The document discusses the statement of cash flows, including its usefulness, format, and how to prepare it using the indirect method. It explains that the statement of cash flows provides information about a company's cash receipts and payments during a period and is separated into operating, investing, and financing activities. It also discusses how to classify transactions and adjust net income to reconcile it to net cash provided by operating activities. Key steps include adding back non-cash expenses, and analyzing changes in current assets and liabilities.

1. 17-1
Learning Objectives
Discuss the usefulness and format of the statement of
cash flows.
1
Prepare a statement of cash flows using the indirect
method.
2
Analyze the statement of cash flows.3
Statement of
Cash Flows17

2. 17-2
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.
Usefulness of the Statement of Cash Flows
LO 1
LEARNING
OBJECTIVE
Discuss the usefulness and format of
the statement of cash flows.
1

3. 17-3
Income
Statement Items
Operating
Activities
Changes in
Investments
and Long-Term
Asset Items
Investing
Activities
Changes in
Long-Term
Liabilities and
Stockholders’
Equity Items
Financing
Activities
Classification of Cash Flows
LO 1

4. 17-4
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.
LO 1
Illustration 17-1
Typical receipt and payment
classifications
Classification of Cash Flows

5. 17-5
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 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.
LO 1
Illustration 17-1
Typical receipt and payment
classifications
Classification of Cash Flows

6. 17-6
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).
LO 1
Illustration 17-1
Typical receipt and payment
classifications
Classification of Cash Flows

7. 17-7
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.
Significant Noncash Activities
LO 1

8. 17-8
Net What?
Accounting Across the Organization
LO 1

9. 17-9
Order of Presentation:
1. Operating activities.
2. Investing activities.
3. Financing activities.
Direct Method
Indirect Method
Format of the Statement of Cash Flows
LO 1

10. 17-10 LO 1
Illustration 17-2
Format of statement of cash flows

11. 17-11
Illustration: Classify each of these transactions by type of cash
flow activity.
1. Issued 100,000 shares of $5 par value
common stock for $800,000 cash.
2. Borrowed $200,000 from Castle Bank, signing
a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for $170,000
cash.
4. Paid employees $12,000 for salaries and
wages.
5. Collected $20,000 cash for services performed.
Financing
Financing
Investing
Operating
Operating
LO 1
DO IT! Classification of Cash Flows1

12. 17-12
Three sources of information:
1. Comparative balance sheets
2. Current income statement
3. Additional information
LO 2
LEARNING
OBJECTIVE
Prepare a statement of cash flows
using the indirect method.
2

13. 17-13
Three Major Steps:
Illustration 17-3
LO 2
Preparing the Statement of Cash Flows

14. 17-14
Illustration 17-3
LO 2
Three Major Steps:
Preparing the Statement of Cash Flows

15. 17-15
Illustration 17-3
LO 2
Three Major Steps:
Preparing the Statement of Cash Flows

16. 17-16
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.
Indirect and Direct Methods
LO 2

17. 17-17
Illustration 17-4
Indirect Method
LO 2
COMPUTER SERVICES COMPANY
Income Statement
For the Month Ended December 31, 2017

18. 17-18
Illustration 17-4
LO 2
Indirect Method
2017 2016

19. 17-19
Indirect Method
Illustration 17-4
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 common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 2

20. 17-20
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 in noncash current asset and current
liability accounts.
LO 2
Step 1: Operating Activities

21. 17-21
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.
Question
Step 1: Operating Activities
LO 2

22. 17-22
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
Net cash provided by operating activities 154,000$
Illustration 17-6
Step 1: Operating Activities
LO 2

23. 17-23
LOSS ON DISPOSAL OF EQUIPMENT
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 the
operating section.
◆ Any gain on disposal is deducted from net income in the
operating section.
Step 1: Operating Activities
LO 2

24. 17-24
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 equipment 3,000
Net cash provided by operating activities 157,000$
Illustration 17-7
Step 1: Operating Activities
LOSS ON DISPOSAL OF EQUIPMENT
LO 2

