Int. 2: Ch. 22: Statement of Cash Flows

Statement of Cash Flows

To provide information about a company’s cash receipts and cash payments during a period

• Secondary objective is to provide cash-basis information about the company’s operating, investing, and financing activities

  • Reports cash receipts, cash payments, and net change in cash resulting from a company’s operating, investing, and financing activities during a period

Indirect method

Starts with net income and converts it to net cash flow from operating activities; adjusts net income for items that affected reported net income but did not affect cash

• Reconciliation method

• To compute net cash flow from operating activities, a company adds back noncash charges in the income statement to net income and deducts noncash credits

Direct Method

Reports cash receipts and cash disbursements from operating activities

• Difference between these two amounts is the net cash flow from operating activities.

  • Deducts operating cash disbursements from operating cash receipts

Significant Noncash Transactions

Transactions that a company should report or disclose in some manner are the following….

• Acquisition of assets by assuming liabilities (including capital lease obligations) or by issuing equity securities.

• Exchanges of nonmonetary assets.

• Refinancing of long-term debt.

• Conversion of debt or preferred stock to common stock.

• Issuance of equity securities to retire debt.

Operating Activities

Involves income statement items

Cash inflows from:

• Sales of goods or services

• Interest revenue from notes receivable

• Dividends from equity investments

Cash outflows to:

• Suppliers for inventory

• Employees for services

• Government for taxes

• Lenders for interest expense

• Others for expenses

Cash Equivalent

Short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates