5. Statement of Cash Flows Flashcards
what is the purpose of the statement of cash flows
- to provide a detailed summary of where cash came from
- and how it was used during an accounting period
in what ways is cash flow information important to management
- for making decisions such as purchasing equipment
- plant expansion
- paying down long-term debt
- declaring dividends
in what way is cash flow information important to external users
- for evaluating a corp’s financial performance
what is actually meant by the word ‘cash’ in accounting
- cash is anything a bank will accept for deposit
- in accounting, cash includes cash equivalents
- cash equivalents are assets that can be quickly converted to cash are not subject to significant risk of changes in value
what are 2 examples of ‘negative’ cash
- bank overdrafts
- demand bank loans
what are the 3 sections the statement of cash flows is split into
- operating activities
- investing activities
- financing activities
how is cash flow from operations generated
- from the principal activities that produce revenue for a corp
- such as selling products
- and most of the expenses reported on the income statement
- which care necessary to carry out these activities
what does cash flow from investing activities involve
- increases and decreases in long-term asset accounts
- these include outlays for the acquisition of property and equipment
- as well as cash proceeds from their disposal
when do cash flows from financing activities occur
- when there are changes to debt or shareholders equity accounts
- like when long-term debt is repaid or shares are issued
- dividend payments are also considered financing activities
what are the 5 steps to prepare a statement of cash flows (SCF)
- 1: set up a cash flow table
- 2: calculate the changes in each balance sheet account
- 3: analyze changes in non-cash balance sheet accounts
- 4: prepare the cash flow from operating activities section of the SCF
- 5: prepare a statement of cash flows
for step 1, how do you set up a cash flow table
- the first column is for each account on the balance sheet
- the next column is the balance and is split into the current and previous year
- when filling in the balances, credit balances are put in brackets
- the total of both columns should equal 0
for step 2, how do you calculate the changes in each balance sheet account
- add a third column to write the changes
- this column has two columns, one for debit on the left and credit on the right
- calculate the net debit or credit changes for every account and put it in the right column
- dont forget that a decrease in a debit account is written as positive in the credit column
- the sum of the debit and credit sides should be the same
for step 3, how do you analyze changes in non-cash balance sheet accounts
- add a fourth column to write the cash effect
- this column has three columns, debit inflow on the left, credit outflow on the right and activity on the right
- if the change in the ‘change’ column is debit, write the equal sum on the ‘cash effect’ credit (cash outflow)
- vice versa for cash inflow
- the difference between the sum of the debit and credit sides give you the net cash inflow (or outflow if -ve)
what is the point of the activity column in step 3
- to label whether the account is operating, investing or financing for step 4
for step 4, when preparing the cash flow from operating activities of the SCF, what is a key change that needs to be made to conform to GAAP
- income taxes paid need to be disclosed separately
- to do this, income before taxes is used as the starting point instead of net income
- the income tax expense is shown on the income statement as a separate cash outflow
- but the change in income taxes payable needs to be accounted in this as well
