Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 13 Statement of Cash Flows 581

uses of operating cash include cash paid to suppliers for merchandise and services and

cash paid to employees for wages. The difference between these operating cash re-

ceipts and cash payments is the net cash flow from operating activities.

The primary advantage of the direct method is that it reports the sources and uses

of cash in the statement of cash flows. Its primary disadvantage is that the necessary

data may not be readily available and may be costly to gather.

Theindirect methodreports the operating cash flows by beginning with net in-

come and adjusting it for revenues and expenses that do not involve the receipt or pay-

ment of cash. In other words, accrual net income is adjusted to determine the net

amount of cash flows from operating activities.

A major advantage of the indirect method is that it focuses on the differences be-

tween net income and cash flows from operations. In this sense, it shows the relation-

ship between the income statement, the balance sheet, and the statement of cash flows.

Because these data are readily available, the indirect method is normally less costly to

use than the direct method. Because of these advantages, most firms use the indirect

method to report cash flows from operations.

Exhibit 2 illustrates the cash flow from operating activities section of the statement of

cash flows under the direct and indirect methods. Both statements are for Family Health

Care for the month ended November 2007. The first statement was shown in Chapter 3,

Exhibit 6, while the second statement was shown in Chapter 3, Exhibit 10. Both state-

ments show the same amount of net cash flow from operating activities, regardless of

the method. We will illustrate both methods in detail later in this chapter.

Cash Flows from Investing Activities

Cash inflows from investing activities normally arise from selling fixed assets, invest-

ments, and intangible assets. Cash outflows normally include payments to acquire

fixed assets, investments, and intangible assets. For example, Oracle Corp.recently in-

vested $10.3 billion cash to acquire PeopleSoft, Inc., to increase its customer base and

strengthen its competitive position in enterprise computing.

Cash flows from investing activities are reported on the statement of cash flows by

first listing the cash inflows. The cash outflows are then presented. If the inflows are

greater than the outflows, net cash flow provided by investing activitiesis reported. If the

inflows are less than the outflows, net cash flow used for investing activitiesis reported.

The cash flows from investing activities section in the statement of cash flows for

Family Health Care is shown below.

Cash flows from investing activities:

Purchase of office equipment $(1,700)

INVESTING

(receipts from sales of

noncurrent assets)

Increases in Cash

INVESTING

(payments for acquiring

noncurrent assets)

FINANCING

(payments for treasury

stock, dividends, and

redemption of debt

securities)

OPERATING

(payments for

expenses)

OPERATING

(receipts from

revenues)

FINANCING

(receipts from

issuing equity and

debt securities)

Exhibit 1 Decreases in Cash

Cash Flows