Intermediate Accounting
Chapter 23
Statement of Cash Flows
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Learning Objective 1
Describe the usefulness and format of
the statement of cash flows
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Statement of Cash Flows
Purpose and Objective
Primary purpose:
To provide information about a company’s cash receipts
and cash payments during a period.
Secondary objective:
To provide cash-basis information about the company’s
operating, investing, and financing activities.
LO 1 3
Statement of Cash Flows
Usefulness 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 flow from operating activities.
4. Cash and noncash investing and financing transactions.
LO 1 4
Statement of Cash Flows
Classification of Cash Flows
Operating Investing Financing
Activities Activities Activities
Income Changes in Changes in Long-
Statement Investments and Term Liabilities and
Items Long-Term Asset Stockholders’
Items Equity
LO 1 5
Classification of Cash Flows
Operating Cash Flows
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Classification of Cash Flows
Investing and Financing Cash Flows
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Classification of Cash Flows
Cash Equivalents
The basis recommended by the FASB for the statement of cash flows is actually
“cash and cash equivalents.” Cash equivalents are short-term, highly liquid (tính
thanh khoản) investments that are both:
• Readily convertible to known amounts of cash, and
• So near their maturity that they present insignificant risk of changes in interest
rates.
(Gần đến ngày đáo hạn nên chúng không có nhiều rủi ro về thay đổi lãi suất.)
Generally, only investments with original maturities of three months or less
qualify under this definition.
(Nói chung, chỉ những khoản đầu tư có thời gian đáo hạn ban đầu từ ba tháng
trở xuống mới đủ điều kiện theo định nghĩa này)
LO 1 8
Classification of Cash Flows
Company Product Life Cycle
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Statement of Cash Flows
Format of the Statement of Cash Flows
Presentation:
1. Operating activities.
o Direct Method
o Indirect Method
2. Investing activities.
3. Financing activities.
LO 1 10
Report inflows and outflows from investing and financing
activities separately.
Statement of Cash Flows
Illustration
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Learning Objective 2
Prepare a Statement of Cash Flows
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Preparation of Statement of Cash Flows
Three Sources of Information:
1. Comparative balance sheets.
2. Current income statement data.
3. Selected transaction data.
Three Major Steps:
Step 1. Determine change in cash.
Step 2. Determine net cash flow from operating activities.
Step 3. Determine net cash flows from investing and
financing activities.
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Illustrations—Tax Consultants Inc.
Scenario
Illustration: Tax Consultants Inc. started on January 1,
2019, when it issued 60,000 shares of $1 par value
common stock for $60,000 cash. The company rented
(thuê) its office space, furniture, and equipment, and
performed tax consulting services throughout the first
year.
The comparative balance sheets at the beginning and end
of the year 2019 appear in Illustration 23.3. Illustration
23.4 shows the income statement and additional
information for Tax Consultants.
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Illustrations—Tax Consultants Inc.
Sources of Information
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Illustrations—Tax Consultants Inc.
Step 1
Step 1: Determine the Change in Cash
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Illustrations—Tax Consultants Inc.
Step 2
Step 2: Determine the Net Cash Flow from Operating
Activities
• Company must determine revenues and expenses on a
cash basis.
• Eliminate the effects of income statement transactions
that do not result in an increase or decrease in cash.
• Convert net income to net cash flow from operating
activities through either a direct method or an indirect
method.
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Illustrations—Tax Consultants Inc.
Step 2 Illustration
Step 2: Determine the Net Cash Flow from Operating
Activities
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Illustrations—Tax Consultants Inc.
Analyze Accounts Receivable
Increase in Accounts Receivable—Indirect Method
Accounts receivable increased by $36,000 (from $0 to
$36,000) during the year.
Accounts Receivable
1/1/19 Balance 0 Receipts from customers 89,000
Blank Revenues 125,000 Blank Blank
12/31/19 Balance 36,000 Blank Blank
When the Accounts Receivable balance increases, cash
receipts are lower than revenue earned under the accrual
basis.
Illustrations—Tax Consultants Inc.
LO 2 20
Analyze Accounts Receivable Continued
Increase in Accounts Receivable—Indirect Method
Accounts Receivable
1/1/19 Balance 0 Receipts from customers 89,000
blank Revenues 125,000 blank blank
12/31/19 Balance 36,000 blank blank
The increase in accounts receivable is subtracted (trừ) from net income to
arrive at net cash provided by operating activities.
Illustrations—Tax Consultants Inc.
Analyze Accounts Payable
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Increase in Accounts Payable—Indirect Method
Accounts payable increased by $5,000 during the year.
When accounts payable increase during the year,
expenses on an accrual basis exceed those on a cash
basis.
Tax Consultants Inc.
Step 3
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Step 3: Determine Net Cash Flows from Investing and Financing Activities
Illustrations—Tax Consultants Inc.
Statement of Cash Flows – 2019
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Illustrations—Tax Consultants Inc.
Year 2 Information
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Illustrations—Tax Consultants Inc.
Year 2 – Statement of Cash Flows
Statement of Cash Flows—2020
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Illustrations—Tax Consultants Inc.
Year 3
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Illustrations—Tax Consultants Inc.
Year 3 – Statement of Cash Flows
Statement of Cash Flows—2021
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Sources of Information for the Statement of
Cash Flows
1. Comparative balance sheets.
2. An analysis of the Retained Earnings account.
3. Includes all changes that have passed through cash or have
resulted in an increase or decrease in cash.
4. Write-downs, amortization charges, and similar “book”
entries, such as depreciation, because they have no effect
on cash.
