Financial Accounting Quiz Chapter 12

What does the Statement of Cash Flows report?

cash receipts, cash payments, net change in cash resulting from operating, investing, and financing activities during a period

Statement of Cash Flows provides information 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 by operating activities

• cash investing and financing transactions

Operating activities

cash effects of transactions that enter into determining net income

Investing activities

cash effects of long-term investments, plant assets, lending money, and collecting the loans

Financing activities

cash effects of borrowing and repaying + cash effects related to stockholders

What is included in operating activities?

cash effects of transactions that generate revenues and expenses (sales, interest, dividends, inventory, wages, taxes, other expenses)

What is included in investing activities?

cash flows from acquiring and disposing of investments and long-term assets (sale of PPE, collection of principal, purchase PPE, making loans)

What is included in financing activities?

cash flows resulting from changes in long-term liabilities and stockholders’ equity (sale of stock, issuance of bonds and notes, dividends, treasury stock)

Order of activities on Statement of Cash Flows

1. operating activities

2. investing activities

3. financing activities

4. net increase (decrease) in cash

5. cash at beginning of period

6. cash at end of period

7. noncash investing and financing activities

Three sources of information for Statement of Cash Flows

1. comparative balance sheets

2. current income statement

3. additional information (transaction data saying how cash was provided or used)

Step 1 of preparation

determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis (add/subtract what has/hasn’t been paid)

Step 2 of preparation

analyze changes in noncurrent asset and liability accounts and stockholders’ equity and report as investing and financing activities, or disclose as noncash

Step 3 of preparation

compare the net change in cash on the statement of cash flows with the change in the Cash account of the balance sheet to make sure amounts agree

Transactions that create cash inflow

• sellings goods/services for cash

• collecting AR

• selling PPE

• receiving dividends or interest income

• borrowing money

• issuing stock

Transactions that create cash outflow

• paying suppliers, wages, rent, utilities

• paying interest or income taxes

• purchasing PPE

• repaying loan principal

• paying dividends

• buying back company stock (treasury)

Transactions that DO NOT affect cash

• depreciation or amortization expense

• issuing stock to acquire assets

• converting debt to equity

• adjusting fair value of investments

• accrued expenses

• writing off bad debts

Corporation in introductory phase

• negative cash from operations

• negative cash from investing

• positive cash from financing