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INSTRUCTOR INFORMATION

LECTURE
Full name: DANG THI THUY HANG, MB, Ph.D.
STATEMENT OF CASH FLOWS Address: Room 1114, 11th Floor, Building A1, NEU
Phone number: +84 915 166 150
Email: [email protected]
Faculty/Institute: School of Accounting and Auditing
Department: Financial Accounting

Hà Nội, 2023
Copyright © 2019 - Trường Đại học Kinh tế Quốc dân 1 2

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LEARNING OBJECTIVES MAIN TOPICS

 Describe the usefulness and format of the statement of cash flows. The usefulness of the Statement of cash flows

 Prepare a statement of cash flows.

 Contrast the direct and indirect methods of calculating net cash Classification of cash flows
flows from operating activities.
 Discuss special problems in preparing a statement of cash flows.
Format of the statement of cash flows
 Explain the use of a worksheet in preparing a statement of cash
flows.
Prepare a statement of cash flows

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STATEMENT OF CASH FLOWS

THE STATEMENT OF CASH FLOWS

THE USEFULNESS OF THE presents a detailed summary of
all the cash inflows and outflows,
or the sources and uses of cash
STATEMENT OF CASH FLOWS during the period.

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Purpose of the Statement of cash flows Usefulness of the Statement of Cash Flows
 To provide relevant information about the cash receipts and cash payments Provides information to help assess:
of an entity during a period.
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and meet obligations.
 The statement provides answers to the following questions:
3. Reasons for difference between net income and net cash flows
1. Where did the cash come from during the period?
from operating activities.
2. What was the cash used for during the period?
4. Evaluate cash and noncash investing and financing transactions.
3. What was the change in the cash balance during the period?

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Content of the Statement of cash flows CLASSIFICATION OF CASH FLOWS

1. Operating activities involve the cash effects of transactions that enter into the
determination of net income.

2. Investing activities include making and collecting loans and acquiring and
disposing of investments (both debt and equity) and property, plant, and
equipment.

3. Financing activities involve liability and equity items. They include:

(a) obtaining resources from owners and providing them with a return
on their investment, and
(b) borrowing money from creditors and repaying the amounts
borrowed.
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CLASSIFICATION OF CASH FLOWS CLASSIFICATION OF CASH FLOWS

Operating Cash Flows Investing and Financing Cash Flows

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CLASSIFICATION OF CASH FLOWS FORMAT OF THE STATEMENT OF CASH FLOWS

Cash Equivalents
The basis recommended by the IASB for the statement of cash flows is
actually “cash and cash equivalents.” Cash equivalents are short-term,
highly liquid 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.

Generally, only investments with original maturities of three

months or less qualify under this definition.

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FORMAT OF THE STATEMENT OF CASH FLOWS

Statement of Cash Flows
Cash flows from operating activities xxx

xx
Cash flows from investing activities

Cash flows from financing activities x

Net increase (decrease) in cash xx

Cash at beginning of period x

Cash at end of period xx

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Preparation of Statement of Cash Flows

 Three Sources of Information:

1. Comparative statement of financial position
PREPARE A STATEMENT OF CASH FLOWS
2. Current statement of profit or loss data.
3. Selected transaction data.

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Preparation of Statement of Cash Flows

Step 1: Determine change in cash
Determine Determine
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Determine
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change in net cash flow net cash  Compute the difference between the beginning and the
ending cash balance from examining its comparative
cash from flows from statements of financial position.
operating investing and
activities financing
activities
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Step 2: Determine net cash flow from operating activities Direct method

 Determine based on analyzing not only the current year’s

income statement but also comparative statements of
financial position as well as selected transaction data Cash receipts - Cash payments = Net cash flows
(both cash and non-cash transactions).
* Direct method
* Indirect method

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Direct method Direct method

Cash receipts Cash payments

Paid to suppliers
From customers (sales of goods and services)

Paid to employees
From lessees, licensees, principals and other revenues

Interest paid
From receipts of interest and dividends
Income taxes paid
Other operating cash receipts
Other operating cash payments

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Net Cash Flow from Operating Activities Illustration

Direct Method
In 2021, Smile Co. has the information as below:
• Revenues from providing goods and services is CU8,000,000; Cash collected from
accounts receivable is CU200,000.
• Cash payments for purchasing goods is CU5,000,000; salaries and wages paid for
employees is CU1,000,000; Cash payments for operating activities is CU70,000.
• Cash dividends received is CU10,000; Interest paid for bank is CU12,000.
Compute net cash from operating activities?

