What is the purpose of the statement of cash flows?
Helps users asses a company’s ability to generate cash from its operating activities, How company received and used other cash flows regarding investing and financing activities.
When is a statement of cash flows useful?
Investing and financing transaction during period and effect on capital structure. making comparisons with other companies.
What is cash?
May include cash equivalents. Short-term, highly liquid investment that have insignificant risk and are readily converted to cash within short period of time.
What three categories are cash receipts and payment classified into?
Operating activities, Investing activities, Financing activities.
What are operating activities?
Related to company’s principal income-producing activities. Activities relate to cash effects of transactions that create revenues and expenses that enter into determination of net income.
What are investing activities?
Related to acquisition and disposal of non-current assets, purchasing and disposing of long-lived assets and investment not held for trading.
What are financing activities?
Related to changes in a company’s debt and equity including obtaining cash from issuing debt and repaying the amounts borrowed, obtaining cash from selling common and preferred shares and paying dividends. Generally included non-current liabilities and shareholders’ equity items.
What are significant non-cash activities?
If it does not affect cash do not report in statement of cash flows. report in separate note in financial statements.
What are some examples of significant non-cash activities?
Issue of shares to purchase assets or to reduce liabilities, conversion of debt into equity, exchange of property, plant, and equipment, acquisition of assets by directly assuming related liabilties.
How do we convert accrual basis information to cash basis information?
Cash flow relating to an item on income statement can be determined by using related items from statement of financial position.
Why is the statement of cash flows so important?
Success of business depends on ability to generate cash flows. Statement of cash flows measures cash flow by calculating change in cash and cash equivalents.
What is the order of a cash flow statement?
Operating, Investing, Financing, Net increase (decrease) in cash, Cash beginning of period, Cash end of period.
Why do most companies prefer the indirect method for preparing operating activited?
Easier to prepare, less info for competition.
How do we prepare the operating activities section using the indirect method?
Start with Net income and add or deduct items not affecting cash to arrive at net cash provided (used) by operating activities
+ Noncash expenes
-Noncash gains
+Decreases in current asset accounts and increases in current liability accounts
- opposite
How do we prepare the investing activities section?
Measure cash flows relating to non-current asset accounts. Reported same under both direct and indirect methods, asset acquisitions are uses of cash. Depreciation is a noncash charge.
How do we prepare the financing activities section?
Determine net cash provided (used) by financing activities by analyzing changes in non-current liability and equity accounts. Changes to notes, loans and mortgages, and bonds payable are analyzed to determine cause of change.