25. 17-25
CHANGES TO NONCASH CURRENT ASSET
When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual basis.
Company adds to net income the amount of the decrease in
accounts receivable.
Accounts Receivable
1/1/017 Balance 30,000
Sales Revenue 507,000
Receipts from customers 517,000
12/31/17 Balance 20,000
Illustration 17-8
Step 1: Operating Activities
LO 2

26. 17-26
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 equipment 3,000
Decrease in accounts receivable 10,000
Net cash provided by operating activities 167,000$
Illustration 17-9
Step 1: Operating Activities
LO 2
CHANGES TO NONCASH CURRENT ASSET

27. 17-27
When the Inventory balance increases, the cost of
merchandise purchased exceeds the cost of goods sold.
Inventory
1/1/17 Balance 10,000
Purchases 155,000
Cost of goods sold 150,000
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.
Step 1: Operating Activities
LO 2
CHANGES TO NONCASH CURRENT ASSET

28. 17-28
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 equipment 3,000
Decrease in accounts receivable 10,000
Increase in inventory (5,000)
Net cash provided by operating activities 162,000$
Step 1: Operating Activities
Illustration 17-9
LO 2
CHANGES TO NONCASH CURRENT ASSET

29. 17-29
When the Prepaid Expense balance increases, cash paid for
expenses is higher than expenses reported on an accrual
basis. The company deducts the decrease from net income
to arrive at net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher
than the expenses paid.
Step 1: Operating Activities
LO 2
CHANGES TO NONCASH CURRENT ASSET

30. 17-30
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 equipment 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$
Step 1: Operating Activities
Illustration 17-9
LO 2
CHANGES TO NONCASH CURRENT ASSET

31. 17-31
CHANGES IN CURRENT LIABILITIES
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 Tax 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.
Step 1: Operating Activities
LO 2

32. 17-32
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 equipment 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$
Illustration 17-10
Step 1: Operating Activities
LO 2
CHANGES IN CURRENT LIABILITIES

33. 17-33
Summary of Conversion to Net Cash Provided
by Operating Activities—Indirect Method
Step 1: Operating Activities
LO 2
Illustration 17-11

34. 17-34
Josh’s PhotoPlus reported net income of $73,000 for 2017.
Included in the income statement were depreciation expense of
$7,000 and a gain on disposal of equipment of $2,500. Josh’s
comparative balance sheets show the following balances.
12/31/16 12/31/17
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! Cash from Operating Activities2a
LO 2

35. 17-35
Josh’s PhotoPlus reported net income of $73,000 for 2017, which
included depreciation expense of $7,000 and a gain on disposal
of equipment of $2,500. Accounts receivable increased $4,000
and accounts payable decreased by $3,800. Calculate net cash
provided by operating activities.
DO IT! Cash from Operating Activities2a
LO 2

36. 17-36
Company purchased land of $110,000 by issuing long-term
bonds. This is a significant noncash 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
Step 2: Investing and Financing Activities
LO 2

37. 17-37
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 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$
Illustration 17-13Partial statement
Step 2: Investing and Financing Activities
LO 2

38. 17-38
From the additional information, the company acquired an office
building for $120,000 cash. This is a cash outflow reported in
the investing section.
1/1/17 Balance 40,000
Office building 120,000
12/31/17 Balance 160,000
Building
Step 2: Investing and Financing Activities
LO 2

39. 17-39
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 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$
Illustration 17-13Partial statement
Step 2: Investing and Financing Activities
LO 2

40. 17-40
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.
1/1/17 Balance 10,000
Purchase 25,000
12/31/17 Balance 27,000
Equipment sold 8,000
Cash 4,000
Accumulated Depreciation 1,000
Loss on Disposal of Equipment 3,000
Equipment 8,000
Journal
Entry
Equipment
Step 2: Investing and Financing Activities
Illustration 17-12
LO 2

