LESSON8STATEMENTOFCASHFLOWS8Aims:1.ToExplaintheconceptofTheCashFlowStatements,2.ToClassifyactivitiesaffectingcashasoperating,investing,orfinancingactivities.3.ToUsethedirectmethodtomeasurecashflows.4.ToDeterminecashflowsfromincomestatementandbalancesheetaccounts.5.ToUsetheindirectmethodtocalculatecashflowsfromoperations.Astatementofcashflowsreportsthecashreceiptsandcashpaymentsofanentityduringaperiod.Itexplainsthecausesforthechangesincashbyprovidinginformationaboutoperating,financingandinvestingactivities.Astatementofcashflowsisimportantforthefollowingpurposes:1.Itshowstherelationshipsofnetincometochangesincashbalances.Cashbalancescandeclinedespitepositivenetincomeandviceversa.8.1IntroductiontoStatementofCashFlows2.Itreportspastcashflowsasanaidto:(1)predictingfuturecashflows;(2)evaluatingmanagement'sgenerationanduseofcash;(3)determiningacompany'sabilitytopayinterestanddividendsandtopaydebtswhentheyaredue.3.Itrevealscommitmentstoassetsthatmayrestrictorexpandfuturecoursesofaction.TheCashFlowStatementsprovidesexplanationsofchangesincashandcashequivalents.8.1IntroductiontoStatementofCashFlowsReadersoffinancialstatementswantinformationonafirm’sactivitiesinthreeprimaryareas:(1)operatingmanagementisprimarilyconcernedwithmajorday-to-dayactivitiesthatgeneraterevenuesandexpenses(operatingactivities).(2)financialmanagementislargelyconcernedwithwheretogetcash(financingactivities)andhowtousecash(investingactivities).8.2ClassificationofaFirm'sActivitiesAffectingCash(3)FinancingActivities(FA):Financingactivitiesinvolveobtainingresourcesasaborrowerorissuerofsecuritiesandrepayingcreditorsandowners,8.2ClassificationofaFirm'sActivitiesAffectingCashTwoapproachescanbeusedtocomputethenumberreportedascashflowfromoper-atingactivities.(1)Computingitascollectionslessoperatingdisbursementsiscalledthedirectmethod:(2)Adjustingtheaccrualnetincometoreflectonlycashoutlaysiscalledtheindirectmethod8.3TwoMethodsofComputingCashFlows

fromOperatingActivitiesTransactionsaffectingcashflowsfromallsources(Table8-4toTable8-6):8.4TransactionsAffectingCashFlows

fromAllSources8.4TransactionsAffectingCashFlows

fromAllSources(1)Rearrangingthebalancesheetequation:Assets=Liabilities+Stockholders'EquityCash+Non-cashAssets=Liabilities+Stockholders’EquityCash=Liabilities+Stockholders'Equity-Non-cashAssetsAnychangeincashmustbeaccompaniedbyachangeinoneormoreitemsontherightside:Cash=ALiabilities+AStockholders'Equity-ANon-cashAssets8.5PreparingaStatementofCashFlows

UsingtheDirectMethodTherefore:Changeincash=ChangeinallnoncashaccountsOr:Whathappenedtocash=WhyithappenedDeterminecashflowsfromProfitandLossAccountandbalancesheetaccounts.8.5PreparingaStatementofCashFlows

UsingtheDirectMethod(2)TheCashFlowStatementsfocusesonthechangeinthenon-cashaccountsasawaytoexplainhowandwhythelevelofcashchangedduringagivenperiod.(3)Cashflowsfromoperatingactivities:1)Collectionsfromsalestocustomersarealmostalwaysthemajoroperatingactivitythatincreasescash.2)Disbursementsforpurchasesofgoodstobesoldandoperatingexpensesarealmostalwaysthemajoroperatingcashoutflows.3)Theexcessofcollectionoverdisbursementsisnetcashprovidedbyoperatingactivities.8.5PreparingaStatementofCashFlows

