Financial Accounting: Statement of Cash Flows

Vocabulary-style flashcards covering the definitions, classifications, and methods of the Statement of Cash Flows based on IAS 7 and FASB standards.

Cash

Comprises cash on hand and demand deposits.

Cash equivalents

Short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value, generally with a maturity of less than $3$ months.

IAS 7

The accounting standard that defines cash as cash on hand and demand deposits, and cash equivalents as highly liquid, low-risk investments held for short-term commitments.

Restricted cash

Cash held for a specific purpose (such as petty cash or payroll) that is not available for immediate general use.

Statement of cash flows

A dynamic financial report that shows the sources and uses of cash (movements) during a specific period of time.

Statement of financial position

Commonly known as the balance sheet, it provides a static vision of the amount of cash available at a single point in time.

Operating activities

Cash flows related to the primary revenue-producing activities of a company, such as sale of goods, salaries, taxes paid, and interest paid on borrowings.

Investing activities

Cash flows related to the acquisition and disposal of non-current assets (tangible, intangible, or financial), as well as receipt of repayment of loans.

Financing activities

Cash flows that result in changes in the size and composition of the contributed equity and borrowings, such as issuing new shares, repayment of debt, and payment of dividends.

FASB (USA) classification

A classification standard where interest paid, interest received, and dividends received are categorized as Operating, while dividends paid are categorized as Financing.

Direct method

A presentation method for operating cash flows that shows major classes of gross cash receipts and payments, summaries from the cash ledger.

Indirect method

A presentation method for operating cash flows that starts with profit or loss before tax and adjusts for non-operating items, non-cash items, and changes in working capital.

Accrual accounting

A system of accounting that focuses on the economic meaning of a transaction rather than its physical cash effects.

De-accrual

The process of adjusting net income by adding back non-cash expenses (like depreciation) and liability increases, and subtracting asset increases to find net cash flow.

Net Cash Provided by Operating Activities (Indirect Formula)

$$Net income + Depreciation and Amortization expense - \text{Change in Accounts Receivable} - \text{Change in Inventories} + \text{Change in Accounts Payable} + \text{Change in Prepaid expenses}$$

Creative accounting

The manipulation of financial figures; cash is often viewed as a more objective measure of performance because it is harder to manipulate than profit.