Brewer7ce PPT Ch14

CHAPTER 14
“How Well Am I
Doing?” - Cash
Flow
Statement
Prepared by
Rodney
Delcourt,
CPA (CMA)
Algonquin
© 2023 McGraw Hill Limited College
Learning Objectives
1. Identify sources and uses of cash from

changes to balance sheet accounts, and classify
transactions as operating, investing, or
financing activities.
2. Prepare cash flow statements using several
alternative methods.
© 2023 McGraw Hill Limited 2

The Cash Flow
Statement
Highlights the major activities that affect
cash flows and can be used to answer
questions such as:
 Are we generating sufficient positive
cash flow from operations to remain
viable?
 Will the company be
 To what extent will the able to pay its
company have to employees,
borrow money for suppliers, and other
necessary creditors in a timely
investments? manner?
 Why is there a difference
between net income and cash
flow for the year?
Definition of Cash
The term cash on the statement of cash

flows refers broadly to both cash and
cash equivalents.
Cash & Cash

Equivalents:
Currency and Bank Accounts
Commercial Paper
Money Market Funds
T-bills

Constructing the Cash Flow
Statement Using Changes in
Noncash Balance Sheet Accounts
Changes in Changes in
Capital Liabilities
Stock
Net Cash
Flows for
Dividends a Period Changes in
Paid to Noncash
Stockholde Assets
rs
Net Income

Explaining Net Cash Flow by
Analyzing the Noncash Balance
Sheet Accounts

Constructing the
Cash Flow Statement
Sources Uses
Net Income Always
Net Loss Always
Changes in non-cash assets Decreases Increases
Changes in liabilities * Increases Decreases
Changes in capital stock Increases Decreases
accounts
Dividends paid to Always
stockholders
Total sources Total
uses
Total sources - Total uses = Net Cash Flow
* Contra asset accounts, such as the Accumulated Depreciation account,

follow the rules for liabilities
Constructing the Cash
Flow Statement
Increases in noncash asset

accounts imply uses of cash.
Example: Inventory is purchased on credit from a
supplier. It is implied that cash was used to acquire
the inventory.
Increases in liability accounts imply
sources of cash.
Example: Inventory is purchased on credit from a
supplier. It is implied that an increase in a payable
has the effect of increasing cash available for other
uses.
Constructing the Cash
Flow Statement
Decreases in noncash assets
accounts imply sources of cash.
Example: Accounts receivable decreases when a
customer pays their bill. When the customer pays
the bill, the company’s cash increases.
Decreases in liability accounts imply

uses of cash.
Example:
Example: AA company
company pays
pays a
a note
note payable
payable held
held by
by aa
creditor.
creditor. When
When the
the payment
payment isis made,
made, cash
cash
decreases.
decreases.
A Simplified Cash Flow
Statement: An Example
Ed's Pizza Hut
Comparative Balance Sheet Account Balances
3/31/2023 3/31/2022 Change

DR (CR) DR (CR) Incr. (Decr.)
Cash $ 71,000 $ 90,000 $ (19,000)
Accounts Receivable 23,000 40,000 (17,000)
Inventory 350,000 300,000 50,000
Land 68,000 100,000 (32,000)
Equipment 84,000 84,000 -
Accumulated Depn. (45,000) (39,000) 6,000
Accounts Payable (38,000) (27,000) 11,000
Salaries Payable (9,000) (14,000) (5,000)
Note Payable - J oe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
Retained Earnings (4,000) (34,000) (30,000)
$ - $ -

Additional Information:
 There was a net loss for the 2023 year of $27,000.
 Depreciation for 2023 was $6,000.
 During 2023, Ed sold land originally costing
$32,000 for $32,000.
 During 2023, Ed paid dividends of $3,000 to the
stockholders.
 Ed issued $50,000 of common stock to settle the
note due to Joe Doe.

Summary of the sources of cash for
Ed’s Pizza Hut:
Ed's Pizza Hut
Sources of Cash
Decrease in A/R $ 17,000
Decrease in Land 32,000
Increase in A/P 11,000
Depreciation 6,000
Total sources of cash $ 66,000

Summary of the uses of cash for
Ed’s Pizza Hut.
Ed's Pizza Hut
Uses of Cash
Net loss $ 27,000
Increase in Inventory 50,000
Decrease in Salaries Payable 5,000
Dividends paid 3,000
Total uses of cash $ 85,000
The net cash flow for Ed’s Pizza Hut is

($19,000): $66,000 in sources minus
$85,000 in uses.
A Simplified Cash
Flow Statement
Ed's Pizza Hut
Sources of Cash This simplified
Decrease in A/R $ 17,000 approach does
Decrease in Land 32,000 not follow the
format required
Depreciation 6,000
Total sources of cash $ 66,000 for external
reporting
Ed's Pizza Hut purposes. It is
Uses of Cash
for illustrative
Net loss $ 27,000
Increase in Inventory 50,000 purposes only.

