A statement of cash flows complements an accrual-based income statement by explaining the changes in cash during the period. Recall that revenues and expenses are reported on the - Select your answer -balance sheetincome statementretained earnings statementstatement of cash flowsCorrect 1 of Item 1 on an accrual basis. Consequently, some of the cash for the revenue earned may not have been - Select your answer -collected paidCorrect 2 of Item 1 as of the statement date. In other cases, cash may have been received before revenue is earned. Conversely, some of the cash for the expenses reported may not have been - Select your answer -collected paidCorrect 3 of Item 1 as of the statement date. And in still other cases, cash may have been paid before expense is incurred. This void caused by accrual accounting is filled by the statement of cash flows which explains the sources from which a company has acquired cash (inflows) and how the company has used its cash (outflows). A statement of cash flows helps the reader of the financial statements:

assess a companys ability to produce future cash flows

judge a companys ability to meet obligations and pay dividends

estimate the companys need for external financing

Cash inflows and outflows come from three categories: operating activities, financing activities and investing activities.

Determine whether the activities described in the following table are operating, investing, or financing activities:

Company purchased a factory for cash	- Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 4 of Item 1
Payment to supplier for purchase of inventory	- Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 5 of Item 1
Company issued long-term bonds	- Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 6 of Item 1
Company paid cash dividends	- Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 7 of Item 1
Collection on customer's account	- Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 8 of Item 1

In addition to recognizing what type of activity transactions are describing, it is important to recognize whether a transaction is an increase in cash or a decrease in cash. Determine whether the activity described results in an increase in cash or a decrease in cash.

Company purchased a factory for cash	- Select your answer -Increase in CashDecrease in CashCorrect 9 of Item 1
Payment to supplier for purchase of inventory	- Select your answer -Decrease in CashIncrease in CashCorrect 10 of Item 1
Company issued long-term bonds	- Select your answer -Increase in CashDecrease in CashCorrect 11 of Item 1
Company paid cash dividends	- Select your answer -Increase in CashDecrease in CashCorrect 12 of Item 1
Collection on customer's account	- Select your answer -Increase in CashDecrease in CashCorrect 13 of Item 1

There are two methods for reporting operating activities on the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows.

Selected information from Rowe Publishing Company's Income Statement

Selected information from Rowe Publishing Company's Balance Sheets

Direct method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2014
Cash flow operating activities:
Cash collected from customer	$ 1,042,000
Cash paid to suppliers	(586,000)
Cash payments to employees	(347,000)
Cash payments for interest	(16,000)
Cash payments for income taxes	(29,000)
Net cash provided by operating activities		$ 64,000
Cash flows from investing activities:
Equipment purchase	$ (25,000)
Net cash used for investing activities		(25,000)
Cash flows from investing activities:
Repayment of notes payable	$ (35,000)
Proceeds from issuance of bonds payable	50,000
Payment of dividends	(35,000)
Net cash used for financing activities		(20,000)
Net increase (decrease) in cash		$ 19,000
Cash, December 31, 2013		66,000
Cash, December 31, 2014		$ 85,000

Indirect method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income		$69,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$ 15,000
Increase in accounts receivable	(9,000)
Increase in inventory	(20,000)
Increase in accounts payable	12,000
Increase in salaries payable	4,000
Decrease in income taxes payable	(7,000)	(5,000)
Net cash provided by operating activities			$ 64,000
Cash flows from investing activities:
Equipment purchase		($ 25,000)
Net cash used for investing activities			(25,000)
Cash flows from financing activities:
Repayment of notes payable		($ 35,000)
Proceeds from issuance of bonds payable		50,000
Payment of dividends		(35,000)
Net cash used for financing activities			(20,000)
Net increase (decrease) in cash			$ 19,000
Cash, December 31, 2013			66,000
Cash, December 31, 2014			$ 85,000

Notice that the only difference between the two methods is in the - Select your answer -operatinginvestingfinancingCorrect 1 of Item 2 activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adjusts for non-cash items such as depreciation expense and for increases and decreases in the balances in current assets.

The balance sheets for Byron Manufacturing at December 31, 2013 and 2014 are shown:

Byron Manufacturing Balance Sheets As of December 31, 2014 and 2013
Assets	2014	2013
Current assets:
Cash	5,500	9,410
Accounts receivable	10,590	8,820
Inventory	19,680	18,610
Total current assets	35,770	36,840
Property, plant, and equipment
Building	499,000	499,000
Equipment	279,000	272,800
	778,000	771,800
Accumulated depreciation	(148,950)	(119,600)
Net property, plant, and equipment	629,050	652,200
Total assets	664,820	689,040
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	55,370	36,270
Salaries payable	9,400	11,640
Income taxes payable	950	9,970
Total current liabilities	65,720	57,880
Long-term liabilities:
Bonds payable	351,000	395,000
Stockholders' equity:
Common stock	182,000	147,000
Retained earnings	66,100	89,160
Total stockholders' equity	248,100	236,160
Total liabilities and stockholders' equity	664,820	689,040

Additional Information needed to prepare the Statement of Cash Flows using the indirect method:

Net income was $2,520

Byron paid $25,580 in cash dividends

Byron issued $49,830 in bonds payable for cash

Byron retired $93,830 in bonds payable with cash

No property, plant and equipment assets were sold or disposed of during the period

Prepare the Statement of Cash Flows using the indirect method.

Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income		$
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$
- Select your answer -IncreaseDecreaseCorrect 3 of Item 3 in accounts receivable	(1,770)
- Select your answer -IncreaseDecreaseCorrect 4 of Item 3 in inventory
- Select your answer -IncreaseDecreaseCorrect 6 of Item 3 in accounts payable	19,100
- Select your answer -IncreaseDecreaseCorrect 7 of Item 3 in salaries payable
- Select your answer -IncreaseDecreaseCorrect 9 of Item 3 in income taxes payable	(9,020)	34,350
Net cash provided by operating activities		$ 36,870
Cash flows from investing activities:
Purchase of equipment	$ (6,200)
Net cash used for investing activities		(6,200)
Cash flows from financing activities:
Issued bonds payable	$
Retired bonds payable	(93,830)
Issued common stock
Paid cash dividends	(25,580)
Net cash used for financing activities		(34,580)
Net increase (decrease) in cash		$
Cash, December 31, 2013
Cash, December 31, 2014		$

The major causes of differences between Byron Manufacturings net income and net cash from operating activities are the non cash - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 15 of Item 3, the - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 16 of Item 3 (showing that the company paid less than what was expensed on the income statement), and the - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 17 of Item 3 (showing the company paid more for taxes than it expensed in the year.)