Statement of Cash Flows

Flashcards on Statement of Cash Flows, covering usefulness, format, preparation using the indirect method, analysis, and the direct method.

What are the three learning objectives of Chapter 12 Statement of Cash Flows?

Discuss the usefulness and format of the statement of cash flows, prepare a statement of cash flows using the indirect method, and analyze the statement of cash flows.

What information does the Statement of Cash Flows provide to help assess?

Entity’s ability to generate future cash flows, entity’s ability to pay dividends and meet obligations, reasons for difference between net income and net cash provided (used) by operating activities, and cash investing and financing transactions during the period.

What are the three classifications of cash flows?

Operating activities, investing activities, and financing activities.

What are some examples of cash inflows from operating activities?

From sale of goods or services and from interest received and dividends received.

What are some examples of cash outflows from operating activities?

To suppliers for inventory, to employees for wages, to government for taxes, to lenders for interest, and to others for expenses.

What are some examples of cash inflows from investing activities?

From sale of property, plant, and equipment, from sale of investments in debt or equity securities of other entities, and from collection of principal on loans to other entities.

What are some examples of cash outflows from investing activities?

To purchase property, plant, and equipment, to purchase investments in debt or equity securities of other entities, and to make loans to other entities.

What are some examples of cash inflows from financing activities?

From sale of common and preferred stock and from issuance of debt (bonds and notes).

What are some examples of cash outflows from financing activities?

To stockholders as dividends and to redeem long-term debt or reacquire capital stock (treasury stock).

Name some significant noncash activities.

Direct issuance of common stock to purchase assets, conversion of bonds into common stock, issuance of debt to purchase assets, and exchanges of plant assets.

What is the format of the statement of cash flows presentation?

Operating Activities, Investing Activities, Financing Activities

What are the three sources of information needed to prepare a Statement of Cash Flows Using the Indirect Method?

Comparative balance sheets, current income statement, and additional information.

What are the three major steps in preparing the Statement of Cash Flows?

Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Analyze changes in noncurrent asset and liability accounts and stockholders’ equity accounts and report as investing and financing activities, or disclose as noncash transactions. Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree.

What are the two reasons companies favor the indirect method?

Easier and less costly to prepare and focuses on differences between net income and net cash flow from operating activities.

What are the common adjustments to Net Income (Loss) when determining net cash provided/used by operating activities?

Add back noncash expenses, deduct gains and add losses, and analyze changes in noncash current asset and current liability accounts.

Define free cash flow.

Free cash flow describes the cash provided by operating activities after adjustment for capital expenditures and dividends.

In the direct method, what do companies report?

Companies report only major classes of operating cash receipts and cash payments.