This document provides an overview of the statement of cash flows, including its purpose, key components, and methods of preparation. It discusses cash flows from operating, investing and financing activities and how they are classified. It also describes the indirect and direct methods for preparing the statement of cash flows and provides an example of each. Key terms like cash and cash equivalents, free cash flow, and non-cash transactions are also explained.

1. KIESO – WEYGANDT – WARFIELD – YOUNG – WIECEK - MCCONOMY
INTERMEDIATE
ACCOUNTING
ELEVENTH CANADIAN EDITION
VOLUME 2
Prepared by:
Tammy Crowell CPA, CA, MBA
Dalhousie University

2. CHAPTER 22:
STATEMENT OF CASH FLOWS
2

3. Cash Flows from a Business Perspective
• A lack of cash flow is one of the main
causes of bankruptcy
• A sign of a healthy company is positive cash
flows from operations
• Over the years, the statement of cash
flows has grown in importance
• Helps users answer many questions such as:
• Will the company be able to pay dividends?
• How was the acquisition of the new subsidiary
financed?
3

4. Purpose and Usefulness of the
Statement of Cash Flows
• The information helps users (investors,
creditors, and others) assess the following:
1. Liquidity and solvency – i.e., the entity’s ability
to generate future cash flows and its needs for
cash resources
2. The amounts, timing, and uncertainty of future
cash flows
3. The reasons why net income and net cash
flow from operating activities differ
4

5. Cash and Cash Equivalents
Cash
• Cash on hand
• Demand deposits
Cash Equivalents
• Investments that are
• Short term,
• Highly liquid, and
• Easily converted to a
known amount of cash
• Subject to an
insignificant risk of
change in value
All references to Cash
include Cash Equivalents
when discussing the
Statement of Cash Flows
5

6. The Cash Flow Statement
• The cash flow statement provides
information about:
• The cash receipts (cash inflows), and
• Uses of cash (cash outflows) during the year
• Inflows and outflows are reported for:
• Operating activities
• Investing activities, and
• Financing activities during the year
6

7. Classification of Cash Flows
1. Operating Activities
• The cash flows resulting from the primary revenue-
producing activities of the business such as:
• Collections from customers
• Payments to suppliers
• Payments to Canada Revenue Agency (CRA) for tax
• Payments to employees
• Cash flow provided by operating activities is necessary
for long term sustainability of the business (i.e., to take
advantage of new investment opportunities, to pay
dividends without seeking external financing etc.)
7

8. Classification of Cash Flows
2.Investing Activities
• The acquisition and disposal of long term
assets and long-term investments such as:
• Making and collecting loans
• Acquiring and disposing of investments
• Purchase/disposal of long-lived assets
• Cash flow generated by investing activities
shows if the business is investing in additional
long term assets that will generate profits and
increase cash flows in the future
8

9. Classification of Cash Flows
3.Financing Activities
• Changes in long-term debt or equity capital
such as:
• Issuing or repayment of debt
• Issuing new shares or repurchase of currently
outstanding shares
• Provides information to assess potential for
future claims to entity’s cash and major
changes in the form of financing
9

10. Statement of Cash Flows: Concept
Operating
activities
Investing
activities
Financing
activities
Inflows
Cash
Pool
Operating
activities
Investing
activities
Financing
activities
Outflows
10

11. Classification of Cash Flows
• IFRS requirements relating to classification
of cash flows are similar to ASPE except
for the following:
11

12. Classification of Cash Flows
• Income statement gains and losses on
disposal of long-term assets must be
adjusted in determining cash flows from
operations
• These result from investing activities, not
operating activities
• The amount of the cash flow is the proceeds
on disposal not the gain or loss included in
income
12

13. Classification of Cash Flows
• Income statement gains and losses on
redemption of long-term debt must be
adjusted in determining cash flows from
operations
• These result from financing activities, not
operating activities, and
• The amount of the cash flow is the amount
paid to redeem the debt not the gain or loss
included in income
13

14. Significant Non-Cash Transactions
• Transactions that do not involve the direct receipt or
disbursement of cash in the period such as:
• Asset purchased and paid for by assuming debt, or issuance
of shares
• Exchanges of non-monetary assets
• Conversion of debt to equity
• Issuance of shares to retire debt
• Non-cash transactions are not reported on the
Statement of Cash Flows
• If material, they are reported as notes to the statement
or in a supplementary schedule to the financial
statements
14