41. 17-41
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 equipment 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
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 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$
Statement
of Cash
Flows
Illustration 17-13
Indirect
Method
LO 2

42. 17-42
The increase in common stock resulted from the issuance of
new shares.
1/1/17 Balance 50,000
Shares sold 20,000
12/31/17 Balance 70,000
Common Stock
Step 2: Investing and Financing Activities
LO 2

43. 17-43
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 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$
Illustration 17-13
Partial statement
Step 2: Investing and Financing Activities
LO 2

44. 17-44
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.
1/1/17 Balance 48,000
Net income 145,000
12/31/17 Balance 164,000
Dividends 29,000
Retained Earnings
Step 2: Investing and Financing Activities
LO 2

45. 17-45
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 equipment 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
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 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$
Illustration 17-13
Indirect
Method
Statement
of Cash
Flows
LO 2

46. 17-46
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.
Step 2: Investing and Financing Activities
Question
LO 2

47. 17-47
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.
Step 3: Net Change in Cash
Illustration 17-4
LO 2
2017 2016

48. 17-48
Burning Through Our Cash
Box (cloud storage), Cyan (game creator), Fireeye (cyber security), and Mobile
Iron (mobile security of data) are a few of the tech companies that recently have
issued or are about to issue stock to the public. Investors now have to determine
whether these tech companies have viable products and high chances for success.
An important consideration in evaluating a tech company is determining its financial
flexibility—its ability to withstand adversity if an economic setback occurs. One way
to measure financial flexibility is to assess a company’s cash burn rate, which
determines how long its cash will hold out if the company is expending more cash
than it is receiving. Fireeye, for example, burned cash in excess of $50 million in
2013. But the company also had over $150 million as a cash cushion, so it would
take over 30 months before it runs out of cash. And even though Box has a much
lower cash burn rate than Fireeye, it still has over a year’s cushion. Compare that to
the tech companies in 2000, when over one-quarter of them were on track to run out
of cash within a year. And many did. Fortunately, the tech companies of today seem
to be better equipped to withstand an economic setback.
Source: Shira Ovide, “Tech Firms’ Cash Hoards Cool Fears of a Meltdown,” Wall Street
Journal (May 14, 2014).
Accounting Across the Organization
LO 2

49. 17-49
Free Cash Flow
Free cash flow describes the cash remaining from
operations after adjustment for capital expenditures and
dividends.
Illustration 17-14
LO 3
LEARNING
OBJECTIVE Analyze the statement of cash flows.3

50. 17-50
$21,863
Less: Expenditures on property, plant, and equipment 4,257
Dividends paid 7,455
$10,151
Required:
Calculate
Microsoft’s
free cash
flow.
Cash provided by operating activities
Free cash flow
LO 3
Free Cash Flow Illustration 17-15
Microsoft’s cash flow
information ($ in millions)

51. 17-51
1. Compute net cash provided by 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.
LEARNING
OBJECTIVE
APPENDIX 17A: Statement of Cash
Flows Using the Direct Method.
4
LO 4

52. 17-52 LO 4
Step 1: Operating Activities Illustration 17A-2
Major classes of cash
receipts and payments

53. 17-53
Illustration 17-4
Direct Method
LO 4
COMPUTER SERVICES COMPANY
Income Statement
For the Month Ended December 31, 2017

54. 17-54
Illustration 17-4
LO 4
Direct Method
2017 2016

55. 17-55
Direct Method
Illustration 17-4
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 common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 4

56. 17-56
Illustration 17A-4
Cash Receipts from Customers
For Computer Services, accounts receivable decreased $10,000.
Illustration 17A-5
Accounts Receivable
1/1/017 Balance 30,000
Sales revenue 507,000
Receipts from customers 517,000
12/31/17 Balance 20,000
LO 4
Step 1: Operating Activities