UsingtheDirectMethod(4)Toobtaincashflowsfrominvestingandfinancingactivities,itisnecessary,iftheinformationregardingthesecashflowsisnotdirectlyavailable.foraccountantstoanalyzechangesinallbalancesheetitemsexceptcash.1)Increasesincash(cashinflows)-increasesinliabilitiesorstockholders’equity;decreasesinnon-cashassets.2)Decreasesincash(cashoutflows)-decreasesinliabilitiesorstockholders'equity;increasesinnon-cashassets8.5PreparingaStatementofCashFlows

UsingtheDirectMethodTheindirectmethodofcomputingcashflowsfromoperatingactivitiesreconcilesnetincometothenetcashprovidedbyoperatingactivities.(1)Depreciationisaddedbacktonetincomebecauseitisanon-cashitem.(2)Adddecreasesinnon-cashcurrentassets.(3)Addincreasesincurrentliabilities,(4)Deductincreasesinnon-cashcurrentassets.(5)Deductdecreasesincurrentliabilities.8.6PreparingaStatementofCashFlows

UsingtheIndirectMethodAdetailexampleofthedirectmethod(Table8-7toTable8-9):8.7ADetailedExampleoftheDirectMethod8.7ADetailedExampleoftheDirectMethod8.7ADetailedExampleoftheDirectMethodThefirststepinpreparingtheCashFlowStatementsistocomputetheamountofthechangeincashfromthebeginningtotheendoftheperiod.Inthisexample,cashdecreasesby$18000.Operatingactivitiescontribute$138000cashduringtheperiod.Investingactivitiesuse$554000cashduringtheperiod.Financingactivitiescontribute$398000cashduringtheperiod.Thisexampleshowshowafirmmayhavepositivenetincomebutstillhaveadeclineincash.8.8SumminguptheAmountoftheChangeinCashOperatingcashinflowsminusoperatingcashoutflowsequalsthenetcashprovidedby(orusedby)operatingactivities.AccountantsoftencomputecollectionsandotheroperatingcashflowitemsfromfiguresintheProfitandLossAccount.Manyaccountantsusethebalancesheetalongwithadditionalinformationandfamiliaritywiththecausesofcertainchangesinbalancesheetamountstocomputethecashflowitems.8.9ComputingCashFlowsfromOperatingActivities(1)ComputingtheCashCollectionsfromCustomers.Inourexample,$360000wascollectedfromcustomers.Thatamountisdeterminedasfollows(Table8-10toTable8-16):8.9ComputingCashFlowsfromOperatingActivitiesNotethattheincreaseinA/Rmeansthatsales>collections.(2)ComputingtheCashPaymentstoSuppliers.Thedifferencebetweencostofgoodssoldandcashpaymentstosupplierscanbedeterminedbylookingatinventoryandaccountspayable.8.9ComputingCashFlowsfromOperatingActivitiesTheeffectsofinventoryandaccountspayableonthepreviousslidecanbecombinedintoonecalculationasfollows:8.9ComputingCashFlowsfromOperatingActivities(3)ComputingtheCashPaymentstoEmployees.Cashpaymentstoemployeescanbedeterminedbyexaminingwagesandsalariespayable.8.9ComputingCashFlowsfromOperatingActivitiesBelowisanexampleofMcDonald’sconsolidatedstatementofcashflows,fortheyears.endedDecember31，2021~2023(Table8-17).8.10ARealExampleoftheIndirectMethod8.10ARealExampleoftheIndirectMethodMeDonald'sconsolidatedstatementofcashflowsispreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates(“GAAP”)whichareissuedbyFASB.TheIASBalsoissuedIAS7StatementofCashFlowswhichestablishedstandardsforcashflowsreportingusedinIFRS.UnderIFRS,thedirectmethodofpresentationisencouraged,buttheindirectmethodisacceptable.Youcanvisitthefollowingwebsiteformoreinformation.8.11AboutIAS7MindMapsDirectmethodIndirectmethodOperatingactivityInvestingactivityFinancingactivityCashreceiptReceiptsCash