The Full-Fledged Cash Flow
Statement: Three Sections:
The Cash Flow

Statement is
divided in three
sections:
Financing
Operating
Activities
Activities
Investing
Activities

Statement: Operating
Activities
Operating activities
are those activities
that enter into the
determination of net
income.
Changes in
noncurrent
Transactions
balance sheet
affecting
accounts that
current assets
Transactions directly affect
affecting net income
current
liabilities

Statement: Investing
Activities
Investing activities
relate to transactions
involving the acquiring
or disposing of
noncurrent assets.
Lending money
Acquiring or to another
selling entity and
property, plant subsequently
and equipment Acquiring or collecting on
selling the loan
investment
securities

Statement: Financing
Activities
Financing activities relate
to transactions involving
borrowing from creditors
or repaying creditors and
engaging in transactions
with the company’s
owners.
Interest on
debt is
classified as an
operating
activity

Organization of the Full-
Fledged Cash Flow
Statement
XYZ Company
Cash
Cash
XYZ Company
Cash Flow Statement
Cash Flow Statement
For the Period Ending MM/DD/YY
flows
flows are
are
For the Period Ending MM/DD/YY
I. Operating Activities $ XXX

divided
divided
I.
II.
II.
Operating Activities
Investing Activities
$ XXX
XXX
XXX
into
into III.
III.
Financing Activities
XXX
XXX
three
three
Net Cash Flow s for the
Net Cash Flow s for the
Period
Period
$ XXX
$ XXX
categorie
Add: Beg. Cash Balance XXX
categorie Add: Beg. Cash Balance
Ending Cash Balance

XXX
$ XXX
s.
s.
Ending Cash Balance $ XXX

Organization of the Full-
Fledged Cash Flow
Statement
Operating Activities:
Net income
Changes in current assets
Changes in noncurrent assets that aff ect net income (e.g., depreciation)
Changes in current liabilities (except for debts to lenders and dividends payable)
Changes in noncurrent liabilities that aff ect net income
Investing Activities:
Changes in noncurrent assets that are not included in net income
Financing Activities:
Changes in the current liabilities that are debts to lenders rather than obligations to suppliers,
employees, or the government
Changes in noncurrent liabilities that are not included in net income
Changes in capital stock accounts
Dividends

Operating
Activities
Includes
Includes those
those activities
activities that
that enter
enter
into
into the
the determination
determination of of net
net
income.
income.
Net
NetIncome
Income(Loss)
(Loss) $$ XXX
XXX
Add:
Add: Decr.
Decr.ininCurrent
CurrentNoncash
NoncashAssets
Assets XXX
XXX
Incr.
Incr.in
inCurrent
CurrentLiabilities
Liabilities XXX
XXX
Depreciation
Depreciation XXX
XXX
Losses
Losses XXX
XXX
Less:
Less: Incr.
Incr.in
inCurrent
CurrentNoncash
NoncashAssets
Assets (XXX)
(XXX)
Decr.
Decr.ininCurrent
CurrentLiabilities
Liabilities (XXX)
(XXX)
Gains
Gains (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities $$ XXX
XXX

Sources of
Sources of cash
cash are
are added
added to
to net
net income
income
and uses
and uses of
of cash
cash are
are subtracted
subtracted from
from
net income.
net income.
Impact on Net Income

Sources Uses
Current
Decreases Increases
Noncash Assets
Current
Increases Decreases
Liabilities

