Statement of Cash Flows

Statement of Cash Flows

Shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources of cash and all of the uses of cash. Provides information about cash receipts (inflows) and cash payments (outflows).

Operating Activities

1. Section of the statement of cash flows includes the cash inflows and outflows related to the normal course of business operations. (The cash effect of transactions that create revenues and expenses and thus enter into the determination of net income).

2. Involve Income Statement Items

Investing Cash Outflows

1. To purchase property, plant, and equipment

2. To purchase investments in other entities

3. Making loans to other entities

Financing Cash Inflows

1. From sale of company's own stock to its stockholders

2. From borrowing money (bank loan)

Financing Cash Outflows

1. To stockholders as dividends

2. To creditors as the repayment of principal of funds borrowed (The interest payment would be considered an operating activity since it would effect net income).

The major purpose of the operating activities section of the cash flow statement is to

Convert net income from an accrual basis to a cash basis.

Direct Method (Operating)

1. FASB preferred but allows both methods

2. The net cash flow from operating activities as computed using the indirect method must also be reported in a separate schedule.

3. Lists each individual cash flow

Indirect Method (Operating)

1. Is used extensively in practice

2. Most companies favor the indirect method because it is easier to prepare, focuses on the differences between net income and net cash flow from operating activities, and tends to reveal less company information to competitors.

3. The indirect method starts with net income and makes a series of adjustments to convert the accrual net income into cash net income.

Examples of Non-Cash Revenues and Expenses

1. Depreciation Expense

2. Losses

3. Gains

4. Ignored when using the direct method to calculate net cash provided by operating activities.

Losses

Non-cash expense

Gains

Non-cash revenue

Cash

Detailed by entire financial statement thus it would be incorrect to include it in any one section.

Investments

Classified as an investing activity (this includes loans made by the company; notes receivable).

Notes Payable

Represents amounts borrowed from creditors and thus would be classified as a financing activity.

Current Assets

Accounts Receivable, Investments, Inventory, and Prepaid Expenses

Current Liabilities

Accounts Payable, Salaries Payable, Interest Payable, and Income Taxes Payable