57. 17-57
Cash Payments to Suppliers
Illustration 17A-8
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
Purchases 155,000
Cost of goods sold 150,000
12/31/17 Balance 15,000
Accounts Payable
Payment to suppliers 139,000 1/1/17 Balance 12,000
12/31/17 Balance 28,000
Purchases 155,000
LO 4
Step 1: Operating Activities

58. 17-58
Illustration 17A-10
Formula to compute cash payments
to suppliers—direct method
Cash Payments to Suppliers
In 2017, Computer Services Company’s inventory increased $5,000
and cash payments to suppliers were $139,000.
LO 4
Step 1: Operating Activities

59. 17-59
Illustration 17A-11
Cash Payments for Operating Expenses
Cash payments for operating expenses were $115,000.
Illustration 17A-12
LO 4
Step 1: Operating Activities

60. 17-60
1/1/17 Balance 0
12/31/17 Balance 0
Interest expense 42,000
Cash Payments for Interest
In 2017, Computer Services’ had interest expense of $42,000.
Cash paid for interest 42,000
Interest Payable
LO 4
Step 1: Operating Activities

61. 17-61
1/1/17 Balance 8,000
Income tax expense 47,000
12/31/17 Balance 6,000
Cash paid for taxes 49,000
Cash Payments for Income Taxes
Cash payments for income taxes were $49,000.
Illustration 17A-15
Income Tax Payable
LO 4
Step 1: Operating Activities

62. 17-62
Illustration 17A-16
Operating activities section
of the statement of cash flows
LO 4
Step 1: Operating Activities

63. 17-63
Accumulated Depreciation
1/1/17 Balance 1,000
12/31/17 Balance 3,000
Depreciation expense 3,000
Equipment sold 1,000
Equipment
1/1/17 Balance 10,000
12/31/17 Balance 27,000
Purchases 25,000
Cost of equipment sold 8,000
Increase in Equipment. (1) Equipment purchased for $25,000, and
(2) equipment sold for $4,000, cost $8,000, book value $7,000.
Illustration 17A-17
LO 4
Step 2: Investing and Financing Activities

64. 17-64
Cash 4,000
Accumulated Depreciation 1,000
Loss on Disposal of Equipment 3,000
Equipment 8,000
Increase in Equipment. (1) Equipment purchased for $25,000, and
(2) equipment sold for $4,000, cost $8,000, book value $7,000.
LO 4
Step 2: Investing and Financing Activities

65. 17-65
Increase in Land. Land increased
$110,000. The company purchased land
of $110,000 by issuing bonds.
Significant noncash
investing and
financing transaction.
Increase in Bonds Payable. Bonds
Payable increased $110,000. The
company acquired land by exchanging
bonds for land.
Significant noncash
investing and
financing transaction.
Increase in Building. Acquired building
for $120,000 cash.
Investing transaction.
LO 4
Step 2: Investing and Financing Activities

66. 17-66
Increase in Common Stock. Increase
in Common Stock of $20,000. 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 of
$145,000 and the declaration and
payment of a cash dividend
of $29,000.
Financing
transaction
(cash dividend)
Financing
transaction.
LO 4
Step 2: Investing and Financing Activities

67. 17-67 LO 4
Illustration 17A-18
Statement of cash flows,
2017—direct method

68. 17-68
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.
LO 4
Step 3: Net Change in Cash
Illustration 17-4
2017 2016

69. 17-69
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
LEARNING
OBJECTIVE
APPENDIX 17B: Use a worksheet to prepare the
statement of cash flows using the indirect method.
5

70. 17-70
Illustration 17B-2
Comparative
balance sheets,
income statement,
and additional
information for
Computer Services
Company
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 common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
Preparing the Worksheet
LO 5

71. 17-71
1. Enter in the balance sheet accounts section the balance sheet
accounts and their beginning and ending balances.
2. Enter in the reconciling columns of the worksheet the data that
explain the changes in the balance sheet accounts other than
cash and their effects on the statement of cash flows.
3. Enter on the cash line and at the bottom of the worksheet the
increase or decrease in cash. This entry should enable the
totals of the reconciling columns to be in agreement.
LO 5
Preparing the Worksheet

