10 - The Cash Flow Statement Flashcards
What is a cash flow statement?
Accounting report that summarises a business’s cash receipts, cash payments, and net change in cash for a specific time period.
Why is a business’s cash flow statement important?
A business’s cash flow statement is important because it summarises the changes in the business’s cash by listing the cash inflows and cash outflows from its operating, investing, and financing activities during an accounting period. This information cannot be obtained from the business’s income statement or balance sheet. The information is useful to decision-makers in evaluating the business’s solvency and liquidity.
What types of transactions may cause cash inflows and cash outflows for a business?
The types of transactions that may cause cash inflows (receipts) for a business are decreases in its assets other than cash, increases in its liabilities, and increases in its owner’s equity.
The types of transactions that may cause cash outflows (payments) for a business are increases in its assets other than cash, decreases in its liabilities, and decreases in its owner’s equity.
What do users need to know about a business’s cash flow statement?
Users need to know that a business’s cash flow statement shows its cash inflows and cash outflows according to the type of activity that caused the increase or decrease in cash.
There are three sections: the cash flows from operating activities, the cash flows from investing activities and the cash flows from financing activities.
The net cash flows from each section are summed and the total increase (decrease) in cash is added to (or subtracted from) the beginning cash balance to determine the ending cash balance.
What are operating activities?
The primary activities of buying, selling, and delivering goods for sale, as well as providing services.
What are investing activities?
Transactions that affect investments in non-current assets of the company.
What are financing activities?
Obtaining capital from the owner and providing the owner with a return on investment, as well as obtaining capital from creditors and repaying the amounts borrowed.
What is the direct method?
Subtracting the operating cash outflows from the operating cash inflows to determine the net cash provided by (or used in) operating activities on the cash flow statement.
How does a business report the cash flows from its operating activities on its cash flow statement using the direct method?
Under the direct method, a business reports its cash flows from operating activities in two parts: operating cash inflows and operating cash outflows. A business may report as many as three categories of operating cash inflows (e.g. collections from customers) and as many as four categories of operating cash outflows (e.g. payments to suppliers).
How do users combine the changes in a business’s current assets and current liabilities with its revenues and expenses for the accounting period to determine the business’s operating cash flows?
The change in accounts receivable is combined with the sales revenue to determine the collections from customers. The change in salaries payable is combined with the salaries expense to determine the payments to employees. The change in inventory and the change in accounts payable are combined with the cost of goods sold to determine the payments to suppliers.
Why do internal and external users study a business’s cash flow statement in conjunction with its income statement and balance sheet?
Internal and external users study a business’s cash flow statement in conjunction with its income statement and balance sheet to evaluate the business’s liquidity and solvency, its ability to purchase property and equipment, and its cash flow returns.
What is the indirect method?
Adjusting net income to compute net cash provided by operating activities on the cash flow statement.
What are cash flow returns?
A business’s cash flows divided by the dollar amount of its assets or owner’s equity.
What cash flow ratios are used to evaluate a business’s performance?
The operating cash flow margin (Net cash flow from operating activities / Net sales) is used to evaluate a business’s profitability
(and liquidity). The cash return on total assets ([Net cash flow from operating activities + Interest paid] / average total assets) and
the cash return on owner’s equity (Net cash flow from operating activities / Average owner’s equity) are used to evaluate a
business’s performance in relation to its available resources.