Net
NetIncome
Income(Loss)
(Loss) $$ XXX
XXX
Add:
Add: Decr.
Decr.ininCurrent
CurrentNoncash
NoncashAssets
Assets XXX
XXX
Incr.
Incr.in
inCurrent
CurrentLiabilities
Liabilities XXX
XXX
Depreciation
Depreciation XXX
XXX
Losses
Losses XXX
XXX
Less:
Less: Incr.
Incr.in
inCurrent
CurrentNoncash
NoncashAssets
Assets (XXX)
(XXX)
Decr.
Decr.ininCurrent
CurrentLiabilities
Liabilities (XXX)
(XXX)
Gains
Gains (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities $$ XXX
XXX
Sources Uses
Current
Decreases Increases
Noncash Assets
Current
Increases Decreases
Liabilities
Net
NetIncome
Income(Loss)
(Loss) $$ XXX
XXX
Add:
Add: Decr.
Decr.ininCurrent
CurrentNoncash
NoncashAssets
Assets XXX
XXX
Incr.
Incr.in
inCurrent
CurrentLiabilities
Liabilities XXX
XXX
Depreciation
Depreciation XXX
XXX
Losses
Losses XXX
XXX
Less:
Less: Incr.
Incr.in
inCurrent
CurrentNoncash
NoncashAssets
Assets (XXX)
(XXX)
Decr.
Decr.ininCurrent
CurrentLiabilities
Liabilities (XXX)
(XXX)
Gains
Gains (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities $$ XXX
XXX
Sources Uses
Current
Decreases Increases
Noncash Assets
Current
Increases Decreases
Liabilities
Net
NetIncome
Income(Loss)
(Loss) $$ XXX
XXX
Add:
Add: Decr.
Decr.ininCurrent
CurrentNoncash
NoncashAssets
Assets XXX
XXX
Incr.
Incr.in
inCurrent
CurrentLiabilities
Liabilities XXX
XXX
Depreciation
Depreciation XXX
XXX
Losses
Losses XXX
XXX
Less:
Less: Incr.
Incr.in
inCurrent
CurrentNoncash
NoncashAssets
Assets (XXX)
(XXX)
Decr.
Decr.ininCurrent
CurrentLiabilities
Liabilities (XXX)
(XXX)
Gains
Gains (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromOperating
OperatingActivities
Activities $$ XXX
XXX
Depreciation
Depreciation is
is added
added back back to
to net
net
income
income because
because it it is
is aa decrease
decrease inin
noncash
noncash assets.
© 2023 McGraw Hill Limited
assets. 25
Net
NetIncome
Income(Loss)
(Loss) $$ XXX
XXX
Add:
Add: Decr.
Decr.in inCurrent
CurrentNoncash
NoncashAssets
Assets XXX
XXX
Incr.
Incr.in
inCurrent
CurrentLiabilities
Liabilities XXX
XXX
Depreciation
Depreciation XXX
XXX
Losses
Losses XXX
XXX
Less:
Less: Incr.
Incr.in
inCurrent
CurrentNoncash
NoncashAssets
Assets (XXX)
(XXX)
Decr.
Decr.in inCurrent
CurrentLiabilities
Liabilities (XXX)
(XXX)
Gains
Gains (XXX)
(XXX)
Net
NetCash
CashFlows
FlowsfromfromOperating
OperatingActivities
Activities $$ XXX
XXX
Gains
Gains are
are
subtracted Losses
Losses are
are added
added
subtracted from
from
net back
back to
to net
net income.
income.
net income.
income.

Includes
Includes transactions
transactions that
that involve
involve the
the
acquisition
acquisition or
or disposal
disposal of
of noncurrent
noncurrent
assets.
assets.
Add:
Add:Proceeds
Proceedsfrom
fromsale
saleof
ofland,
land,
buildings,
buildings,equipment,
equipment,or orother
other
noncurrent
noncurrentassets
assets $$ XXX
XXX
Receipt
Receiptofofprincipal
principalfrom
frominvestments
investments XXX
XXX
Less:Payments
Less:Paymentsto toacquire
acquireland,
land,buildings,
buildings,equipment,
equipment,
or
orother
othernon
noncurrent
currentassets
assets (XXX)
(XXX)
Payments
Paymentsto toacquire
acquireinvestments
investments (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromInvesting
InvestingActivities
Activities $$ XXX
XXX

Includes
Includes transactions
transactions involving
involving
receipts
receipts from
from or
or payments
payments toto
creditors
creditors and
and owners.
owners.
Add:
Add: Proceeds
Proceedsfrom
fromborrowing
borrowing ss $$ XXX
XXX
Proceeds
Proceedsfrom
fromissuing
issuingcapital
capitalstock
stock XXX
XXX
Proceeds
Proceedsfrom
fromsale
saleof
ofbonds
bonds XXX
XXX
Less:
Less: Principal
Principalpayments
paymentson onborrowed
borrowedfunds
funds (XXX)
(XXX)
Payments
Paymentsrelated
relatedtotobond
bondmaturities
maturities (XXX)
(XXX)
Dividend
Dividendpayments
payments (XXX)
(XXX)
Net
NetCash
CashFlows
Flowsfrom
fromFinancing
FinancingActivities
Activities $$ XXX
XXX

Other Issues: Gross or
Net?
For investing and financing
activities, items on the statement of
cash flows should be presented in
gross amounts rather than in net
Example:
Example: amounts.

