Chapter 12 Statement of Cash Flows

usefulness of the statement of cash flows

reports the cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period

usefulness of the statement of cash flows helps users to assess:

1) entity's ability to generate future cash flows
2) the entity's ability to pay dividends and meet obligations
3) the reasons for the difference between net income and net cash provided (used) by operating activities
4) the cash investing and financing transactions during the period

operating activities (income statement)

cash effects of transactions that creates revenue and expenses

investing activities (changes in investments and long term assets)

a) include acquiring and disposing of investments and property, plant, and equipment
b) lending money and collecting the loans

financing activities (changes in long term liabilities and stockholders' equity)

a) obtaining cash from issuing debt and repaying the amounts borrowed
b) obtaining cash from stockholders and providing them with a return on their investment

significant non-cash activities

a report in a separate note, supplementary schedule, or separate schedule

preparing the statement of cash flows

The effects of the use of accrual accounting must be adjusted to determine cash flows. To accomplish this, info comes from comparative balance sheets, current income statement and additional information

indirect and direct methods

Net income must be converted from an accrual basis to a cash basis. Both methods arrive at the same total amount

free cash flow

describes the cash remaining from operations after adjustment for capital expenditures and dividends

free cash flow equation

cash provided by operating activities - capital expenditures - cash dividends

liquidity

is the ability of a business to meet its immediate obligations

Current Cash Debt Coverage Ratio

cash provided by operating activities / average current liabilities

solvency

is the ability of a company to survive over the longterm

cash debt coverage ratio

cash provided by operating activities/average total liabilities