Cash Flow Statement

A Statement of Cash Flows explains how changes in balance sheet accounts and income statement accounts cause the change in cash from the beginning of the period to the end of the period. Recall that revenues and expenses are reported on the

on an accrual basis. Consequently, some of the cash for the revenue earned may not have been as of the statement date. Conversely, some of the cash for the expenses reported may not have been

as of the statement date. This void caused by accrual accounting is filled by the statement of cash flows by explaining 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 that affect cash flow.

Company purchased a factory

Inventory decreased from previous year

Company issued long-term bonds

Company paid common dividends

Accounts Receivable balance increased from previous year

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

Inventory decreased from previous year

Company issued long-term bonds

Company paid common dividends

Accounts Receivable balance increased from previous year

There are two methods of reporting 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, 2013
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)
Paid 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, 12/31/2012		66,000
Cash, 12/31/2013		$ 85,000

Indirect method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2013
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, January 1, 2013			66,000
Cash, December 31, 2013			$ 85,000

Notice that the difference between the two methods is the

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 adds back non-cash items and increases and decreases in the balances in current assets.

The balance sheets for Byron Manufacturing at December 31, 2012 and 2013 are shown:

Byron Manufacturing Balance Sheets As of December 31, 2013 and 2012
Assets	2013	2012
Current assets:
Cash	5,410	9,070
Accounts receivable	10,570	8,870
Inventory	19,620	18,430
Total current assets	35,600	36,370
Property, plant, and equipment
Building	495,000	495,000
Equipment	279,000	271,600
	774,000	766,600
Accumulated depreciation	(147,400)	(119,350)
Net property, plant, and equipment	626,600	647,250
Total assets	662,200	683,620
Liabilities and Equity
Current liabilities:
Accounts payable	55,260	36,120
Salaries payable	9,390	11,710
Income taxes payable	950	9,960
Total current liabilities	65,600	57,790
Long-term liabilities:
Bonds payable	350,000	397,000
Equity:
Common stock	185,000	146,000
Retained earnings	61,600	82,830
Total equity	246,600	228,830
Total liabilities and equity	662,200	683,620

Additional Information needed to prepare the Statement of Cash Flows:

Net income was $3,000

Byron paid $24,230 in cash dividends

Byron issued $47,100 in bonds payable for cash

Byron retired $94,100 in bonds with cash

No fixed assets were sold or disposed of during the period

Fill in the table below to prepare the Statement of Cash Flows for Byron Manufacturing. The beginning balance column is taken from the 2012 Balance Sheet and the ending balance column is taken from the 2013 Balance Sheet. The Increase/Decrease columns represent the change in the accounts and will be debits or credits depending on the normal balance in the accounts. Most accounts will have either a debit or a credit. Accounts used in the non-operating sections of the Statement of Cash Flows are analyzed in more detail. Bonds Payable will show an increase and a decrease for the bond issue and retirement and Retained Earnings will increase with net income and decrease for cash dividends paid. The increases and decreases in the balance sheet accounts are increases and decreases in cash depending on the nature of the account. Follow the letters to see how the increase or decrease affects cash on the statement of cash flows. Click here for help with how changes in balance sheet accounts affect cash.

If an amount box does not require an entry, leave it blank or enter "0".

Byron Manufacturing Spreadsheet to Prepare the Statement of Cash Flows For the Year Ended December 31, 2013
	Beginning		Increase/Decrease			Ending
Balance Sheet Accounts	Balance		Debit	Credit		Balance
Cash					(m)
Accounts receivable	8,870	(h)	1,700			10,570
Inventory	18,430	(i)				19,620
Building	495,000					495,000
Equipment	271,600	(b)				279,000
Accumulated depreciation	119,350				(c)	147,400
Accounts payable	36,120			19,140	(j)	55,260
Salaries payable	11,710	(k)				9,390
Income taxes payable	9,960	(l)	9,010			950
Bonds payable	397,000	(e)			(d)	350,000
Common stock	146,000			39,000	(f)	185,000
Retained earnings	82,830	(g)			(a)	61,600
			Increase/Decrease in Cash
Statement of Cash Flows			Debit	Credit
Cash flow from operating activities
Net income		(a)
Adjustments to reconcile net income to net cash flow from operating activities
Depreciation expense		(c)
Increase in accounts receivable				1,700	(h)
Increase in inventory					(i)
Increase in accounts payable		(j)	19,140
Decrease in salaries payable					(k)
Decrease in income taxes payable				9,010	(l)
Cash flows from investing activities
Purchase equipment					(b)
Cash flows from financing activities
Issued bonds payable		(d)
Retired bonds payable					(e)
Issued common stock		(f)	39,000
Paid dividend					(g)
Net increase (decrease) in cash		(m)
			279,900	279,900

Now you can prepare the Statement of Cash Flows using the indirect method. Fill in the Statement based on the spreadsheet. Select Increase or Decrease and enter the amounts.

Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income		$
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$

in accounts receivable	(1,700)

in inventory

in accounts payable	19,140

in salaries payable

in income taxes payable	(9,010)	32,970
Net cash provided by operating activities		$ 35,970
Cash flows from investing activities:
Purchase of equipment	$ (7,400)
Net cash used for investing activities		(7,400)
Cash flows from financing activities:
Proceeds from issuance of bonds payable	$
Retired bonds payable	(94,100)
Issued common stock
Payment of dividends	(24,230)
Net cash used for financing activities		(32,230)
Net increase (decrease) in cash		$
Cash, 1/1/2013
Cash, 12/31/2013		$