Chapter 11: Statement of Cash Flows

Operating Activities

Cash receipts and cash payments for transactions relating to revenue and expense activities

Investing Activities

Cash transactions involving the purchase and sale of long-term assets and current investments

Financing Activities

Inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders)

Noncash Activities

Significant investing and financing activities that do not affect cash; reported after the cash flow statement or in note to the financial statements

Indirect Method vs Direct Method

Differ in presentation format for operating activities; both report investing, financing, and noncash activities identically

Indirect Method

Begins with net income and lists adjustments to net income to arrive at operating cash flows; easier and less costly—most popular method

Direct Method

Adjusts the items in the income statement to directly show the cash inflows and outflows from operations; if used, the company must also report the other method either with the statement of cash flows or in a note

Decrease in cash (operating activities)

Increase in a current asset or decrease in current liability

Increase in cash (operating activities)

Decrease in current asset or increase in current liability

Increase in cash (investing activities)

Sale of long-term assets or collection for notes receivable

Decrease in cash (investing activities)

Purchase of long-term asset or loan to another

Increase in cash (financing activities)

Issuance of stock or borrowing

Decrease in cash (financing activities)

Purchase of treasury stock or payment of notes payable, bonds payable, dividends

Cash Return of Assets = Cash Flow to Sales x Asset Turnover

Cash Return of Assets Equation 1

Cash Flow to Sales = Operating Cash Flow / Net Sales

Cash Flow to Sales Equation

Cash Return of Assets = Operating Cash Flow / Average Total Assets

Cash Return of Assets Equation 2

Asset Turnover = Net Sales / Average Total Assets

Asset Turnover Ratio