Statement of Cash Flows ACT 201 Lecture By: Ms. Adina Malik Chapter 17

Usefulness of the Statement of Cash Flows Provides information to help assess: 1. Entity’s ability to generate future cash flows. 2. Entity’s ability to pay dividends and obligations. 3. Reasons for difference between net income and net cash provided (used) by operating activities. 4. Cash investing and financing transactions during the period.

Usefulness and Format Format of the Statement of Cash Flows Order of Presentation: 1. Operating activities. 2. Investing activities. 3. Financing activities. The cash flows from operating activities section always appears first, followed by the investing and financing sections.

Preparing the Statement of Cash Flows Three Sources of Information: 1. Comparative balance sheets 2. Current income statement 3. Additional information Three Major Steps: Step 1: Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Step 2: Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. Step 3: Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure that the amounts agree.

Income Statement Transactions Current Portion of the Balance Sheet Operating Activities Changes in Long Term Investments Changes in Fixed Asset Items Investing Activities Changes in Long Term Liabilities Changes in Stockholders’ Equity Financing Activities Classification of Cash Flows

Format of the Statement of Cash Flows

STEP 1: Net Cash Provided by Operating Activities—Indirect Method

STEP 2: Investing Activities Purchase or sale of Fixed Assets and Long-term Investments. For e.g. the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section. For e.g. the equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000 with accumulated depreciation $1,000. Cash 4,000 Accumulated depreciation1,000 Loss on sale of equipment3,000 Equipment8,000 Loss will be shown in the operating activities, while purchase of equipment with $25,000 will be shown in the investing activity. Journal Entry

Financing Activities The increase in common stock resulted from the issuance of new shares. This is cash inflow. Dividend payment is cash outflow. Issuance of bonds is cash inflow, while redemption/retirement of bonds is cash outflow.