Topic 5: The Statement of Cash Flows

Purpose of the Statement of Cash Flows

Provides insights not apparent in the balance sheet or income statement and highlights differences between net income and cash from operations

Importance of Operating Cash Flow

Can reflect company performance better than net income especially when non-cash expenses are high

Cash Flow Categories

Operating activities, investing activities, and financing activities

Operating Activities

Transactions that affect net income including cash received from customers and cash paid to suppliers and employees

Investing Activities

Purchase and sale of long-term assets such as land buildings and equipment

Financing Activities

Cash inflows and outflows from transactions with owners and creditors including issuing stock or repaying loans

Non-Cash Investing and Financing

Significant activities that do not involve cash but must still be disclosed such as issuing stock to purchase equipment

Cash Flow Patterns in Mature Companies

Usually positive operating cash flow negative investing cash flow and possibly negative financing cash flow

Cash Flow Patterns in Growing Companies

May show positive operating cash flow negative investing cash flow and positive financing cash flow

Pro Forma Cash Flow Statement

A projected statement used to evaluate whether plans for operations investing and financing are feasible

Direct Method of Cash Flow

Lists specific cash inflows and outflows from operating activities

Indirect Method of Cash Flow

Adjusts net income for non-cash items and changes in working capital to calculate cash from operations

Preparation Requirements

Requires classification of detailed cash transactions into operating investing or financing categories