ACCT303 Chapter 4B - Statement of Cash Flows, teaching pp -...

Chapters 4 B
Statement of Cash Flows

Statement of Cash Flows 2
Objectives of this Chapter
I. Identify business activities which can
generate or use cash and differentiate
between income flows (i.e., accrual
basis) and cash flows from operating
activities.
II. The Importance and the usefulness of
the statement of cash flows.

Statement of Cash Flows 3
Objectives of this Chapter
(contd.)
III. Learn how to prepare the statement of
cash flows.
VI. The “cash burn rate” and the use of this
rate in evaluating the financial viability of
start-up companie s.
V. Learn the two alternatives (direct and
indirect methods) in preparing net cash
flows from operating activities.

Statement of Cash Flows 4
I. Activities which can either
generate cash or use cash
for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.

Statement of Cash Flows 5
A. Operating Activities (i.e.,
sales revenue, expenses)
■
All these activities are reported in the I/S
(income statement). However, I/S only
provides the accrual-basis net income
(revenue –expense + gains – losses )
which very often is not the change in
cash.
■
Therefore, we need to adjust from net
income flows to cash flows in order to
report the net cash provided by (or used
in) operating activities
.

Statement of Cash Flows 6
A. Operating Activities
(contd.)
■
There are two approaches to reconcile
net income to net cash provided by (or
used in) operating activities:
1. Indirect Method
==> Lump-Sum Adjustment
2. Direct Method
==> Individual Account Adjustment

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1. Indirect Method
■
Adjust net income (the lump sum
amount of all revenues and expenses)
for all differences between income
flows and cash flows.

Statement of Cash Flows 8
2. Direct Method
■
Adjust each revenue account to cash
collection and adjust each expense
account to cash payment. Subtract total
cash payments from total cash collections
to derive net cash flows of the operation
activities.
■
SFAS No. 95 allows a choice between the
direct and indirect approach for the cash
flow statement

Statement of Cash Flows 9
Cash flows from operating
activities
■
Cash Inflows:
1. Collections from customers including
cash received from sales (or services)
and collections of A/R.
2. Cash receipts of interests or dividends.
3. Collections of other operating receipts
(i.e., unearned revenue, rent revenue).

Statement of Cash Flows 10
Cash Flows from
Operating Activities
(contd.)
■
Cash Outflows:
1. Payments to suppliers.
2. Payments to employees.
3. Payments for interest expense.
4. Payments for income taxes.
5. Payments for other expenses(i.e.,
Prepaid expenses; rent expenses).

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Activities which can either
generate cash or use cash for
a business entity
A. Operating activities.
B. Investing activities.