Basic Steps in the Preparation of the Statement of Cash Flows

Question 1

What are the three sources of information used to prepare a statement of cash flows?

Answer 1

Comparative statements of financial position,
The current income statement,
Selected transaction data from the general ledger.

Question 2

What is Step 1 in preparing a statement of cash flows?

Answer 2

Determine the change in cash by comparing the beginning and ending balances of cash and cash equivalents.

Question 3

What is Step 2 in preparing a statement of cash flows?

Answer 3

Record information from the income statement into the operating activities section, adjusting for non-cash revenues and expenses to calculate cash flows from operations.

Question 4

What are the three categories of adjustments made to the operating activities section of a statement of cash flows?

Answer 4

Revenues and expenses that do not represent cash transactions (e.g., credit sales).

Depreciation and amortization (non-cash expenses).

Gains or losses on the disposal of long-term assets (as these are related to investing or financing activities).

Question 5

What is Step 3 in preparing a statement of cash flows?

Answer 5

Analyze the change in each statement of financial position account and identify the cash flows related to these changes (e.g., changes in assets, liabilities, and equity).

Question 6

What is Step 4 in preparing a statement of cash flows?

Answer 6

Complete the statement by calculating subtotals for operating, investing, and financing activities, and ensure that the total change in cash equals the actual change in cash for the period.

Question 7

What equation relates changes in cash to other statement of financial position accounts?

Answer 7

Δ Cash = Δ Liabilities + Δ Shareholders’ Equity − Δ Non-cash Assets