Chapter 22: Statement of cash flows

Statement of cash flows

A period statement that is required for all companies that provide balance sheet and income statement, which is required for all the periods in the income statement

Statement shows

1. Where cash came from

2. What cash was used for

3. Change in cash balances

Provides users with info to

1. Generate future cash flow

2. Meet future obligations

3. Reason for difference in net income and net cash

4. Report inv/fin cash activities

5. Ability to pay future dividends

Limitations of the statement

1. Historical cost based

2. Subject to manipulation

Operating activities

Include all transactions and events not involved in investing or financing, directly impacted to net income Investig

Investing activities

Lending money and collecting on those loans, acquiring and disposing investments and PPEFin

Financing activities

Obtaining cash from creditors, repaying amounts borrowed, and obtaining capital from returns on their investments.

Non-cash financing and investing activities

Does not involve cash and would be considered an investing or financing activity if cash were involved. Must be disclosed in either the footnote or supporting schedule.

When must the direct method for operating activities be used

1. If the direct method is used in the body of the statement, the indirect method must be shown in a supporting schedule as a reconciliation of the direct method

2. If the indirect method is being sued for the statement, either shown as a body or single line

Why begin with Net income under the indirect method

To adjust this amount for items that affected net income, but not cash in the same manner

Decrease in trade receivable for the period

Add to NI

Decrease in Inv

Add to NI

Decrease in prepaid expense

Add to NI

Increase in trade payable for the period

Add to NI

Increase in accrued liabilities

Add to NI

Dep exp

Add to NI

Amortization of intangibles

Add to NI

Period amortization of a discount on bonds payable to notes payable

Add to NI

Amortization of a premium on notes receivable or investment in bonds

Add to NI

Losses that occurred during the period

Add to NI

Increase in trade receivable

Deduct from NI

Increase Inventory

Deduct from NI

Increase in prepaid

Deduct from NIDecre

Decrease in trade payable

Deduct from NI

Decrease in accrued liabilities

Deduct from NI

Amortization of a premium on notes or bonds payable

Deduct from NI

Amortization of a discount on notes receivable or investments in bonds

Deduct from NIGains

gains occurred

Deduct from period

Depreciation and amortization under the direct method

Nothing is done

Depreciation and amortization under the indirect method

Added back to the NI, but amortizations of bonds/notes payable and amortization of a discount on notes receivable investment in bonds are exceptions that are deducted from NI.

Gains and losses under the direct method

No impact Gian

Gians and losses under the indirect method

Taken out or added to NI

The declaration of dividends, stock dividends, and stock splits impact under the direct and indirect method

Do nothing to the NI, so do nothing and do not show them (disclose)

Write-off of an AR under direct and indirect method

Nothing is done to either because it has no impact on the NI

Period ending adjusting entry using the allowance for doubtful accounts for bad bet under the direct method

Nothing is done

Period ending adjusting entry using the allowance for doubtful accounts for bad bet under the indirect method

Either added or deducted form NI

Paid income taxes

Operating outflow re

Recorded depreciation on building

Neither, not disclosed

Loaned money to CFO, receiving in return a two year NR

Investing, outflow

Received a semiannual interest payment on the NR from the CFO

Operating, inflow Paid

Paid rent incurred during previous periods

Operating, outflow

Issued common stock in exchange for land

Neither, must be disclosed

Acquired trading equity securities for cash

Operating, inflow

Paid interest on long term note

Operating, outflow

Sold equipment for cash

Investing, inflow

Received dividend on an equity investment

Operating, inflow

Sold an available for sale investment for cash

Investing, inflow

Amortized patent

Neither, not disclosed

Acquired machine by issuing note

Neither, must be disclosed

Paid insurance

Operating, outflow

Working capital accounts

These are current asset or current liability accounts that experience a timing difference (record and pay at different times). So if you debit a liability that means you are paying cash this period that did not impact the NI for this period. If you credit an asset you decreased the asset, thus adding back to the NI.

Decrease in rent payable

Operating, outflow

Cash payment that reduces liability

Increase prepaid rent

Operating, outflow

Increased Merchandise inventory

Operating, outflow