 Assume
Assume Canadian
Canadian Tire
Tire purchases
purchases $50
$50 million
million in
in
property
property during
during the
the year
year and
and sells
sells other
other
property
property for
for $30
$30 million.
million.

 Instead
Instead ofof showing
showing the
the net
net change
change ofof $20
$20
million,
million, the
the company
company must
must report
report the
the gross
gross
amounts
amounts of of both
both transactions.
transactions.

Operating Activities:
Direct or Indirect Method?
Two Formats for Reporting Operating
Activities
Direct Indirect
Method Method
Reports the Starts with

cash effects accrual net
of each income and
operating converts to
activity cash basis
Note that no matter which format is used, the same
amount of net cash flows from operating activities
is generated.
Indirect Method of Determining
Net Cash Provided by Operating
Activities Add (+) or Deduct (−)
to Adjust Net Income
Net income $XXX

Adjustments needed to convert net income to a cash basis:
Depreciation charges +
Add (deduct): Changes in current asset accounts affecting revenue
or expense:*
Increase in the account −
Decrease in the account +
Add (deduct): Changes in current liability accounts affecting
revenue or expense:†
Increase in the account +
Decrease in the account −
Add (deduct): Gains or losses on sales of assets:
Gain on sales of assets −
Loss on sales of assets +
Add (deduct): Changes in the deferred income taxes account:
Increase in the account +
Decrease in the account −
Net cash provided by operating activities $XXX
*Examples include accounts receivable, accrued receivables, inventory, and prepaid expenses.
†Examples include accounts payable, accrued liabilities, and taxes payable.

A Full-Fledged Cash Flow
Ed's Pizza Hut
3/31/2023 3/31/2022 Change

Cash $ 71,000 $ 90,000 $ (19,000)
Inventory 350,000 300,000 50,000
Land 68,000 100,000 (32,000)
Equipment 84,000 84,000 -
Note Payable - Joe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
$ - $ -
Let’s revisit the comparative balance

sheet account balances for Ed’s Pizza 32
A Full-Fledged Cash Flow
Let’s also refresh our memory regarding the
following additional information.

 Additional
Additional Information:
Information:

There
There was
was aa net
net loss
loss for
for 2023
2023 ofof $27,000.
$27,000.

Depreciation
Depreciation for
for 2023
2023 waswas $6,000.
$6,000.

During
During 2023,
2023, EdEd sold
sold land
land originally
originally costing
costing
$32,000
$32,000 for
for $32,000.
$32,000.

During
During 2023,
2023, EdEd paid
paid dividends
dividends ofof $3,000
$3,000 toto the
the
stockholders.
stockholders.

EdEd issued
issued $50,000
$50,000 of of common
common stock
stock to
to settle
settle
the
the note
note due
due toto Joe
Joe Doe.
Doe.
Preparing the Cash Flow
Statement: Steps 1 - 4
1.Copy onto the worksheet the title of each account appearing on
the comparative balance sheet, except for cash and cash
equivalents and retained earnings. To avoid confusion, contra
asset accounts, such as the accumulated depreciation account,
should be listed with the liabilities. Contra asset accounts are
treated in the same way as liabilities on the cash flow
statement.
2.Compute the change from the beginning balance to the ending

balance in each balance sheet account. Break the change in
retained earnings down into net income and dividends paid to
shareholders.
3.Using Exhibit 14–2 as a guide, code each entry on the

worksheet as a source or a use.
4.Under the cash flow effect column, write sources as positive

numbers and uses as negative numbers.
Statement: Steps 5 - 8
5. Make any necessary adjustments to reflect gross, rather
than net, amounts involved in transactions—including
adjustments for gains and losses. Some of these
adjustments may require adding new entries to the bottom
of the worksheet. The net effect of all such adjusting
entries must be zero.
6. Classify each entry on the worksheet as an operating

activity, investing activity, or financing activity according to
the criteria given in Exhibit 14–7.
7. Copy the data from the worksheet to the cash flow

statement section by section, starting with the operating
activities section.
8. At the bottom of the cash flow statement, prepare a

reconciliation of the beginning and ending balances of cash
and cash equivalents. The net change in cash and cash
equivalents
© 2023 McGraw Hill Limitedshown at the bottom of this statement should 35
Statement: Step 1
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and
Current assets
Accounts receivable
Inventory
Noncurrent assets
Land List each account
Equipment
Contra Assets, Liabilities,
appearing on the
Contra assets
Accumulated depreciation
comparative balance
Current liabilities sheets except for
Accounts payable
Salaries payable cash and cash
Noncurrent liabilities
Notes payable equivalents and
Stockholders' equity
Common stock retained earnings.
Retained earnings
Net loss
Dividends
Total (net cash flow)

