Chapter 14 - Statement of cash flows. This chapter explains how to classify transactions as operating, investing, or financing activities, and it explains how to create a statement of cash flows. The indirect method of determining the net cash provided by operating activities is illustrated within the chapter and the direct method is demonstrated in the appendix. | Statement of Cash Flows Chapter 14 External Reports Income Statement Balance Sheet Statement of Cash Flows The statement of cash flows highlights the major activities that impact cash flows and hence, affect the overall cash balance. Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Can we pay debts? Can we pay dividends? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments? A Fundamental Principle Cash Balance = Noncash Balance Sheet Accounts This principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance. A Review of Basic Equations Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = . | Statement of Cash Flows Chapter 14 External Reports Income Statement Balance Sheet Statement of Cash Flows The statement of cash flows highlights the major activities that impact cash flows and hence, affect the overall cash balance. Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Can we pay debts? Can we pay dividends? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments? A Fundamental Principle Cash Balance = Noncash Balance Sheet Accounts This principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance. A Review of Basic Equations Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance Statement of Cash Flows: Key Concepts The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Currency and Bank Accounts Cash Treasury Bills Money Market Funds Commercial Paper Cash Equivalents Organizing a Statement of Cash Flows Operating Activities Revenue and expense transactions that affect net income. Investing Activities Acquiring or disposing of noncurrent assets. Financing Activities Borrowing from and repaying principal to creditors and transactions with stockholders. Organizing a Statement of Cash Flows Operating Activities: Direct or Indirect Method? Reconstructs the income statement on a cash basis from top to bottom Direct Method Accrual net income is adjusted to a cash basis; Used by 99% Indirect Method Both methods result in the exact same amount of cash provided by operating activities. The Indirect Method: A Three-Step Process Step 1 Step 2 Step 3 Step 1: Add Depreciation Charges Accumulated Depreciation is a .