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Illustration Indirect method

Cash flows from operating activities  Statement of cash flows prepared under indirect method starts with Net income
Cash receipts (accrual basic) adds (+) and deducts (-) required adjustments to calculate Net
cash from operating activities (cash basic).
From customers CU8,200,000
 The required adjustments includes:
Cash payments
1. Non-cash expenses, such as: Depreciation expense, Amortization
To suppliers CU5,000,000 expense, Depletion expense
To employees 1,000,000 2. Gains and losses from disposal of Property, Plants and Equipment

For operating activities 70,000 3. Increases and decreases in current non-cash assets and current
liabilities.
For interest 12,000 6,082,000
Net cash flows from operating activities
CU2,118,000
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Indirect method- ADJUSTMENTS

Indirect method
Adjustment
Net income
Non-cash transactions Depreciation expense +
Amortization expense +
Depletion expense
+
Gains and losses from disposal of Gains -
Property, Plants and Equipment, sales Losses
of investments +
Difference in current non-cash assets Increase -
Decrease
+
Difference in current liabilities Increase +
Decrease
-
Net cash from operating activities
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Illustration

 Accounting Consultants Inc. started on January 1, 2020, when it issued 60,000

ordinary shares of $1 par value for $60,000 cash. The company rented its office
space, furniture, and equipment, and performed accounting consulting services
throughout the first year.
The comparative statements of financial position at the beginning and end of the year
2020 and the statement of profit or loss for 2020 of the company are showed in the
next slides.

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Illustration Illustration

Accounting Consultants Inc. Accounting Consultants Inc.

Statement of financial position Statement of profit or loss
Assets 31/12/2020 1/1/2020
For the year end December 31, 2020
Accounts receivable $ 36,000 $ -
Cash 49,000 - Revenues $ 125,000
Total assets $ 85,000 $ -
Operating expenses 85,000
Equity and Liabilities
Ordinary shares ($1 par) $ 60,000 $ - Income before income taxes 40,000
Retained earnings 20,000 - Income tax expense 6,000
Accounts payable 5,000 -
Net income $ 34,000
Total Equity and Liabilities $ 85,000 $ -
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Step 1: Determine the Change in Cash Step 2: Determine Net Cash Flow from Operating
Activities (Indirect method)
Accounting Consultants Inc.
Statement of financial position
Assets 31/12/2020 1/1/2020 Differences
Net income $ 34,000
Accounts receivable $ 36,000 $ -$ 36,000
Cash 49,000 - 49,000 Adjustments to reconcile net income to net cash provided
by operating activities:
Total assets $ 85,000 $ -$ 85,000
Increase in accounts receivable (36,000)
Equity and Liabilities
Ordinary shares ($1 par) $ 60,000 $ -$ 60,000 Increase in accounts payable 5,000
Retained earnings 20,000 - 20,000
Accounts payable 5,000 - 5,000 Net cash provided by operating activities $ 3,000
Total Equity and Liabilities $ 85,000 $ -$ 85,000
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Step 3: Determine Net Cash Flows from Investing and Financing Activities Net Cash Flows from Investing Activities – Direct method

From disposal of PPE

Cash inflows From sales of investments
 Compute base on the analysis of the differences between the
Collection of principal
beginning and the ending presented on the comparative
statements of financial position, and related transactions.
Purchase PPE
Cash outflows
Purchase debt or equity investments
Lend to other companies

Net Cash Flows from Investing Activities

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Net Cash Flows from Financing Activities – Direct method

Illustration
Step 3: Determine Net Cash Flows from Financing Activities

Issuance of equity securities (ordinary shares)

Cash inflows
Issuance of debt securities (bonds)
Cash flows from financing activities

Issuance of ordinary shares $ 60,000

Pay cash dividends
Cash outflows
Pay long-term debts Payment of cash dividends (14,000)
Purchase treasury shares
Net cash flows form financing activities $ 46,000
Net Cash Flows from Financing Activities

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Accounting Consultants Inc.