Statement: Step 2
Ed's Pizza Hut
Current assets
Accounts receivable $ (17,000)
Inventory 50,000
Noncurrent assets
Land (32,000)
Compute the change
Equipment
-
from the beginning
Contra assets
Accumulated depreciation 6,000
balance to the
Current liabilities ending balance for
Accounts payable 11,000
Salaries payable (5,000) each account.
Notes payable (50,000)
Common stock 50,000
Retained earnings
Net loss (27,000)
Dividends 3,000

Statement: Step 3
Ed's Pizza Hut
Source or Cash Flow Adjust- Adjusted Classifi-
Change Use? Effect ments Effect cation
Assets (except cash and cash
Current assets
Accounts receivable $ (17,000) Source
Inventory 50,000 Use Code each
Noncurrent assets
Land (32,000) Source entry on the
Equipment -
Contra Assets, Liabilities, and worksheet as
Contra assets
Accumulated depreciation 6,000 Source a source or
Current liabilities
Accounts payable 11,000 Source use of cash.
Salaries payable (5,000) Use
{
Recall that the
Notes payable (50,000) Use
Stockholders' equity transaction involving
Common stock 50,000 Source the Notes Payable and
Retained earnings Common Stock was
Net loss (27,000) Use
noncash.
Dividends 3,000 Use

Statement: Step 4
Ed's Pizza Hut
Current assets
Accounts receivable $ (17,000) Source $ 17,000
Inventory 50,000 Use (50,000)
Noncurrent assets
Land (32,000) Source 32,000 Code sources
Equipment
- -
of cash as
Contra assets
Accumulated depreciation 6,000 Source 6,000
positive
Current liabilities
Accounts payable 11,000 Source 11,000
numbers and
Salaries payable (5,000) Use (5,000) uses of cash
Notes payable (50,000) Use (50,000) as negative
Common stock 50,000 Source 50,000 numbers.
Retained earnings
Net loss (27,000) Use (27,000)
Dividends 3,000 Use (3,000)
Total (net cash flow) $ (19,000)

Statement: Step 5 Make any
necessary
Ed's Pizza Hut
Statement of Cash Flows Worksheet adjustments,
Source or Cash Flow Adjust- Adjusted including
Classifi-
Assets (except cash and cash adjustments
Current assets for gains and
Accounts receivable $ (17,000) Source $ 17,000 - $ 17,000
Inventory 50,000 Use (50,000) - (50,000)losses. The
Noncurrent assets net effect of
Land (32,000) Source 32,000 - 32,000
Equipment - - - - these should
Contra Assets, Liabilities, and equal zero.
Contra assets
Accumulated depreciation 6,000 Source 6,000 - 6,000
Current liabilities
Accounts payable 11,000 Source 11,000 - 11,000
Salaries payable (5,000) Use (5,000) - (5,000)
{
We need to make an
Notes payable (50,000) Use (50,000) 50,000 -
Stockholders' equity adjustment for the
Common stock 50,000 Source 50,000 (50,000) -noncash transaction
Retained earnings relating to Notes Payable
Net loss (27,000) Use (27,000) - and Common Stock.
(27,000)
Dividends 3,000 Use (3,000) - (3,000)
Total (net cash flow) $ (19,000) $ - $ (19,000)

Statement: Step 6
Ed's Pizza Hut
Source or Cash Flow Adjust- Adjusted Classifi-
Assets (except cash and cash
Current assets
Accounts receivable $ (17,000) Source $ 17,000 - $ 17,000 Operating
Inventory 50,000 Use (50,000) - (50,000) Operating
Noncurrent assets Classify
Land (32,000) Source 32,000 - 32,000 Investing
Equipment - each entry - - -
Contra Assets, Liabilities, and as
Contra assets
Accumulated depreciation 6,000 operating,
Source 6,000 - 6,000 Operating
Current liabilities investing,
Accounts payable 11,000 Source 11,000 - 11,000 Operating
Salaries payable (5,000) Use or(5,000) - (5,000) Operating
Noncurrent liabilities financing
Notes payable (50,000) Use (50,000) 50,000 -
Stockholders' equity activity.
Common stock 50,000 Source 50,000 (50,000) -
Retained earnings
Net loss (27,000) Use (27,000) - (27,000) Operating
Dividends 3,000 Use (3,000) - (3,000) Financing
Total (net cash flow) $ (19,000) $ - $ (19,000)