15. Format of the Statement of Cash Flows
• Two methods of preparing the operating cash
flow section of the Statement of Cash Flows:
1. Indirect method
• Derives operating cash flows from accrual
basis income statement
2. Direct method
• Determines operating cash flows directly for
each operating source or use of cash
15

16. The Indirect Method
Net Income
+
-
Earned
Revenues
Expenses
Incurred
Operating
cash flow
Eliminate
non-cash revenues
Eliminate
non-cash charges
16

17. The Indirect Method
Accrual Basis Statements Cash Flow Statement
Income Statement items
and changes in Current
Assets and Current Liabilities
Operating activities:
Adjust net income for accruals,
non-cash charges and non-
operating gains/losses
Balance Sheet:
Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
outflows for purchases of assets
Balance Sheet:
Changes in Non-Current
Liabilities and Equity
Financing activities:
Inflows and outflows from loan
and equity transactions
17

18. Format of the Statement of
Cash Flows (Indirect Method)
Cash flows from operating activities:
Net Income (Loss) $ XXX
Adjustments (List individual adjustments) $ XX
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
Change in cash $ XXX
18

19. The Direct Method
• Received from
customers for cash
sales and on account
• Cash receipts from
other revenue sources
Outflows
Inflows
• Paid to suppliers for
cash purchases and
payments on account
• Paid to employees for
salaries and wages
• Paid to government for
taxes
19

20. Format of the Statement of Cash Flows
(Direct Method)
Cash flows from operating activities:
Cash receipts (separately): inflows $ XXX
Cash payments (separately): outflows ($XXX)
Net cash flow from operating activities $ XXX
Cash flows from financing activities:
(List individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX
Cash flows from investing activities:
(List individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Change in cash $ XXX
20

21. Format of the Statement of Cash Flows
• Both IFRS and ASPE encourage the use of the
direct method as it provides additional information
• More consistent with the objective of the statement of
cash flows
• Information about specific sources of cash inflows and
purposes of cash outflows helps in estimating future
cash flows
• Lending officers and other investors also prefer
the direct method
21

22. Direct Method - Example
Given:
• Tax Consultants Inc. began operations on January 1,
2016
Income Statement
For the year ended December 31, 2017
Revenues $ 125,000
Operating expenses 85,000
Income before income taxes 40,000
Income tax expense 6,000
Net Income $ 34,000
22

23. Direct Method - Example
Comparative Statement of Financial Position
Dec 31, 2017 Dec 31, 2016
Assets:
Cash $ 89,000 $ 40,000
Accounts receivable 66,000 30,000
Total $155,000 $ 70,000
Liabilities and Shareholders’ Equity:
Accounts payable $ 35,000 $ 30,000
Common shares 80,000 20,000
Retained earnings 40,000 20,000
Total $155,000 $ 70,000
23

24. Direct Method – Example
Operating Cash Flows
Accounts Receivable
increased by $36,000
Cash collections are
less than revenue
recognized
Reduce revenue
from credit sales
by $36,000 to derive
cash flows from
operations
24

25. Direct Method – Example
Operating Cash Flows
Accounts Payable
increased by $5,000
Cash paid for purchases
is less than COGS
reported
Increase COGS
by $5,000 to derive
cash flows from
operations
25

26. Direct Method – Example
Operating Cash Flows
Cash receipts from customers:
= Revenue from credit sales – increase in A/R balance
= $125,000 – $36,000 = $89,000
Cash payments to suppliers:
= Cost of goods sold – increase in A/P balance
= $85,000 – $5,000 = $80,000
26

27. Direct Method – Example
Operating Cash Flows
Operating Activities:
Cash received from customers $89,000
Cash paid to suppliers (80,000)
Cash paid for income taxes (6,000)
Net cash inflow $ 3,000
27

28. Investing and
Financing Cash Flows
Accrual Basis
Common stock + $60,000
Retained earnings +$20,000
Beg. Balance: $ 0
Net Income: 34,000
less: Dividends (14,000)
End Balance: $20,000
Cash Flow
Financing Activities:
Issue of Shares: $60,000
Dividends paid: (14,000)
Inflow 46,000
28

29. Direct Method – Example
Summary
Cash provided by operating activities: 3,000
Cash used by investing activities: -0-
Cash provided by financing activities: 46,000
Net inflow for the year 49,000
Beginning cash balance: 40,000
Cash, end of year $89,000
29

