Financial Accounting: Statement of Cash Flows

Practice vocabulary flashcards covering the categories, methods, and specific adjustments associated with the Statement of Cash Flows as discussed in the lecture.

Statement of Cash Flows

A separate financial statement designed to describe exactly where cash came from and where cash was used over a specific period of time.

Cash Equivalents

Short-term investments with an original maturity date of ninety days or less, such as certain certificates of deposit or treasury bills.

Financing Cash Flows

The category of cash flows involving transactions with suppliers of capital, such as issuing or repurchasing shares, borrowing money, and paying dividends.

Investing Cash Flows

The category of cash flows related to the acquisition and disposal of noncurrent assets, including plant, property, and equipment, as well as buying or selling stocks and bonds of other companies.

Operating Cash Flows

The category of cash flows that includes all transactions not classified as financing or investing, such as collections from customers and payments for inventory, salaries, and taxes.

Direct Method

An approach to measuring cash flow from operations where each cash transaction is directly observed and categorized into one of three activity types.

Indirect Method

A technique for measuring cash flow from operations that begins with net income and applies adjustments for non-cash items and changes in working capital accounts.

Working Capital Accounts

The collective name for selected current assets and current liabilities used in the operating activities of a business.

Depreciation Expense

A non-cash expense that is added back to net income when using the indirect method to calculate cash flow from operations.

Free Cash Flow

The unencumbered or uncommitted cash flow generated from operations that remains available for discretionary decisions like funding growth, repurchasing equity, or paying dividends.

Deferred Income Tax

A liability representing timing differences between Generally Accepted Accounting Principles ($GAAP$) and the tax code, where an organization recognizes an expense before the actual cash payment is required by the government.

Matching Principle

The accounting rule that dictates expenses must be recognized in the same period as the revenues they helped generate, which differentiates accrual accounting from cash flow accounting.

Gains and Losses on Asset Sales

Adjustments made during the second step of the indirect method to remove the non-operating and non-cash impact of asset disposals from the net income figure.

Interest Paid (US GAAP)

Under $US\,GAAP$, the cash used to pay interest is classified as an operating cash outflow rather than a financing cash flow.

Cash from Customers

The most significant operating cash inflow, representing the actual cash collected for goods or services provided, regardless of when the revenue was recognized.

Accounts Receivable (Indirect Method)

Under the indirect method, an increase in this current asset requires a downward adjustment to net income because it indicates revenue was earned but not yet collected in cash.

Accounts Payable (Indirect Method)

Under the indirect method, an increase in this current liability is added back to net income because it signifies that certain expenses were recognized but not yet paid in cash.