Chapter 14: Statement of Cash Flows

Test 4

Statement of Cash Flows

reports a company’s cash inflows and outflows for a period.

Statement of Cash Flows provides information about the company’s ability to

1. Generate cash from operation

2. Maintain and expand its operating capacity

3. Meet its financial obligations

4. Pay dividends

3 types of cash flows activities

1. Cash flows from (used for) operating activities

2. Cash flows from (used for) investing activities

3. Cash flows from (used for) financing activities

Cash flows from (used for) operating activities affects ….

net income of the company

Cash flows from (used for) investing activities affects ….

investments in the noncurrent assets of the company

Cash flows from (used for) financing activities affects ….

the debt and equity of the company

Cash inflow

A source of cash causes the cash flow to increase

Cash outflow

A use of cash causes cash flow to decrease

Direct method

reports operating cash inflows (receipts) and cash outflows (payments)

Primary operating cash inflow

cash received from customer from sale of products or providing services (+)

Primary operating cash outflows

cash payments for merchandise, operating expenses, interest, and income tax payments. (-)

Find net cash flows from operating activities

Cash received from operating activities less cash payments for operating activities

Advantage of the Direct Method

it reports directly cash receipts and cash payments for each operating activity on the statement of cash flows

Disadvantage of the Direct Method

data might not be readily available in the accounting records

The Indirect Method

reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash

Cash inflows from operating activities

from sale of products and providing services (+)

Cash outflows from operating activities

to purchase inventory, pay employees, and pay taxes (-)

Cash flows from (used for) investing activities shows ….

cash inflows and outflows related to changes in a company’s long term assets.

Cash inflows from investing activities

selling fixed assets (property, plant, and equipment), investments, and intangible assets. (+)

Cash outflows from investing activities

payments to purchase fixed assets (property, plant, and equipment), investments, and intangible assets. (-)

Cash flows from (used for) financing activities shows ….

cash inflows and outflows related to changes in the company’s long-term liabilities and stockholder’s equity

Cash inflows from financing activities

issuing long-term debt or equity securities. (issuing bonds, notes payable, preferred stock, and common stock) (+)

Cash outflows from financing activities

paying cash dividends, repaying long-term debt, and acquiring treasury stock. (-)

Classifying cash flows: issued shares of common stock

Financing

Classifying cash flows: purchased a new piece of equipment

Investing

Classifying cash flows: sold merchandise to customers

Operating

Classifying cash flows: paid employees’ wages

Operating

Classifying cash flows: paid a dividend

Financing

Classifying cash flows: loss (or gain) on disposal of an asset

Operating (adjusting net income)

Classifying cash flows: depreciation expense

Operating

Classifying cash flows: cash received from sale (or paid for purchase) of land (or building)

Investing

Classifying cash flows: Dividends paid

Financing

Classifying cash flows: cash received for issuing common stock

Financing

Classifying cash flows: bond redemption

Financing

Find net income

Dividends declared - beginning balance