72. 17-72
Illustration 17B-3
Completed worksheet—
indirect method
LO 5
Preparing
the
Worksheet

73. 17-73
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.
LEARNING
OBJECTIVE
APPENDIX 17C: Use the T-account approach
to prepare a statement of cash flows.
6
LO 6

74. 17-74 LO 6
Illustration 17C-1

75. 17-75
Similarities
◆ Companies preparing financial statements under IFRS must prepare
a statement of cash flows as an integral part of the financial
statements.
◆ Both IFRS and GAAP require that the statement of cash flows
should have three major sections—operating, investing, and
financing—along with changes in cash and cash equivalents.
Relevant Facts
LEARNING
OBJECTIVE
Compare the procedures for the statement
of cash flows under GAAP and IFRS.
7
LO 7
A Look at IFRS

76. 17-76
◆ Similar to GAAP, the cash flow statement can be prepared using
either the indirect or direct method under IFRS. In both U.S. and
international settings, companies choose for the most part to use the
indirect method for reporting net cash flows from operating activities.
◆ The definition of cash equivalents used in IFRS is similar to that
used in GAAP. A major difference is that in certain situations, bank
overdrafts are considered part of cash and cash equivalents under
IFRS (which is not the case in GAAP). Under GAAP, bank
overdrafts are classified as financing activities in the statement of
cash flows and are reported as liabilities on the balance sheet.
Relevant Facts
LO 7
A Look at IFRS

77. 17-77
Differences
◆ IFRS requires that noncash investing and financing activities be
excluded from the statement of cash flows. Instead, these noncash
activities should be reported elsewhere. This requirement is
interpreted to mean that noncash investing and financing activities
should be disclosed in the notes to the financial statements instead
of in the financial statements. Under GAAP, companies may present
this information on the face of the statement of cash flows.
LO 7
A Look at IFRS
Relevant Facts

78. 17-78
◆ One area where there can be substantial differences between IFRS
and GAAP relates to the classification of interest, dividends, and
taxes. The following table indicates the differences between the two
approaches.
LO 7
A Look at IFRS
Relevant Facts

79. 17-79
◆ Under IFRS, some companies present the operating section in a
single line item, with a full reconciliation provided in the notes to the
financial statements. This presentation is not seen under GAAP.
LO 7
A Look at IFRS
Relevant Facts

80. 17-80
Presently, the FASB and the IASB are involved in a joint project on the
presentation and organization of information in the financial statements.
One interesting approach, revealed in a published proposal from that
project, is that in the future the income statement and balance sheet would
adopt headings similar to those of the statement of cash flows. That is, the
income statement and balance sheet would be broken into operating,
investing, and financing sections.
Looking to the Future
LO 7
A Look at IFRS

81. 17-81
Under IFRS, interest paid can be reported as:
a) only a financing element.
b) a financing element or an investing element.
c) a financing element or an operating element.
d) only an operating element.
IFRS Self-Test Questions
LO 7
A Look at IFRS

82. 17-82
IFRS requires that noncash items:
a) be reported in the section to which they relate, that is, a
noncash investing activity would be reported in the
investing section.
b) be disclosed in the notes to the financial statements.
c) do not need to be reported.
d) be treated in a fashion similar to cash equivalents.
IFRS Self-Test Questions
LO 7
A Look at IFRS

83. 17-83
In the future, it appears likely that:
a) the income statement and balance sheet will have headings of
operating, investing, and financing, much like the statement of
cash flows.
b) cash and cash equivalents will be combined in a single line
item.
c) the IASB will not allow companies to use the direct approach
to the statement of cash flows.
d) None of the above.
IFRS Self-Test Questions
LO 7
A Look at IFRS

84. 17-84
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