Statement: Step 7
Ed's Pizza Hut Copy the
Statement of Cash Flows data from the
For the Period Ending 3/31/2013
worksheet
Net loss $ (27,000) into the
Add: Decrease in accounts receivable 17,000 Statement of
Increase in accounts payable 11,000
Increase in depreciation 6,000 Cash Flows
Less: Increase in inventory (50,000) section by
Decrease in salaries payable (5,000) section.
Net cash flow from operations (48,000)
Proceeds from sale of land 32,000
Dividends paid (3,000)
Net change in cash (19,000)

Statement: Step 8
Ed's Pizza Hut
Statement of Cash Flows
Prepare a cash
Net loss $ (27,000)
Add: Decrease in accounts receivable 17,000 reconciliation
Increase in accounts payable 11,000 at the bottom
Increase in depreciation 6,000
Less: Increase in inventory (50,000)
of the
Decrease in salaries payable (5,000) statement.
Cash, beginning 90,000
Cash, ending $ 71,000

Interpretation of the Cash
Flow Statement
Examine
Examine the
the sections
sections carefully.
carefully.
For
For example,
example, the
the operating
operating section
section
indicates:
indicates:

Ed’s
Ed’s Pizza
Pizza Hut
Hut generated
generated aa negative
negative cash
cash flow
flow
from
from operations
operations of
of $48,000.
$48,000. This
This is
is usually
usually aa
sign
sign of
of fundamental
fundamental difficulties.
difficulties.

Ultimately,
Ultimately, aa positive
positive cash
cash flow
flow is
is necessary
necessary to
to
avoid
avoid liquidating
liquidating assets
assets or
or borrowing
borrowing money
money to
to
pay
pay for
for day-to-day
day-to-day activities.
activities.

Appendix 14A: The
Direct Method of
Determining the Net
Cash Provided by

Computing Net Cash Provided by
The direct method
computes net cash
provided by operating
activities by
reconstructing the income
statement on a cash basis
from top
Cashto bottom.
provided by
operating activities under
the direct method will
always agree with the
amount computed using
the indirect method.

Similarities and Differences
in Handling Data
Add (+) or
Deduct (-) to Adjustments for
Adjust to a
Revenue or Expense Item Cash Basis
accounts that
Sales revenue (as reported) affect revenue are
Adjustments to a cash basis:
1 Increases in accounts receivable -
the same in the
2 Decreases in accounts receivable + direct method and
Cost of goods sold (as reported) indirect methods.
3 Increase in merchandise inventory +
4 Decrease in merchandise inventory - Adjustments
5 Increase in accounts payable - for accounts
6 Decrease in accounts payable +
that affect
Operating expenses (as reported)
Adjustments to a cash basis: expenses are
7 Increase in prepaid expenses + handled in
8 Decrease in prepaid expenses -
9 Increase in accrued liabilities - opposite ways
10 Decrease in accrued liabilities + for the direct
11 Period's depletion and depreciation charges -
and indirect
Income tax expense (as reported)
Adjustments to a cash basis: methods.
12 Increase in accrued taxes payable -
13 Decrease in accrued taxes payable +
14 Increase in deferred income taxes -
15 Decrease in deferred income taxes +

Direct Method: Gains
and Losses
Regarding gains and

losses on sale of
assets, no
adjustments are
needed at all under
the direct method.

Direct Method: General Model
Add (+) or Deduct (−) to Illustration—WestJet Revenue
Adjust to a Cash Basis or Expense Item (in millions)
Sales revenue (as reported) $3,427
1. Increase in accounts receivable − −4
2. Decrease in accounts receivable +
Total $3,423
Operating expenses (as reported) 3,087
3. Increase in inventory + +4
4. Decrease in inventory −
5. Increase in prepaid expenses + +35
6. Decrease in prepaid expenses −
7. Increase in accounts payable − −153
8. Decrease in accounts payable +
9. Increase in advance ticket sales − −49
10. Decrease in advance ticket sales +
11. Period’s depreciation charges − −149
Total 2,775
Income tax expense (as reported) 98
12. Increase in deferred income taxes − −31
13. Decrease in deferred income taxes +
Total 67
Net cash provided by operating activities $ 581

