 Equipment sold Blank 8,000
Purchase 25,000
12/31/20 Balance 27,000

Increase in Equipment
Equipment
1/1/20 Balance 10,000 Equipment sold 8,000
Purchase 25,000
12/31/20 Balance 27,000
Cash 4,000
Accumulated Depreciation 1,000
Loss on Disposal of Equipment 3,000
Equipment 8,000

(7 of 18)

(8 of 18)
Increase in Common Stock

The increase in common stock resulted from the issuance
of new shares.
Common Stock
1/1/20 Balance 50,000 Blank Blank
Shares sold 20,000
12/31/20 Balance 70,000

(9 of 18)

(10 of 18)
Increase in Retained Earnings

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
Blank 1/1/20
Balance 48,000
Dividends 29,000 Net income 145,000
12/31/20 Balance 164,000

(11 of 18)

(12 of 18)
Which is an example of a cash flow from an investing

activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.

Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Answer: Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.

Step 3: Net Change in Cash (1 of 2)
Compare the Net Change in Cash on the Statement of Cash Flows
with the Change in the Cash Account Reported on the Balance
Sheet to Make Sure the Amounts Agree

Analyzing the Statement of Cash Flows
Analyze the statement of cash flows.
Free Cash Flow

Free cash flow describes the cash remaining from
operations after adjustment for capital expenditures and
dividends.
Net Cash
Free Cash Provided by
Flow = Capital Cash
Operating − −
Expenditures Dividends
Activities

Free Cash Flow
Calculate
Microsoft’s
fee cash flow.
Cash provided by operating activities $29,080

Less: Expenditures on property, plant, and equipment 5,944
Less: Dividends paid 9,882
Free cash flow $13,254

Appendix 17A: Statement of Cash Flows—Direct
Method
• Compute net cash provided by operating activities by
adjusting each item in the income statement from
accrual basis to cash basis.
• Companies report only major classes of operating cash
receipts and cash payments.
• For these major classes, difference between cash
receipts and cash payments is net cash provided by
operating activities.

Cash Receipts − Cash Payments = Net Cash Provided by
Operating Activities




Direct Method
Additional information for 2020:
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 common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.

Cash Receipts from Customers
For Computer Services, accounts receivable decreased
$10,000.
Accounts Receivable
1/1/20 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000
12/31/20 Balance 20,000

Cash Payments to Suppliers
Inventory increased $5,000, cash payments to suppliers
were $139,000.
Inventory
1/1/20 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
12/31/20 Balance 15,000
Accounts Payable
Payments to suppliers 139,000 1/1/20 Balance 12,000
Purchases 155,000
12/31/20 Balance 28,000

Cash Payments to Suppliers
Inventory increased $5,000, cash payments to suppliers
were $139,000.

Cash Payments for Operating Expenses
Operating expenses $111,000
Add: Increase in prepaid expenses 4,000
Cash payments for operating expenses $115,000

Cash Payments for Interest
Computer Services reported interest expense of $42,000
on the income statement.
Interest Payable
Cash paid for interest 42,000 1/1/20 Balance 0
Expense 42,000
12/31/20 Balance 0

Cash Payments for Income Taxes
Computer Services reported income tax expense of
$47,000 on the income statement.
Income Tax Payable
Cash paid for taxes 49,000 1/1/20 Balance 8,000
Expense 47,000
12/31/20 Balance 6,000


Cash receipts from customers $517,000
Less: Cash payments
To suppliers $139,000
For operating expenses 115,000
For interest expense 42,000
For income taxes 49,000 345,000

(14 of 18)
Increase in Equipment. (1) Equipment purchased for $25,000,

and (2) equipment sold for $4,000, cost $8,000, book value
$7,000.
Equipment
1/1/20 Balance 10,000 Cost of equipment sold 8,000
Purchases 25,000
12/31/20 Balance 27,000
Accumulated Depreciation
Equipment sold 1,000 1/1/20 Balance 1,000
Expense 3,000
12/31/20 Balance 3,000

(15 of 18)
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

(16 of 18)
Increase in Land. Land increased Significant noncash

$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.

Significant noncash
Bonds Payable increased
investing and financing
$110,000. The company
transaction
acquired land by exchanging
bonds for land.
(17 of 18)
Increase in Common Stock. Increase

in Common Stock of $20,000.
Financing transaction
Increase resulted from the issuance
of new shares of stock.
Increase in Retained Earnings. The

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

(18 of 18)

Step 3: Net Change in Cash (2 of 2)
Compare the Net Change in Cash on the Statement of Cash
Flows with the Change in the Cash Account Reported on the
Balance Sheet to Make Sure the Amounts Agree

Appendix 17B: Worksheet Indirect Method
(1 of 2)
Companies may use a worksheet to assemble and classify

data that will appear on the statement of cash flows.
The worksheet is merely an aid in preparing the
statement.
Its use is optional.

Appendix 17B: Worksheet Indirect
Method (2 of 2)

Appendix 17C: T-Account Approach (1 of 2)
The change in cash is equal to the change in all of the

other balance sheet accounts.
If we analyze the changes in all of the noncash balance
sheet accounts, we will explain the change in the cash
account.

Appendix 17C: T-Account Approach (2 of 2)

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Accounting Principles

Statement of Cash Flows

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3. Purchased two semi-trailer trucks for $170,000

5. Collected $20,000 cash for services performed. Operating

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Company adds to net income amount of decrease in accounts

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Company deducts increase in inventory from net income.

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Calculate net cash provided by operating activities for Josh’s

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Net cash provided by operating activities $172,000

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Increase in Common Stock

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Increase in Retained Earnings

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Which is an example of a cash flow from an investing

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