The Statement of

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Chapter 8

• The Statement of
• Cash Flows

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8-1 Multi-Step vs. Single-Step Income Statement
Multiple-step Single-step
Sales Revenue Net Sales a Total Revenue
Cost of Goods Sold Gross Profit b Total Expenses
Operating Expenses Income from operations c
Non-operating items

Net Income d
a Sales - Sales returns - Sales Discounts b Net
sales - Cost of goods sold c Gross profit -
Operating expenses d Income from operations
Other revenue/gains - other expenses/losses
Other Revenues and Gains Other Expenses and Losses
Interest revenue from notes receivable and marketable securities Interest expense on notes and loans payable
Dividend revenue from investments in capital stock Casualty losses from recurring causes such as vandalism and accidents
Rent revenue from subleasing a portion of the store Losses from the sales of abandonment of property, plant, and equipment
Gain from sale of property, plant and equipment Loss from strikes by employees and suppliers
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8-2 Typical Receipts and Payments Classified by
Activity
Operating activities Cash inflows
From sale of goods or services. From
returns on loans (interest) and on equity
securities (dividends). Cash outflows
To suppliers for inventory. To
employees for services. To government
for taxes. To lenders for interest.
To others for expenses. Investing
activities Cash inflows From sale
of property, plant, and equipment. From
sale of debt or equity securities of other
entities. From collection of principal
on loans to other entities. Cash outflows
To purchase property, plant, and
equipment. To purchase debt or equity
securities of other entities. To make
loans to other entities. Financing activities
Cash inflows From sale of equity
securities (companys own stock). From
issuance of debt (bonds and notes). Cash
outflows To stockholders as
dividends. To redeem long-term debt or
reacquire capital stock.
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8-3 Information Sources for Activities
OPERATING ACTIVITIES
Analyze Income statement items Changes in noncash current asset and current liability items
INVESTING ACTIVITIES
Analyze increases and decreases in investments and long-term asset items
FINANCING ACTIVITIES
Analyze increases and decreases in long-term liability and stockholders equity items
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8-4 Format of the Statement of Cash Flows
COMPANY NAME Statement of Cash Flows Period Covered COMPANY NAME Statement of Cash Flows Period Covered COMPANY NAME Statement of Cash Flows Period Covered
Cash flows from operating activities (List of individual items) Net cash provided (used) by operating activities XX XXX
Cash flows from investing activities (List of individual inflows and outflows) Net cash provided (used) by investing activities XX XXX
Cash flows from financing activities (List of individual inflows and outflows) (Net cash provided (used) by financing activities XX XXX
Net increase (decrease) in cash XXX
Cash at beginning of period XXX
Cash at end of period XXX
Noncash investing and financing activities (List of individual noncash transactions) XXX
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8-5 Converting Net Income to Net Cash Provided
(Used) by Operating Activities
Accrual Basis of Accounting Accrual Basis of Accounting Cash Basis of Accounting Cash Basis of Accounting
Earned Revenue Net Income Adjust Revenues to Cash Receipts Net Cash Provided by Operating Activities
Net Income Net Cash Provided by Operating Activities
Incurred Expenses Net Income Adjust Expenses to Cash Disbursements Net Cash Provided by Operating Activities

