Purpose of the Statement of Cash Flows
(4)
Provides information about:
- How a company generates and uses cash
- Helps investors and creditors assess the ability to settle liabilities and pay dividends
- Aids in determining need for external financing
- Allows assessment of management’s investing and financing policies
Cash and Cash Equivalents
Definition and Examples
Definition:
- Short-term, highly liquid investments
- Easily convertible to known cash amount
- Maturity of three months or less
Examples:
- Money market accounts
- Treasury bills
- Commercial paper
Framework of the Statement of Cash Flows
Three categories:
- Operating activities
- Investing activities
- Financing activities
Operating Activities
Involves:
- Selling goods or rendering services
- Any receipts/payments not classified as investing or financing
Investing Activities
Cash flows involve:
- Acquiring or disposing of property, plant, and equipment
- Purchasing or selling securities
- Lending and collecting money
Financing Activities
Cash flows involve:
- Receiving cash from shareholders
- Returning cash to shareholders
- Borrowing from and repaying creditors
Indirect Method: Cash Flow from Operating Activities
Steps:
- Start with net income
- Adjust for non-cash revenues/expenses (e.g. depreciation)
- Adjust for changes in current assets and liabilities
- Sum for net cash flow from operations
Cash Flows from Investing Activities (Example)
Example:
- Purchase of fixtures and equipment: $10,200 cash outflow
Cash Flows from Financing Activities (Example)
Example:
- $12,000 cash inflow from loan
- $100 cash outflow for dividends
Jana Juice’s Net Cash Flow
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Statement of Cash Flows for June 2019:
- Net change in cash: $4,000
- Starting balance: $6,460
- Ending balance: $10,460
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Supplemental Disclosures in Cash Flow Statements
Required Disclosures:
- Cash paid for interest and income taxes
- Schedule of non-cash investing/financing activities
- Policy on cash equivalents
