UAL2-U2-L09 · University Accounting Level 2
Statement of cash flows
Learning goals
- Classify operating, investing, financing, and non-cash transactions.
- Prepare operating cash flow using the indirect method.
- Reconcile debt and asset changes to cash-flow presentation.
Prerequisite check
Profit is accrual-based. Depreciation reduces profit without current cash; increasing accounts receivable means some recognized revenue has not yet produced cash.
Vocabulary
- Operating activities: principal revenue-producing activities and other non-investing/non-financing activities.
- Investing activities: acquisition/disposal of long-term assets and investments not treated as cash equivalents.
- Financing activities: changes in equity and borrowings.
- Indirect method: reconciles profit to operating cash through non-cash items and working capital.
- Non-cash transaction: significant investing/financing event excluded from cash totals but disclosed.
Core idea
The statement explains opening-to-closing cash by activity. The indirect method does not call depreciation a cash inflow; it reverses a non-cash expense included in profit. IFRS and ASPE allow or require different classifications for certain interest and dividend cash flows, so use the stated policy consistently rather than memorize one placement for every entity.
Why this treatment makes sense
Separating operations from asset investment and financing helps users judge cash generation, reinvestment, and dependence on lenders or owners. A cash flow statement also exposes profits unsupported by collections.
A repeatable method
- Reconcile opening and closing cash and cash equivalents.
- Map every balance-sheet change using ledgers and non-cash information.
- Start indirect CFO with the required profit subtotal.
- Reverse non-cash/non-operating gains and losses.
- Adjust operating working capital with sign logic.
- Present investing and financing cash from asset, debt, and equity continuity schedules.
- Exclude but disclose material non-cash transactions; run the cash-change check.
Worked example
Niagara Data Repair reports profit $126,000, depreciation $28,000, gain on equipment sale $6,000, accounts receivable increase $14,000, inventory decrease $9,000, prepaid expense increase $2,000, and accounts payable increase $7,000.
| Indirect operating reconciliation | Amount |
|---|---|
| Profit | $126,000 |
| Add depreciation | 28,000 |
| Subtract gain | (6,000) |
| Subtract AR increase | (14,000) |
| Add inventory decrease | 9,000 |
| Subtract prepaid increase | (2,000) |
| Add AP increase | 7,000 |
| Cash from operations | $148,000 |
Equipment cost $60,000 with accumulated depreciation $35,000 sold for $31,000 creates a $6,000 gain and investing cash inflow $31,000. The gain is removed from CFO because the full cash proceeds belong in investing.
Journal, ledger, and statement connection
The cash-flow worksheet is derived from general-ledger movements; it creates no normal closing journal entry. Fixed-asset, debt, lease, and equity schedules prevent netting cash with non-cash changes. Ending cash must equal the statement of financial position.
Common mistakes
- Calling depreciation a source of cash.
- Using total asset change without separating acquisition, disposal, depreciation, and non-cash additions.
- Adding an increase in receivables to CFO.
- Including a machine acquired by lease as cash investing and financing.
Guided practice
Profit $80,000; depreciation $12,000; AR decreases $5,000; AP decreases $3,000. CFO = $80,000 + $12,000 + $5,000 − $3,000 = $94,000.
Independent practice
Level 1 — signs: State the CFO sign for an inventory increase and wages payable increase.
Level 2 — compute: Profit $150,000; depreciation $20,000; loss on sale $4,000; AR increase $8,000; AP decrease $6,000. Find CFO.
Level 3 — continuity: Equipment opens $300,000 and closes $390,000; equipment costing $50,000 was sold; $25,000 was acquired by lease. Find cash purchases, assuming no other cost-account changes.
Self-check and solutions
Level 1: Inventory increase is subtracted; wages payable increase is added.
Level 2: $150,000 + $20,000 + $4,000 − $8,000 − $6,000 = $160,000.
Level 3: Closing = opening + total additions − cost disposed. Total additions = $390,000 − $300,000 + $50,000 = $140,000. Cash purchases = $140,000 − $25,000 lease addition = $115,000.
Retrieval practice
- Is a gain itself a cash flow?
- Where do equipment sale proceeds appear?
- What is the final mathematical check?
Answers: no; investing; opening cash plus net change equals closing cash.
Exam-style application
Prepare CFO from comparative balances, derive equipment purchases from a continuity schedule, classify financing items under the stated policy, identify non-cash activity, and interpret why profit rose while CFO fell.
Lesson summary
Cash-flow preparation is a full-ledger reconciliation that separates accrual performance, long-term investment, financing, and material non-cash activity.