5.8: Preparation of Statement of Cash Flows

Question 1

What are the four steps involved in preparing a statement of cash flows?

Answer 1

Determine the change in cash and cash equivalents during the period.

Record the information from the income statement to the operating activities section of the statement of cash flows.

Analyze the changes in each SFP account to identify cash flows associated with them.

Reconcile the change in cash and cash equivalents with the beginning and ending cash balances.

Question 2

What information is required to prepare a statement of cash flows?

Answer 2

Information from the Statement of Financial Position (SFP), income statement, and selected transaction data, including changes in accounts that affect cash.

Question 3

What does the indirect method of preparing the statement of cash flows involve?

Answer 3

Start with net income.

Adjust for non-cash items like depreciation.

Adjust for changes in current assets and liabilities to arrive at cash from operating activities.

Question 4

What does the direct method of preparing the statement of cash flows involve?

Answer 4

The direct method reports the specific cash inflows and outflows from operations, including cash received from customers, cash paid to suppliers, cash paid to employees, and taxes paid.

Question 5

How are operating activities reported in the indirect method?

Answer 5

Operating activities begin with net income and adjust for non-cash items and changes in working capital, such as:

Depreciation

Changes in accounts receivable

Changes in inventory

Changes in accounts payable

Question 6

What items are included in the financing activities section of the statement of cash flows?

Answer 6

Issuance of common shares

Issuance of bonds payable

Payment of dividends

Repayment of long-term debt

Question 7

What are investing activities in the statement of cash flows?

Answer 7

Investing activities include:

Purchase of property, plant, and equipment (PPE)

Sale of patents

Proceeds from the disposal of assets

Question 8

What is the difference between the direct and indirect methods of preparing cash flow from operating activities?

Answer 8

The direct method shows specific cash inflows and outflows.

The indirect method starts with net income and adjusts for non-cash items and changes in working capital.