INDIRECT METHOD
Begin with net income and adjust for income statement items that did not effect cash. Reconcile net income to net cash provided (used) by operating activities.
DIRECT METHOD
Adjust each item on the income statement from the accrual basis to the cash basis. Major classes of operating cash receipts and cash payments are reported.
OR
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8-6 Operating Activities Indirect Method
Adjustments for Noncash Items
Adjustments to convert net income to net cash
provided by operating activities.
Adjustments for noncash charges and credits Noncash charges and credits Add to (Deduct from) Net Income
Adjustments for noncash charges and credits Depreciation Expense Add
Adjustments for noncash charges and credits Patent amortization expense Add
Adjustments for noncash charges and credits Depletion expense Add
Adjustments for noncash charges and credits Loss on sale of equipment Add
Adjustments for noncash charges and credits Gain on sales of equipment Deduct
All noncash expenses are added to net income, and
all noncash revenues are subtracted from net
income.
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8-7 Operating Activities Indirect Method
Adjustments For Current Assets and Liabilities
Adjustments to convert net income to net cash
provided by operating activities.
Adjustments for Current Items For Changes In Add to Net Income Deduct from Net Income
Adjustments for Current Items Current assets Decreases Increases
Adjustments for Current Items Current liabilities Increases Decreases
Adjustments for Current Items For Changes in Individual Accounts Add to Net Income Deduct from Net Income
Adjustments for Current Items Accounts receivable Decrease Increase
Adjustments for Current Items Inventory Decrease Increase
Adjustments for Current Items Prepaid expenses Decrease Increase
Adjustments for Current Items Accounts payable Increase Decrease
Adjustments for Current Items Accrued expenses payable Increase Decrease
All changes in current assets are handled in a
similar manner and all changes in current
liabilities are handled in a similar manner, but
the adjustments are exactly the opposite.
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8-8 Cash Flows from Operating Activities
Indirect Method
DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31
Current Assets 2003 2002 Change
Accounts receivable 30,000 39,000 9,000 Decrease
Prepaid rent 15,000 10,000 5,000 Increase
Inventory 20,000 18,000 2,000 Increase
Current Liabilities
Accounts payable 18,000 12,000 6,000 Increase
Interest payable 6,000 2,000 4,000 Increase
Taxes payable 3,000 5,000 2,000 Decrease
Problem Data
DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005
Revenues Sales revenue Gain on sale of land Total revenues 400,000 20,000 420,000
Expenses Cost of goods sold Operating expenses Depreciation expense Interest expense Income tax expense Total expenses 280,000 75,000 15,000 8,000 7,000 385,000
Net Income 35,000
Using the data provided, prepare the cash flows
from operating activities section of the
statement of cash flows using the indirect method.
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8-8 Cash Flows from Operating Activities
Indirect Method (continued)
DEMONSTRATION COMPANY Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2004 DEMONSTRATION COMPANY Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2004 DEMONSTRATION COMPANY Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2004
Cash flows from operating activities Net Income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Gain on sale of land Decrease in accounts receivable Increase in prepaid rent Increase in inventory Increase in accounts payable Increase in interest payable Decrease in taxes payable Net cash provided by operating activities 15,000 (20,000) 9,000 (5,000) (2,000) 6,000 4,000 (2,000) 35,000 5,000 40,000
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8-9 Cash Flows from Operating Activities Direct
Method
DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31, 2005 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31, 2005 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31, 2005 DEMONSTRATION COMPANY Comparative Balance Sheet Accounts December 31, 2005
2005 2004 Change
Current assets Accounts receivable Prepaid rent Inventory 30,000 15,000 20,000 39,000 10,000 18,000 9,000 Decrease 5,000 Increase 2,000 Increase
Current liabilities Accounts payable Interest payable Taxes payable 18,000 6,000 3,000 12,000 2,000 5,000 6,000 Increase 4,000 Increase 2,000 Decrease
Problem Data
Using the provided data, prepare the cash flows
from operating activities section of the
statement of cash flows using the direct method.
DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Income Statement For the Year Ended December 31, 2005
Revenues Sales revenue Gain on sale of land Total revenues 400,000 20,000 420,000
Expenses Cost of goods sold Operating expenses Depreciation expense Interest expense Income tax expense Total expenses 280,000 75,000 15,000 8,000 7,000 385,000
Net Income 35,000
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8-9 Cash Flows from Operating Activities Direct
Method (continued)
Accrual Basis Add Deduct Cash Flows
Sales 400,000 9,000 A/R 409,000 ()
Gain on sale of land 20,000 20,000 Gain -0-
Cost of goods sold 280,000 2,000 Inv. 6,000 A/P 276,000 (-)
Operating expenses 75,000 5,000 P. Rent 80,000 (-)
Depreciation expense 15,000 15,000 Depre. -0-
Interest expense 8,000 4,000 Int. Pay. 4,000 (-)
Income tax expense 7,000 2,000 Tax. Pay. 9,000 (-)
Net Income 35,000 Cash from operating activities Cash from operating activities 40,000
DEMONSTRATION COMPANY Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2005 DEMONSTRATION COMPANY Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2005
Cash flows from operating activities Cash receipts from customers Cash payments To suppliers For operating expenses For interest For income taxes Net cash provided by operating activities 276,000 80,000 4,000 9,000 409,000 369,000 40,000