30. Indirect Method – Eastern Window Products
The company’s comparative financial statements are
provided in Illustration 22-10
Determine cash flows from operating activities
Under the indirect method you will start with net income
and adjust working capital to arrive at cash inflows and
outflows
The adjustments made for operating activities are
provided in Illustration 22-11 Panel A
30

31. Indirect Method – Eastern Window Products
• For each current asset and current liability, the
change in the account will require an adjustment
to net income to arrive at operating cash flow
• Receivables have gone down so this will be
added to net income as receipts from customers
were $10,000 more than revenues reported
31

32. Indirect Method – Eastern Window Products
• Inventory has increased by $9,000 reducing
transferred costs to cost of goods sold, requiring
net income to be reduced by this amount to
obtain the effect on cash from operating activities
• Prepaid Expenses have decreased by $1,500,
requiring net income to be increased by this
amount to obtain the effect on cash from
operating activities, as a greater amount was
expensed as compared to cash payments
32

33. Indirect Method – Eastern Window Products
• Accumulated depreciation has gone up entirely
due to depreciation, a non-cash expense, which
needs to be added back to the income statement
to arrive at a cash basis
• Accounts payable have increased therefore cash
payments must have been less than amounts
expensed, and needs to be added back to net
income
33

34. Indirect Method – Eastern Window Products
• Income taxes payable and wages payable have
increased, therefore the expense is higher than the
payments, requiring an add back to net income
• Net income accounts for $59,900 of the increase in
retained earnings, with the remainder of the
change being dividends
• This is required to be treated as a financing outflow
under ASPE and is permitted under IFRS with the
alternative recognition as an operating outflow
34

35. Indirect Method – Eastern Window Products
35

36. Using Both Methods -Yoshi Corporation
• Using the indirect method, all changes in working
capital items as well as non-cash items are
adjusted to and from net income to arrive at cash
flow from operating activities
• See Illustration 22-20 on the next slide for cash
flows using the indirect method
36

37. 37
Using Both Methods -Yoshi Corporation

38. Using Both Methods -Yoshi Corporation
• Using the direct method, receipts from customers
and payments for goods and services and those
payments made to others such as employees, for
income taxes and for interest are shown directly,
without making adjustments to net income for
changes in working capital
• Non-cash items are also not adjusted as they are
when using the indirect method
38

39. Using Both Methods -Yoshi Corporation
39

40. Using Both Methods -Yoshi Corporation
• Some accounts require further analysis in
determining their impact on operating cash flows,
such as:
• FV-NI Investments
• Accounts Receivable
• Allowance for Doubtful Accounts
• Investments
• Property, Plant and Equipment
Appendix 22A provides a Work Sheet approach which could
be used for the additional analysis required for a complex SCF
40

41. Disclosure Requirements
• IFRS and ASPE require similar disclosures on certain items,
including the disclosure of:
1. Significant non-cash investing and financing transactions
2. Policy on what makes up cash and cash equivalents
3. Reconciliation of cash and cash equivalents to balance
sheet accounts
• IFRS has more strict requirements relating to disclosure of
some items, including:
1. Income taxes
2. Interest and dividends (paid and received)
3. Restrictions on cash and cash equivalents
41

42. Analyzing the Statement of Cash Flows
• Operating cash flows indicate the extent to which
cash receipts from customers and other
operating sources were able to cover cash
payments to suppliers of goods and services and
to employees, and for other operating
expenditures
42

43. Analyzing the Statement of Cash Flows
• The investing activities section will show outflows
for new business assets
• It is important to understand whether the new
investment just maintains the existing capacity of
a company
OR
• Whether the investment increases the potential
for higher levels of operating cash flows in the
future
43

44. Analyzing the Statement of Cash Flows
• The financing activities section captures what
changes took place to the firm’s capital structure
and whether the entity increased or reduced the
claims of creditors to cash in the future
44

45. Free Cash Flow
• Free cash flow (FCF) is a non-GAAP measure used
by many companies to indicate discretionary cash
available for new investments, paying dividends,
retiring debt, repurchasing shares, or improving
liquidity
• FCF is typically calculated as:
• Net operating cash flows
• Less: capital expenditures to sustain current level
operations
• As it is a non-GAAP measure, some companies
calculate FCF differently
45

46. Copyright © 2016 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond that
permitted by Access Copyright (The Canadian Copyright
Licensing Agency) is unlawful. Requests for further information
should be addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make back-up
copies for his or her own use only and not for distribution or
resale. The author and the publisher assume no responsibility
for errors, omissions, or damages caused by the use of these
programs or from the use of the information contained herein.
COPYRIGHT