The Direct Method: An
Example Ed's Pizza Hut
3/31/2023 3/31/2022 Change

DR (CR) DR (CR) Incr. (Decr.) Let’s revisit
Cash $ 71,000 $ 90,000 $ (19,000) the
Accounts Receivable 23,000 40,000 (17,000) comparative
Inventory 350,000 300,000 50,000 balance sheet
Land 68,000 100,000 (32,000) account
Equipment 84,000 84,000 - balances for
Accumulated Depn. (45,000) (39,000) 6,000 Ed’s Pizza
Accounts Payable (38,000) (27,000) 11,000 Hut.
Common Stock (500,000) (450,000) 50,000
$ - $ -
The Direct Method: An
Example
Ed's Pizza Hut
Income Statement
For the Year Ended 3/31/2023
Let’s assume
Sales $ 1,000,000 that Ed’s Pizza
Cost of goods sold 750,000 Hut prepared
Gross margin 250,000
this income
Operating expenses 277,000
Net loss $ (27,000) statement.

The Direct Method:
An Example
Step 1: Translate sales revenue

into cash collected from
customers.
Sales (as reported) $ 1,000,000
Add: Decrease in accounts receivable 17,000
Cash collected from customers $ 1,017,000

The Direct Method: An Example
Step 2: Translate cost of

goods sold into cash
disbursements for
purchases.
Cost of goods sold (as reported) $ 750,000
Add: Increase in inventory 50,000
Less: Increase in accounts payable (11,000)
Cash paid for purchases $ 789,000

The Direct Method: An Example
Step 3: Translate operating

expenses into cash paid for
operating expenses.
Operating expenses (as reported) $ 277,000
Add: Decrease in salaries payable 5,000
Less: Increase in depreciation (6,000)
Cash paid for operating expenses $ 276,000
There is no adjustment
needed for income taxes
because Ed’s Pizza Hut
has a net loss of $27,000.
The Direct Method:
Notice that the net
An Example cash provided by
operating activities
Ed's Pizza Hut agrees with that
Statement of Cash Flows computed using the
For the Period Ending 3/31/2023 indirect method.
Cash received from customers $ 1,017,000
Cash paid for purchases (789,000)
Cash paid for operating expenses (276,000)

Special Rules – Direct
and Indirect Methods
• When the direct method is used, it

must also present the indirect method
in a separate schedule accompanying
the cash flow statement.
• When the indirect method is used, it

must also provide a special breakdown
of data. The company has to provide a
separate disclosure of the amount of
interest and the amount of income
taxes paid during the year.

Appendix 14B: The T-
Account Approach to
Statement

T-Account Approach
Ed's Pizza Hut
3/31/2023 3/31/2022 Change

Cash $ 71,000 $ 90,000 $ (19,000)
Inventory 350,000 300,000 50,000
Land 68,000 100,000 (32,000)
Equipment 84,000 84,000 -
Common Stock (500,000) (450,000) 50,000
$ - $ -

T-Account Approach
 Additional Information:
 There was a net loss for 2023 of $27,000.
 depreciation for 2023 was $6,000.
 During 2023, Ed sold land originally costing
$32,000 for $32,000.
 During 2023, Ed paid dividends of $3,000 to the
stockholders.
 Ed issued $50,000 of common stock to settle the
note due to Joe Doe.

T-Account Approach
Here is a summary of the sources
of cash for Ed’s Pizza Hut.
Ed's Pizza Hut

Sources of Cash
Decrease in A/R $ 17,000
Decrease in Land 32,000
Depreciation 6,000
Total sources of cash $ 66,000

T-Account Approach
Here is a summary of the
uses of cash for Ed’s Pizza
Ed'sHut.
Pizza Hut
Uses of Cash
Net loss $ 27,000
Increase in Inventory 50,000
The net cash flow for Ed’s Pizza Hut

is ($19,000): $66,000 in sources
minus $85,000 in uses.
T-Account Approach
Cash
Provided Used
27,000 Net loss
3,000 Cash dividends paid
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Retained Earnings - Net Loss 27,000
Cash - Used 27,000
Retained Earnings - Dividends 3,000

