6. Statement of Cash Flows and Financial Statement Articulation

Question 1

Describe the purpose of the statement of cash flows.

Answer 1

The statement of cash flows reconciles the overall change to the organization’s cash position over the course of the period presented, making it useful for understanding cash resources and needs of the organization. On the cash flow statement, the change in cash is broken down into three categories of cash flows, the combination of which equal the total change in cash for the period presented.

Question 2

Name and explain the three main sections included in the statement of cash flows.

Answer 2

Operating Cash Flows: Cash flows from the organization’s central operations. This includes cash flows from customers, cash flows to employees and suppliers, and cash for interest and taxes.

Investing Cash Flows: Cash flows associated with longer term investing activities of the organization like PP&E activities and other investments.

Financing Cash Flows: Cash flows associated with the company’s financing strategy. Includes transactions in the entity’s own stock, cash inflows from borrowings, and payments of dividends and the principal amount of borrowings.

Question 3

Describe the Indirect and the Direct Method for the Operating Cash Flow section.

Answer 3

Indirect Method: The most common method used. It begins with net income then reconciles to operating cash flow by adjusting non-cash expenses and changes in operating assets and liabilities from accrual accounting to cash basis accounting.

Direct Method: Shows actual gross cash inflows from their sources derived and cash outflows for each purpose. The FASB prefers this method, but it is rarely used because the organization is still required to reconcile net income to cash flows from operations.

Question 4

Name the supplemental disclosures that are required for the statement of cash flows.

Answer 4

Cash paid for interest (when the indirect method is used)

Cash paid for taxes (when the indirect method is used)

Significant non-cash investing and financing transactions. One example of this would be the issuance of bonds for the purchase of a building.

Question 5

What are some ways that the financial statements articulate if they are properly prepared?

Answer 5

Net income and other comprehensive income from the income statement appear in the statement of changes in equity.

Equity balances from the statement of changes in equity appear in the equity section of the balance sheet.

Net income, non-cash gains and losses, beginning and ending cash, and changes in the the balances of the operating assets and liabilities flow to the statement of cash flows when using the indirect method.