B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS

Question 1

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

5. STATEMENT OF CASH FLOWS

What does it report?

Answer 1

Statement of cash flows is to show the changes in cash during the period.

Users want to know about a company’s ability to generate and control cash in order to assess the company’s ability to meet its obligations.

Question 2

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

There are three types of cash flows on a cash flow statement: (3)

Answer 2

• Operating
• Investing:
• Financing

Question 3

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Operating: Changes in cash resulting from business operations (4)

Answer 3

• Cash received from customers
• Cash paid for business expenses
• Dividend income
• Interest income/expense

Question 4

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Investing: Changes in cash resulting from investing activities (3)

Answer 4

• Purchase/sale of investments
• Purchase/sale of long-term assets
• Issuing loans (receiving a loan would be financing)

Question 5

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Financing: Changes in cash resulting from financing activities (5)

Answer 5

• Issuing and selling company stock
• Purchasing treasury stock
• Paying dividends
• Issuing bonds
• Recieving a loan, and Making Payments on a loan

Question 6

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Statement of Cashflows

Most common mistakes on this:

Answer 6

• Dividends received are part of net income and therefore an operating activity.

• Dividends paid are a financing activity.

• Interest expense and income is an operating activity.

• Also read questions carefully to identify non-cash transactions… they aren’t classified on the statement of cash flows if no cash is involved.

• Non-cash activities:** There can be transactions that are significant but don’t affect cash, and so **would not be part of the statement of cash flows.

• An example would be converting debt into stock.
• These would be reported in the notes to the financials or in a separate schedule.

Question 7

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Difference in the Direct vs Indirect Method of Cash Flow Statement

Answer 7

The only real difference in the two methods deals with the operating activities section:

Direct method, each line is a “direct” statement showing cash paid or received such as “cash paid to customers” or “cash paid to suppliers”.

Indirect statement, operating activities starts with net income and works backwards to “cash provided by operating activities”, and several non-cash items such as depreciation expense or gain/loss on sale of equipment.

You’ll notice in the example below that the investing and financing sections are essentially the same. It’s only the operating section that differs.

Question 8

_{B. GENERAL PURPOSE FINANCIAL STATEMENTS - 5. STATEMENT OF CASH FLOWS}

Cash Flow Statement:

When using the indirect method, you are taking net income (accrual basis) and converting it to cash basis.

Here are a few common items and how they relate when doing so:

• A change in assets means cash moved in the _opposite_ direction.

• A change in liabilities means cash moved in the _same_ direction.

Examples:

Answer 8

Examples:

• Increase in inventory means less inventory sold than purchased, this is a subtraction from net income.
• Decrease in inventory means more inventory sold than purchased, this is an addition to net income.
• Increase in a payable means more accrued than paid, so this is added to net income.
• Increase in a receivable means more accrued than received, so this is subtracted from net income.
• Depreciation expense is non cash but reduces net income on the accrual basis, so it is added to net income.