Cash - Used 3,000

T-Account Approach
Cash
Provided Used
Decrease in accounts receivable 17,000 27,000 Net loss
50,000 Increase in inventory
3,000 Cash dividends paid
GENERAL JOURNAL
Post.
Cash - Provided 17,000
Accounts Receivable 17,000
Inventory 50,000
Cash - Used 50,000
T-Account Approach
Cash
Provided Used
Depreciation 6,000 50,000 Increase in inventory
Proceeds from sale of land 32,000 3,000 Cash dividends paid
GENERAL JOURNAL
Post.
Land 32,000

Accumulated Depreciation 6,000
T-Account Approach
Cash
Provided Used
Increase in accounts payable 11,000 5,000 Decrease in salaries payable
48,000 Net cash used by operating activities
GENERAL JOURNAL
Post.
Accounts Payable 11,000
Salaries Payable 5,000

Cash - Used 5,000
T-Account Approach
Cash
Provided Used
GENERAL JOURNAL
Post.
No Effect in the Cash

account.
T-Account Approach
Cash
Provided Used
19,000 Net decrease in cash and cash equivalents
The net effect of these transactions on the cash

account is as shown.
Notice, the net decrease in cash is $19,000.

Preparing the Cash Flow Statement
from the Completed T-Accounts
Ed's Pizza Hut

Statement of Cash Flows
Net loss $ (27,000)
Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000
Increase in depreciation 6,000
Less: Increase in inventory (50,000)
Decrease in salaries payable (5,000)

Chapter Summary
 Cash flow statements explain the change in cash
from one period to the next as shown on the
balance sheet.
 Cash flow statements can be divided into three main
activities: operating, investing and financing.
 Three methods can be used to prepare the cash flow
statement including:
 Direct method – income statement is reconstructed on
a cash basis
 Indirect method – the operating activities section is
constructed by adjusting net income to a cash basis
(in other words, any items that are not a cash basis
are removed from income).
 T-account method – analyzes the changes in various
balance sheet accounts and charts these changes in T-

Brewer7ce PPT Ch14

Uploaded by

Document Informationclick to expand document information

Document Informationclick to expand document information

Copyright:

Available Formats

Brewer7ce PPT Ch14

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Brewer7ce PPT Ch14

Uploaded by

Copyright:

Available Formats

CHAPTER 14

1. Identify sources and uses of cash from

© 2023 McGraw Hill Limited 2

The term cash on the statement of cash

Cash & Cash

© 2023 McGraw Hill Limited 4

© 2023 McGraw Hill Limited 5

© 2023 McGraw Hill Limited 6

* Contra asset accounts, such as the Accumulated Depreciation account,

Increases in noncash asset

Decreases in liability accounts imply

3/31/2023 3/31/2022 Change

© 2023 McGraw Hill Limited 10

© 2023 McGraw Hill Limited 11

© 2023 McGraw Hill Limited 12

The net cash flow for Ed’s Pizza Hut is

© 2023 McGraw Hill Limited 14

The Cash Flow

© 2023 McGraw Hill Limited 15

© 2023 McGraw Hill Limited 16

© 2023 McGraw Hill Limited 17

© 2023 McGraw Hill Limited 18

I. Operating Activities $ XXX

Ending Cash Balance

© 2023 McGraw Hill Limited 19

© 2023 McGraw Hill Limited 20

© 2023 McGraw Hill Limited 21

Impact on Net Income

© 2023 McGraw Hill Limited 22

© 2023 McGraw Hill Limited 26

© 2023 McGraw Hill Limited 27

© 2023 McGraw Hill Limited 28

© 2023 McGraw Hill Limited 29

Reports the Starts with

Net income $XXX

© 2023 McGraw Hill Limited 31

3/31/2023 3/31/2022 Change

Let’s revisit the comparative balance

2.Compute the change from the beginning balance to the ending

3.Using Exhibit 14–2 as a guide, code each entry on the

4.Under the cash flow effect column, write sources as positive

6. Classify each entry on the worksheet as an operating

7. Copy the data from the worksheet to the cash flow

8. At the bottom of the cash flow statement, prepare a

© 2023 McGraw Hill Limited 36

© 2023 McGraw Hill Limited 37

© 2023 McGraw Hill Limited 38

© 2023 McGraw Hill Limited 39

© 2023 McGraw Hill Limited 40

© 2023 McGraw Hill Limited 41

© 2023 McGraw Hill Limited 42

© 2023 McGraw Hill Limited 43

© 2023 McGraw Hill Limited 44

© 2023 McGraw Hill Limited

© 2023 McGraw Hill Limited 46

© 2023 McGraw Hill Limited 47

Regarding gains and