Statement of Cash Flows

1
Statement of Cash Flows
LO 1 Understanding the Types of Activities
Reported in the Statement of Cash Flows
2
Reporting Cash Flows
LO 1

• The statement of cash flows reports a firms
  major cash inflows and outflows for a period. It
  provides useful information about a companys
  ability to do the following
• Generate cash from operations
• Maintain and expand its operating capacity
• Meet its financial obligations
• Pay dividends

3
Reporting Cash Flows
LO 1

• The statement of cash flows reports cash flows
  from three types of activities
• Cash flows from operating activities are cash
  flows from transactions that affect net income.
• Cash flows from investing activities are cash
  flows from transactions that affect investments
  in the noncurrent assets of the company.

(continued)
4
LO 1
Reporting Cash Flows

• Cash flows from financing activities are cash
  flows from transactions that affect the equity
  and debt of the company.

5
LO 1
Reporting Cash Flows
6
Cash Flows from Operating Activities
LO 1

• The direct method reports operating cash inflows
  (receipts) and cash outflows (payments), as
  follows

7
Reporting Cash Flows
LO 1

• The indirect method reports the operating cash
  flows by beginning with net income and adjusting
  it for revenues and expenses that do not involve
  the receipt or payment of cash, as follows

8
Reporting Cash Flows
LO 1

• The primary advantage of the indirect method is
  that it reconciles the differences between net
  income and net cash flows from operations. Also,
  the indirect method is less costly to use than
  the direct method.

Over 99 of companies use the indirect method.
9
LO 1
Reporting Cash Flows

• Whether the direct or indirect method is used,
  the amount of net cash flow from operating
  activities will be the same.

10
Reporting Cash Flows
LO 1
11
Cash Flows from Operating Activities
LO 1

• Cash inflows from operating activities normally
  arise when cash is received from customers.
• Cash outflows from operating activities normally
  arise when cash is paid to suppliers for
  merchandise, supplies, and services and to
  employees for salaries and wages.

12
Cash Flows from Investing Activities
LO 1

• Cash inflows from investing activities normally
  arise from selling fixed assets, investments, and
  intangible assets.
• Cash outflows from investing activities normally
  include payments to acquire fixed assets,
  investments, and intangible assets.

13
Cash Flows from Financing Activities
LO 1

• Cash inflows from financing activities normally
  arise from issuing long-term debt or equity
  securities.
• Cash outflows from financing activities normally
  include paying cash dividends, repaying long-term
  debt, and acquiring treasury stock.

14
Noncash Investing and Financing Activities
LO 1

• Noncash investing and financing activities are
  transactions that do not directly affect cash.
  The effect of such transactions is recorded in a
  separate schedule that appears at the bottom of
  the statement of cash flows.