Accounting 203 Chapter 11

Statement of Cash Flows

Provides relevant information about a company’s cash receipts (inflows of cash) and cash payments (outflows of cash)

-Tells us about a firm’s ability to pay dividends and meet obligations

Cash Flows from Operating Activities

Cash inflows or outflows that relate to acquiring (purchasing or manufacturing), selling, and delivering goods or services

Examples of Operating Inflows

1. Cash sales to customers

2. Collection of accounts receivable arising from credit sales

3. Cash dividends received

4. Interest received on investments in equity and debt securities

Examples of Operating Outflows

1. Payments to suppliers for goods and services

2. Payments to employees for wages and salaries

3. Payments to governments for taxes

4. Payments to lenders for interest on debt

Cash Flows from Investing Activities

Cash inflows and outflows that relate to buying and selling of operating assets and investments in other companies, lending money, and collecting loans

Examples of Investing Inflows

1. Sale of property, plant, and equipment

2. Collection of the principal amount of a loan

3. Sale of investments in other companies

Examples of Investing Outflows

1. Payments to acquire property, plant, and equipment

2. Payments to purchase debt or equity securities of other companies as an investment

3. Payments to loan money to others

In general, investing cash flows relate to increases or decreases of…

long-term assets and investments

Cash Flows from Financing Activities

Cash inflows and outflows that relate to obtaining resources from creditors and investors, providing owners a return on their investment, and repaying creditors

Examples of Financing Inflows

1. Issuance of stock

2. Issuance of debt (bonds or notes payable)

Examples of Financing Outflows

1. Payments to repay the principal amount borrowed of bonds or notes payable

2. Payments to repurchase a company’s own stock (treasury stock)

3. Payments to pay dividends

In general, financing cash flows involve cash receipts and payments that affect…

long-term liabilities and equity

What are the two methods to computing cash flow from operating activities

1. Direct Method: Sum all transactions during the year that involve cash

2. Indirect Method (TESTED ON EXAM): Start with net income and then adjust for non-cash items