Accounting Consultants Inc.
Statement of cash flows
Statement of financial position
For the year end December 31, 2020
Assets 31/12/2021 1/1/2021 Differences
Cash flows from operating activities
Land $ 70,000 $- $ 70,000
Net income $ 34,000 Buildings 200,000 - 200,000
Adjustments to reconcile net income to net cash provided by Accumulated depreciation – Buildings (11,000) - (11,000)
operating activities: Equipment 68,000 - 68,000
Accumulated depreciation – Equipment (10,000) - (10,000)
Increase in accounts receivable (36,000)
Prepaid expenses 6,000 - 6,000
Increase in accounts payable 5,000 Accounts receivable 26,000 36,000 (10,000)
Net cash provided by operating activities 3,000 Cash 37,000 49,000 (12,000)
Cash Flows from financing activities Total assets $ 386,000 $ 85,000
Issuance of ordinary shares 60,000 Equity and Liabilities
Payment of cash dividends (14,000) Share capital- Ordinary ($1 par) $ 60,000 $ 60,000 $ -
Net cash flows from financing activities 46,000 Retained earnings 136,000 20,000 116,000
Bonds payable 150,000 - 150,000
Net increase in cash 49,000
Accounts payable 40,000 5,000 35,000
Cash at beginning of 2020 -
Total Equity and Liabilities $ 386,000 $ 85,000
Cash at end of 2020 $ 49,000 41 42

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Accounting Consultants Inc.

Statement of cash flows
Accounting Consultants Inc. For the year end December 31, 2021
Statement of profit or loss Cash flows from operating activities
For the year end December 31, 2021 Net income $ 134,000
Revenues Adjustments to reconcile net income to net cash provided by
$ 492,000 operating activities:
Operating expenses (excluding depreciation expense) Depreciation expense 21,000
269,000
Decrease in accounts receivable 10,000
Depreciation expense 21,000 Increase in prepaid expenses (6,000)
Increase in accounts payable 35,000
Income from operations 202,000 Net cash provided by operating activities 194,000
Income tax expense Cash flows from investing activities
68,000
Purchase of land (70,000)
Net income $ 134,000 Purchase of buildings (200,000)
Purchase of equipment (68,000)
Additional information Net cash provided by investing activities (338,000)
Cash flows from financing activities
The company declared and paid an $18,000 cash dividend. Issuance of bonds 150,000
The company obtained $150,000 cash through the issuance of long-term bonds. Payment of cash dividends (18,000)
Net cash provided by financing activities 132,000
Land, building, and equipment were acquired for cash. Net decrease in cash (12,000)
Cash at beginning of 2021 49,000
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Cash at end of 2021 $ 37,000 44

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FREE CASH FLOW Free Cash Flow Computation

The amount of discretionary cash flow a company has that may be used for
purchasing additional investments, retiring its debt, purchasing treasury
stock, or simply adding to its liquidity.

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Non-cash transactions Disclosure

• Customers pay by non-cash assets  IAS7 indicates that cash flows related to the received or paid interests, the
• Issuance of ordinary shares or bonds to purchase assets received or paid dividends by cash, must be presented in the separated item in the
Statement of cash flows.
• Exchanges on long-lived assets
 The information about the paid income tax also need disclose separately from other
• Conversion of bonds into ordinary shares or preferred shares into ordinary shares items in the Cash flows from operating activities.
• Issuance of ordinary shares to pay debts

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Discussion

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