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The Statement of Cash Flows

1.Distinguish between operating, investing, and financing activities. Sources and Uses of Cash Section Objective

A statement of cash flows is a financial statement that provides information about the cash receipts and cash payments of a business. ANSWER: QUESTION: What is a statement of cash flows? Page 912

Statement of Cash Flows Reviewed by creditors to determine how the firm will pay principal and interest on debts Reviewed by investors to determine if the corporation will have the cash to pay dividends Reviewed by management for information about cash to pay employees, suppliers, and other obligations Page 912

On the statement of cash flows, the term cash includes cash and cash equivalents. Recall that cash consists of coin, currency, and bank accounts. The Meaning of Cash Page 912

Cash equivalents are assets that are easily convertible into known amounts of cash. ANSWER: QUESTION: What are cash equivalents? Examples: CDs, U.S. Treasury bills, money market funds Page 912

Sources and Uses of Cash The statement of cash flows reports: Page 912 cash inflows Sources of cash cash outflows Uses of cash

Sources and Uses of Cash Cash inflows and outflows are classified under three headings: Page 913 Operating Activities Investing Activities Financing Activities

Operating activities are routine business transactions. ANSWER: QUESTION: What are operating activities? Examples: Selling goods, paying operating expenses Page 912

Investing activities are transactions that involve the acquisition or disposal of long-term assets. ANSWER: QUESTION: What are investing activities? Examples: Buying bonds of other companies, selling land Page 913

Financing activities are transactions that provide cash to the business to carry on its activities. ANSWER: QUESTION: What are financing activities? Examples: Issuing capital stock, paying cash dividends Page 913

Sources of CashUses of Cash Operating Activities Sale of merchandise Sale of services Interest income Dividend income Miscellaneous income Pay for merchandise Pay taxes Pay salaries and wages Pay interest expense Pay for other expenses Page 913

Sources of CashUses of Cash Investing Activities Sale of land, buildings, or equipment Principal payments collected on receivable for long-term assets Sale of investment in bonds or other securities Pay for purchase of land, buildings, or equipment Pay for the purchase of investments in bonds or other securities Page 913

Sources of CashUses of Cash Financing Activities Issuance of common stock Issuance of preferred stock Issuance of bonds payable Borrowing through signing a note payable Resale of treasury stock Pay cash dividends on common stock Pay cash dividends on preferred stock Repay bond indebtedness Repay notes payable or other borrowing Purchase treasury stock Page 913

REVIEWREVIEW ________________ are assets that are easily convertible into known amounts of cash. The statement of cash flows shows the _______ and ____ of cash. Cash inflows and outflows are classified under the headings _________________, _________________, and _________ _________. Operating Activities sources Cash equivalents Complete the following sentences: uses Investing Activities Financing Activities

REVIEWREVIEW _________________ are transactions that involve the acquisition or disposal of long- term assets. An example of a(n) _______________ is the issuance of capital stock for cash. The sale of merchandise on credit is a(n) _______________. operating activity financing activity Investing activities Complete the following sentences:

Thank You for using College Accounting, Tenth Edition Price Haddock Brock