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Statement of Cash Flows

The Statement of Cash Flows analyzes cash receipts and payments in a period, covering activities like operating, investing, and financing.

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Statement of Cash Flows

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  1. Statement of Cash Flows The Statement of Cash Flows provides relevant information about the cash receipts and cash payments of an enterprise during a period. It provides answers to questions: 1. Where did the cash come from during the period? 2. What was the cash used for during the period? 3. What was the change in the cash balance during the period?

  2. The Statement of Cash Flows Content and Format • Three different activities: • Operating, • Investing, • Financing Illustration 5-24 LO 7 Identify the content of the statement of cash flows.

  3. Statement of Cash Flows Operating Investing Financing

  4. Statement of Cash Flows Cash Flows from Operating Activities Reports the cash effects of transactions that enter into the determination of net income. The direct method and indirect method are two different approaches to report cash flows from operations. Each has its advantages and disadvantages, but each reconciles to the same number for total cash flows from operating activities.

  5. The Statement of Cash Flows Preparation – Indirect Approach Noncash charge to expenses. Noncash credit to revenues. LO 8 Prepare a statement of cash flows.

  6. Statement of Cash Flows Cash Flows from Investing Activities Reports cash effects of transactions that result in a change in long-term assets or investment portfolios. For example: Buying or selling property, plant, or equipment Buying or selling financial investment instruments

  7. Statement of Cash Flows Cash Flows from Financing Activities Reports cash effects of transactions that result in a change in long-term liabilities and stockholder’s equity. For example: Acquiring or paying down borrowings Issuing capital stock Paying dividends to stockholders

  8. Basic Format for the Statement of Cash Flows Cash flows from Operating Activities: $$ Cash flows from Investing Activities: $$ Cash flows from Financing Activities: $$ Net increase in cash$$ Cash at beginning of year $$ Cash at end of year$$ Involve the purchase and sale of products or services Involve the acquisition and sale of long-term assets Involve the issuance and payment of long-term liabilities and stock

  9. Statement of Cash Flows Operating Investing Financing

  10. The Statement of Cash Flows Review In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount receivable. LO 8 Prepare a statement of cash flows.

  11. For each of the following transactions, indicate the direction of the cash flow adjustment [inflow or outflow, add or subtract] and the section in which each transaction should be reported on a Statement of Cash Flows [operating, investing, or financing]. Identify non-cash transactions as supplementary information to be found in the Footnotes of the Financial Statements. • The company purchases its own Common Stock in the open market answer:Cash Outflow; Financing • The company issues Preferred Stock in exchange for Land answer:Supplementary Information in Footnotes • The company borrowed cash from the bank by issuing a 90-day Note answer:Cash Inflow; Financing • Twenty-Year Bonds are issued answer:Cash Inflow; Financing

  12. Accounts Receivable decreased during the year. answer: Add back to Operating Section • Income Tax Payable decreased during the year. answer: Subtract from Operating Section • Accounts Payable increased during the year. answer: Add back to Operating Section • Cash Dividends are declared and paid to Common Stockholders. answer: Cash Outflow; Financing • Common Stock is issued to a creditor to pay off a long term loan. answer: Supplementary information in Footnotes

  13. A new piece of Machinery is acquired with cash. answer: Cash Outflow; Investing • Stock of another company is acquired as an Investment. answer: Cash Outflow; Investing • Interest Payable decreased during the year. answer:Subtract from Operating Section • Wages Payable decreased during the year. answer: Subtract from Operating Section • Gain on Sale of Equipment was recognized in Income. answer: Subtract from Operating Section

  14. Purchased a new Copier by issuing a 90-day Note answer: Supplementary information in Footnotes • Unearned Revenue increased during the year. answer: Add back to Operating Section • Prepaid Insurance increased during the year. answer: Subtract from Operating Section • Sold shares of a long-term investment in Nike Company. answer: Cash Inflow; Investing • Depreciation for Operating Equipment was reported on the Income Statement answer: Add back to Operating Section

  15. Loss on Sale of Land was reported on the Income Statement. answer: Add back to Operating Section • Net Income on the Income Statement answer: Operating Section

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