Statement of Cash Flows Flashcards
What is a statement of cash flows?
it is a required part of a full set of financial statements for all business enterprises; the purpose of the statement of cash flows is to provide information about the sources of cash and cash equivalents and their uses
operating cash flows - cash receipts and disbursements from transactions reported on the income statement and current assets and current liabilities (excluding current notes payable and the current portion for long-term debt, which are reported in financing cash flows)
investing cash flows - cash receipts and disbursements from non-current assets
financing cash flows - cash receipts and disbursements from debt (including non-current payables) and equity
the statement also present information about material noncash events; cash flow amounts per share are not disclosed under U.S. GAAP
the cash concept is used because investors, creditors, and other interest parties need information about the entity’s available cash and cash needs (ability to pay cash obligations, dividends, etc.)
Methods of presenting the statement of cash flows
there are two ways to prepare the operating section of a statement of cash flows - the direct method and indirect method; only the indirect method is testable on the CPA exam; regardless of the method used, the presentation of investing and financing activities is the same; only the sections that present operating activities and certain required disclosures are different
companies report net cash flows from operating activities indirectly, by adjusting net income to reconcile it to net cash flows from operating activities as follows:
CFO = net income + noncash expenses/losses - noncash income/gains + increases (decreases) in operating liabilities (assets) - increases (decreases) in operating assets (liabilities)
Operating activities
they involve producing goods and delivering services to customers
an adjustment to net income includes all items are included in net income that do not affecting operating cash receipts and disbursements (those that should be omitted altogether or categorized as investing or financing activities, such as adding depreciation and amortization and subtracting gains on sales of productive assets)
the effect on cash flows for comparative balance sheet changes in asset, liability, and equity accounts can be easily determined (these rules apply to all changes in balance sheet items, including those in the investing and financing activities sections) as follows:
an increase to an asset or a debt balance account (AR) will have the effect on the statement of cash flows as a decrease to cash (indirect effect)
a decrease to an asset of a debit balance account (inventory) will have the effect on the statement of cash flows as an increase to cash (indirect effect)
an increase in a liability, an equity, or a credit balance account (AP) will have the effect on the statement of cash flows as an increase to cash (direct effect)
a decrease in a liability, an equity, or a credit balance account (AFDA) will have the effect on the statement of cash flows as a decrease to cash (direct effect)
as a shortcut, just remember that change in debit balance accounts will have the opposite effect on cash flows (because cash is a debit balance account); changes in credit balance accounts will have the same effect on cash flows
gains are adjusted out of the operating activities section and (generally) not the investing activities section by subtracting their effects from net income
losses are adjusted out of the operating activities section and (generally) into the investing activities section by adding their effects to net income
Investing and financing activities (and noncash investing and financing activities)
investing activities include cash flows from the purchase or sale of non-current assets
financing activities include cash flows from non-current liability (creditor-oriented) and equity (owner-oriented) activities
information about material noncash financing and investing activities (those that do not result in cash receipts or payments) should be provided separately in a supplemental disclosure; of course, any part of the transaction that does involve cash would be included in the statement of cash flows