(Các khoản giảm giá trị, chi phí khấu hao và các mục “sổ
sách” tương tự, chẳng hạn như khấu hao, vì chúng không
ảnh hưởng đến tiền mặt)
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Indirect Method—Additional Adjustments
Adjustments Needed to Determine Net Cash Flow from
Operating Activities.
LO 2 30
Learning Objective 3
Contrast (So sánh) the Direct and
Indirect Methods of Calculating Net
Cash Flow from Operating Activities
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Net Cash Flow from Operating Activities—
Direct Method
Companies adjust each item in the income statement
from the accrual basis to the cash basis.
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Net Cash Flow from Operating Activities—
Direct Method
Formulas
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Net Cash Flow from Operating Activities—
Direct Method
Operating Activities Section
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Net Cash Flow from Operating Activities—
Direct Method
Special Rules – Receipts
Special Rules Applying to Direct and Indirect Methods
Companies that use the direct method are required, at a
minimum, to report separately:
Receipts
1. Cash collected from customers (including lessees,
licensees, etc.).
2. Interest and dividends received.
3. Other operating cash receipts, if any.
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Net Cash Flow from Operating Activities—
Direct Method
Special Rules – Payments
Special Rules Applying to Direct and Indirect Methods
Companies that use the direct method are required, at a
minimum, to report separately:
Payments
1. Cash paid to employees and suppliers of goods or services
(including suppliers of insurance, advertising, etc.).
2. Interest paid.
3. Income taxes paid.
4. Other operating cash payments, if any.
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Learning Objective 4
Discuss Special Problems in Preparing a
Statement of Cash Flows
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Special Problems in Statement Preparation
Adjustments to Net Income
Depreciation and Amortization
• Amortization of limited-life intangible assets.
• Amortization of bond discount or premium.
Postretirement Benefit Costs (Chi phí phúc lợi sau khi
nghỉ hưu)
• Company must adjust (điều chỉnh) net income by the
difference between cash paid and the expense
reported.
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Adjustments to Net Income (1 of 4)
Changes in Deferred Income Taxes (Chi phí thuế thu
nhập hoãn lại)
• Affect net income but have no effect on cash.
Equity Method of Accounting
• Net increase in the investment account does not affect
cash flows.
• Company must deduct the net increase from net
income to arrive at net cash flow from operating
activities.
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Adjustments to Net Income (2 of 4)
Losses and Gains
• A loss is added to net income to compute net cash flow
from operating activities because the loss is a noncash
charge in the income statement.
• Company reports a gain in the statement of cash flows
as part of the cash proceeds from the sale of equipment
under investing activities, thus it deducts the gain from
net income to avoid double-counting— once as part of
net income and again as part of the cash proceeds from
the sale.
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Adjustments to Net Income (3 of 4)
Stock Options
• Cash is not affected by recording the expense.
• The company must increase net income by the amount
of compensation expense from stock options in
computing net cash flow from operating activities.
(Công ty phải tăng thu nhập ròng bằng số tiền chi phí
bồi thường từ quyền chọn mua cổ phiếu khi tính toán
dòng tiền ròng từ hoạt động kinh doanh)
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Adjustments to Net Income (4 of 4)
Unusual and Infrequent Items
• Companies should report either as investing activities or
as financing activities cash flows from unusual and
infrequent transactions and other events whose effects
are included in net income but which are not related to
operations.
LO 4 42
Special Problems 1
Accounts Receivable (Net)
Indirect Method
Because an increase in Allowance for Doubtful Accounts
results from a charge to bad debt expense, a company should
add back an increase in Allowance for Doubtful Accounts to
net income to arrive at net cash flow from operating activities.
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Accounts Receivable (Net)
Alternative 1
Indirect Method
One method of presenting this information in the statement
of cash flows:
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Accounts Receivable (Net)
Alternative 2
Indirect Method
Alternate method (net approach) of presenting this
information in the statement of cash flows:
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Accounts Receivable (Net) (1 of 2)
Direct Method
Company should not net Allowance for Doubtful Accounts
against Accounts Receivable.
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Special Problems 2
Other Working Capital Changes
Other Working Capital Changes
Some changes in working capital, although they affect
cash, do not affect net income.
• Purchase of short-term available-for-sale securities.
• Issuance of a short-term nontrade note payable for
cash.
• Cash dividend payable.
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Special Problems 2
Net Losses
Net Losses
Illustration: If the net loss is $50,000 and the total
amount of charges to add back is $60,000, then net cash
provided by operating activities is $10,000.
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Special Problems 2
Significant Noncash Transactions
Common noncash transactions that a company should report or disclose:
1. Acquisition of assets by assuming liabilities (including capital lease
obligations) or by issuing equity securities.
(Mua lại tài sản bằng cách đảm nhận các khoản nợ (bao gồm cả nghĩa
vụ cho thuê vốn) hoặc bằng cách phát hành chứng khoán vốn.)
2. Exchanges of nonmonetary assets.
(Trao đổi tài sản phi tiền tệ.)
3. Refinancing (Tái cấp vốn) of long-term debt.
4. Conversion of debt or preferred stock to common stock.
5. Issuance of equity securities to retire (thanh toán) debt.
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Learning Objective 5
Explain the Use of a Worksheet in
Preparing a Statement of Cash Flows
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Use of a Worksheet
A worksheet involves the following steps.
Step 1. Enter the balance sheet accounts and their beginning
and ending balances in the balance sheet accounts section.
Step 2. Enter the data that explain the changes in the balance
sheet accounts and their effects on the statement of cash
flows in the reconciling columns of the worksheet.
Step 3. Enter the increase or decrease in cash on the cash line
and at the bottom of the worksheet. This entry should enable
the totals of the reconciling columns to be in agreement.
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