Page 653 - Accounting Principles (A Business Perspective)

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E Increase in prepaid rent.
F Increase in Federal Income Taxes Payable.
Dells Corporation
Partial Statement of cash flows- Direct Method
For the Year Ended 2010 June 30
Cash flows from operating activities:
Cash received from customers $ 940,000
Cash paid for merchandise (620,000)
Salaries and wages paid (210,000)
Rent paid (50,000)
Interest paid (3,000)
Federal income taxes paid (50,000)
Net cash provided by operating activities $ 7,000
Key terms
Cash flow liquidity ratio Cash and marketable securities plus net cash provided by operating activities
divided by current liabilities.
Cash flow margin ratio Net cash provided by operating activities divided by net sales.
Cash flow per share of common stock ratio Net cash provided by operating activities divided by the
average number of shares of common stock outstanding.
Cash flows from operating activities The net amount of cash received or disbursed during a given
period on items that normally appear on the income statement.
Direct method Deducts from cash sales only those operating expenses that consumed cash.
Financing activities Generally include the cash effects of transactions and other events involving creditors
and owners. Cash payments made to settle current liabilities such as accounts payable, wages payable, and
income taxes payable are not financing activities. These payments are operating activities.
Indirect method A method of determining cash flows from operating activities that starts with net income
and indirectly adjusts net income for items that do not involve cash. Also called the addback method.
Investing activities Generally include transactions involving the acquisition or disposal of noncurrent
assets. Examples include cash received or paid from the sale or purchase of property, plant, and equipment;
available-for-sale and held-to-maturity securities; and loans made to others.
Noncash charges or expenses Expenses and losses that are added back to net income because they do
not actually use cash of the company. The items added back include amounts of depreciation on plant assets,
depletion that was expensed, amortization of intangible assets such as patents and goodwill, amortization of
discount on bonds payable, and losses from disposals of noncurrent assets.
Noncash credits or revenues Revenues and gains included in arriving at net income that do not provide
cash; examples include gains from disposals of noncurrent assets, income from investments carried under
the equity method, and amortization of premium on bonds payable.
Operating activities Generally include the cash effects of transactions and other events that enter into the
determination of net income.
Statement of cash flows A statement that summarizes the effects on cash of the operating, investing, and
financing activities of a company during an accounting period. Both inflows and outflows are included in
each category. The statement of cash flows must be prepared each time an income statement is prepared.
Working capital Equal to current assets minus current liabilities.
Self-test
True-false
Indicate whether each of the following statements is true or false.
The requirement for a statement of cash flows was preceded by the requirement for the statement of changes in

financial position.
The statement of cash flows is one of the major financial statements.
Investing activities are transactions with creditors and owners.
The direct method of calculating cash flows from operations is encouraged by the FASB and is the predominant
method used.

Accounting Principles: A Business Perspective 654 A Global Text