FA 5 - The Statement of Cash Flows Flashcards
Purpose of Statement of Cash Flows
To provide a picture of what happened to a business’ cash during an accounting period.
Sections of Statement of Cash Flows
Operating activities;
Investing activities; and
Financing activities.
Operating Activities
information on cash used or received in the process of preparing and providing goods and services to customers.
Effectively, it shows what net income would be under the cash accounting system.
Direct method
Using transactional information that impacted cash during that period:
- Take all cash collections from operating activities
- Subtract all cash disbursements from operating activities.
Indirect method
Start with net income, and make adjustments to undo the impact of accruals that were made during the period.
Investing activities
cash flows relating to long-lived assets (land, ppe, etc.)
Inflows and outflows relating to loans receivable and certain investment securities also included.
i. Cash paid to purchase long-lived assets;
ii. Cash received through sale/disposal of long-lived assets;
iii. Loans made to other entities; and
iv. Investment securities.
Financing activities
cash flows associated with paying back money to investors and creditors
IFRS and GAAP distinctions on what gets included
Sources and Uses of funds
Quick informal document to show how a business is managing its cash
i. Take two balance sheets (start, end of period);
ii. See change in each account; and
iii. Categorize each change into source or use of funds.
Start up
Operating - negative or very low
Investing - negative
Financing - large fluctuations/ who knows
Profitable/ growing
Operating - positive
Investing - negative
Financial - positive, negative or neutral
Mature
Operating - positive
Investing - slightly negative
Financing - negative
In decline
Operating - negative
Investing - positive
Financing - positive or negative
Sources of information for creating Statement of Cash Flows
i. Balance sheet at start of period;
ii. Balance sheet at end of period; and
iii. Income statement for the period.
Depreciation and amortization under indirect method
Added back to cash flows in the operating section
Gains and losses under indirect method
Non-operating gains and losses in the income statement:
Losses added back and gains subtracted in the investing section (usually)
