12-112-2STATEMENT OF CASH FLOWSFinancial Accounting, Sixth Edition1212-31.Indicate the usefulness of the statement of cash flows.2.Distinguish among operating, investing, and financing activities.3.Explain the impact of the product life cycle on a companys cash flows.4.Prepare a statement of cash flows using the indirect method.5.Use the statement of cash flows to evaluate a company.Study Objectives12-4Usefulness Classifications Significant noncash activities Format Corporate life cycle Preparation Indirect and direct methodsStep 1: Operating activities Step 2: Investing and financing activitiesStep 3: Net change in cashFree cash flow Assessing liquidity and solvencyThe Statement of Cash Flows: Usefulness and FormatPreparing the Preparing the Statement of Cash Statement of Cash FlowsIndirect FlowsIndirect MethodMethodUsing Cash Flows to Using Cash Flows to Evaluate a CompanyEvaluate a CompanyStatement of Cash Flows12-5SO 1 Indicate the usefulness of the statement of cash flows.Provides information to help assess:1.Entitys ability to generate future cash flows.2.Entitys ability to pay dividends and obligations.3.Reasons for difference between net income and net cash provided (used) by operating activities.4.Cash investing and financing transactions during the period.Usefulness and FormatUsefulness of the Statement of Cash Flows12-6Classification of Cash FlowsSO 2 Distinguish among operating, investing, and financing activities.Usefulness and FormatIncome Statement ItemsOperating ActivitiesChanges in Investments and Long-Term Asset ItemsInvesting ActivitiesChanges in Long-Term Liabilities and Stockholders EquityFinancing Activities12-7Usefulness and FormatSO 2 Distinguish among operating, investing, and financing activities.Illustration 12-1 Typical receipt and payment classificationsClassification of Cash Flows12-8Usefulness and FormatSO 2 Distinguish among operating, investing, and financing activities.Illustration 12-1 Typical receipt and payment classificationsClassification of Cash Flows12-91. Issuance of common stock to purchase assets.2. Conversion of bonds into common stock.3. Issuance of debt to purchase assets.4. Exchanges of plant assets.Companies report noncash activities in either a useparate schedule (bottom of the statement) or useparate note to the financial statements.Usefulness and FormatSO 2 Distinguish among operating, investing, and financing activities.Significant Noncash Activities12-1012-11Order of Presentation:1.Operating activities. 2.Investing activities.3.Financing activities.Direct MethodIndirect MethodUsefulness and FormatSO 2 Distinguish among operating, investing, and financing activities.Format of the Statement of Cash Flows12-12SO 2 Distinguish among operating, investing, and financing activities.Illustration 12-2Format of the Statement of Cash Flows12-13Illustration: Classify each of these transactions by type of cash flow activity.Format of the Statement of Cash FlowsSO 2 Distinguish among operating, investing, and financing activities.1. Issued 100,000 shares of $5 par value common stock for $800,000 cash.2. Borrowed $200,000, signing a 5-year note bearing 8% interest.3. Purchased two semi-trailer trucks for $170,000 cash.4. Paid employees $12,000 for salaries and wages.5. Collected $20,000 cash for services provided.FinancingFinancingInvestingOperatingOperating12-14Usefulness and FormatSO 3 Explain the impact of the product life cycle on a companys cash flows.Impact of product life cycle on cash flows.Illustration 12-3The Corporate Life Cycle12-1512-16Three Sources of Information:1.Comparative balance sheets2.Current income statement3.Additional informationUsefulness and FormatSO 3 Explain the impact of the product life cycle on a companys cash flows.Preparing the Statement of Cash Flows12-17Usefulness and FormatThree Major Steps:Illustration 12-4SO 3 Explain the impact of the product life cycle on a companys cash flows.Preparing the Statement of Cash Flows12-18Usefulness and FormatThree Major Steps:Illustration 12-4SO 3 Explain the impact of the product life cycle on a companys cash flows.Preparing the Statement of Cash Flows12-19Usefulness and FormatThree Major Steps:Illustration 12-4SO 3 Explain the impact of the product life cycle on a companys cash flows.Preparing the Statement of Cash Flows12-20Companies favor the indirect method for two reasons: 1.Easier and less costly to prepare. 2.Focuses on differences between net income and net cash flow from operating activities.Usefulness and FormatSO 3 Explain the impact of the product life cycle on a companys cash flows.Indirect and Direct Methods12-21SO 4 Prepare a statement of cash flows using the indirect method.Preparing the Statement of Cash FlowsIllustration Indirect Method Illustration 12-512-22SO 4 Prepare a statement of cash flows using the indirect method.Preparing the Statement of Cash FlowsIllustration 12-512-23SO 4.Preparing the