chapter 11

Statement of Cash Flows Overview

• Authors: Spiceland & Thomas Herrmann, Fourth Edition

Cash Flow Activities

• Operating Activities: Cash transactions relating to revenue and expenses.

• Investing Activities: Cash transactions involving purchase and sale of long-term assets and current investments.

• Financing Activities: Cash inflows and outflows related to external financing (transactions with lenders and stockholders).

Example: E-Games, Inc. Statement of Cash Flows

• For Year Ending December 31, 2024

  • Operating Activities: Net income $42,000, Adjustments include:

    • Depreciation: $9,000

    • Loss on Sale of Land: $4,000

    • Net Cash Flows: $50,000

  • Investing Activities: Purchases and sales leading to net cash flows of -$29,000.

  • Financing Activities: Issuance of stock: $5,000, cash dividends paid: -$12,000, Net cash flows: -$7,000.

  • Net Increase in Cash: $14,000, ending cash $62,000.

Learning Objectives

1. Classify Cash Transactions: Understand categories (operating, investing, financing).

2. Prepare Statement of Cash Flows: Follow the steps to compile cash flow statement.

Common Mistakes

• Misclassifying dividends:

  • Dividends received: Operating Activities.

  • Dividends paid: Financing Activities.

Sources for Cash Flow Preparation

1. Income Statement: Provides operating activities data.

2. Balance Sheet: Reflects changes over periods, aiding in activity classification.

3. Accounting Records: Supplementary info for cash inflows/outflows.

Relationship of Financial Statements to Cash Flows

• Cash flows stem from changes in the balance sheet and income statement characteristics.

Key Points

• Operating Activities: Relate mainly to income on the income statement.

• Investing Activities: Involve changes in long-term assets.

• Financing Activities: Refer to changes in liabilities and stockholders' equity.

• Noncash activities reported separately.

Preparing the Statement of Cash Flows Steps

1. Net cash flows from Operating Activities.

2. Net cash flows from Investing Activities.

3. Net cash flows from Financing Activities.

4. Total cash flow reconciling with balance sheet changes.

Adjustment Types in Cash Flow Statement

• Noncash Items: Adjustments for depreciation and losses.

• Changes in Current Assets/Liabilities: Details of inflows/outflows affecting cash.

Key Ratios and Financial Analysis

• Analyze cash flows to measure performance and financial health (e.g., Cash Return on Assets).

• Comparison of cash flows from operations to net income.

Summary of Important Adjustments

• Increases in current assets typically reduce cash flow; inversely, decreases increase it.

• Noncash transactions and adjustments to reconcile net income to cash flow are critical for accurate reporting.