William F. Bentz Statement of Cash Flows A.The statement of cash flows is one of the three primary financial statements that must be issued by publicly traded corporations in the USA. B.The purpose is to provide detailed cash flow information not available from other sources.

William F. Bentz STRUCTURE C.The statement is divided into three major sections for purposes of reporting cash flows. These are 1.Operating activities 2.Investing activities 3.Financing activities

William F. Bentz OPERATIONS D.The cash flow from operating activities is primarily the cash received from customers less the cash paid for the expenses, including interest and taxes, associated with those revenues or the reporting period.

William F. Bentz INVESTING E.The cash flows associated with investing activities include the purchase and sale of assets used in the business or held as investments. Investing activities are usually reflected in the noncurrent assets of a company.

William F. Bentz FINANCING F.Financing activities include borrowing transactions with lenders and transactions with stockholders. Borrowing activities and transactions involving the company’s own securities are financing activities.

William F. Bentz OTHER FEATURES G.Other features of the statement of cash flows include the reconciliation of the beginning and ending balances of cash and cash equivalents as reported on the beginning and ending statements of financial position.

William F. Bentz OTHER FEATURES A second such feature is the reconciliation of net income with the cash flow from operations. Third, we report any major transactions that normally would involve cash payments, but were structured so that the reporting company did not make a cash payment directly.

William F. Bentz Differing Perspectives There are two different perspectives of the purpose of the statement of cash flows. One perspective is that investors would benefit from having information about the major sources and uses of cash. This includes the major sources and uses of cash for operations. The so- called direct method reflects this view.

William F. Bentz Differing Perspectives The other view is that the main purpose of the statement of cash flows is to reconcile the total cash flows from operations with net income, as well as providing cash flows from investments and financing, to explain the difference between cash flows and income.

William F. Bentz Differing Perspectives This latter perspective leads to the reconciliation view. In my opinion, the reconciliation focuses on explaining what happened, while the direct view better supports forecasts of future cash flows. Each method has its strengths.

William F. Bentz

PREPARING STATEMENTS A.Companies have access to all the details needed to prepare a statement of cash flows. B.We are using only reported information to create statements of cash flow, so ours are less accurate.

William F. Bentz ASSUMPTIONS n For problem and exam purposes, assume merchandise purchase transactions are the only ones affecting accounts payable. Thus, accounts payable is assumed to related to the cost of sales, but no other expenses.

William F. Bentz How-to-do-it n Read the supplementary information to learn what has been provided in the problem or case. n Work in SOE order, and find the related SFP accounts (e.g., Sales, Accounts receivable, Allowance for uncollectible accounts, etc.)

William F. Bentz More How-to-do-it n Check-off the information you have used to avoid double counting. n Analyze any changes in every SFP account to be sure you have considered all likely transactions. When every item is checked off, you should be finished!

William F. Bentz More How-to-do-it n Reason through all the amounts to see if they make sense for the account information provided. n Check your overall answer against the change in cash to see if you missed anything or made a calculation mistake.