chapter 11 Statement of Cash Flows Lecture Notes

These flashcards cover key concepts related to the classification and reporting of cash transactions in the statement of cash flows, including definitions of operating, investing, and financing activities, as well as differences between the indirect and direct methods.

Operating Activities

Cash transactions relating to income statement items, including cash receipts and payments for revenue and expenses.

Investing Activities

Cash transactions primarily involving changes in long-term assets, such as the purchase and sale of physical assets.

Financing Activities

Cash transactions related to changes in long-term liabilities and stockholders’ equity.

Indirect Method

A method of reporting operating activities that starts with net income and adjusts for noncash effects to arrive at net cash flows.

Direct Method

A reporting method that directly presents cash inflows and outflows from operating activities, showing cash received and paid for specific items.

Adjustments for Noncash Components

Changes made to net income in the indirect method to account for items such as depreciation, gains, and losses that do not represent cash.

Depreciation Expense

A noncash expense that reduces net income but does not represent an actual cash outflow in the period.

Loss on Sale of Assets

A noncash component that is added back to net income when calculating cash flows since it reduced the net income.

Cash Return on Assets

A financial metric calculated as net cash flows from operating activities divided by average total assets.

Payment of Cash Dividends

A cash outflow for financing activities representing the distribution of profits to shareholders.

Net Cash Flows from Operating Activities

The total cash generated or used from operating activities after adjustments for noncash components and changes in working capital.

Common Mistake: Misclassifying Dividends

Dividends received are classified under operating activities, while dividends paid are classified under financing activities.

Operating Section - Direct Method

The part of the statement of cash flows that reports cash inflows and outflows from operating activities directly without adjustments for noncash items.