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Principles of Accounting- Statement of Cash Flows

Only one method to prepare cash flows from investing and financing: the direct method | Fulbright Economics Teaching Program Principles of accounting Lecture 4 2005-2006 Fulbright Economics Teaching Program Ho Chi Minh City, Vietnam Academic Year: 2005-2006 Principles of Accounting 7/17/2006 Nguyễn Tấn Bình 1 Lecture Notes 4 Statement of Cash Flows 7/17/2006 Nguyễn Tấn Bình 2 Nguyen Tan Binh 1 Fulbright Economics Teaching Program Principles of accounting Lecture 4 2005-2006 The main objective of the statement of cash flows • Shows the relationship between the Net Income and Net Cash Flow • Explains how cash is generated and used during a business period • Evaluates the ability to pay debt in time • This information is very useful to decision makers (managers, lenders, shareholders ) in forecasting the future cash flows 7/17/2006 Nguyễn Tấn Bình 3 The necessity of the statement of cash flows Additionally provides a lot of important information that the balance sheet and the income statement cannot to provide: • The balance sheet only reflects the values and the sources of assets at a certain date (a point of time) 9 How to know how much the firm has disbursed for purchases (or collected from liquidations) of fixed assets during a business period? 9 How to know how much the firm has borrowed (or paid back) during a business period? 7/17/2006 Nguyễn Tấn Bình 4 Nguyen Tan Binh 2 Fulbright Economics Teaching Program Principles of accounting Lecture 4 2005-2006 The necessity of the statement of cash flows Additionally provides a lot of important information that the balance sheet and the income statement fail to provide: • The income statement is made on the accrual, not the cash, basis of accounting 9 Why does a firm show profit but have no cash, and vice versa? 9 How to explain changes (increases or decreases) in cash balance from the beginning to the end of the business period? 7/17/2006 Nguyễn Tấn Bình 5 What is called “cash” in the statement of cash flows • Cash, bank deposits, floats, and cash equivalent securities • Cash equivalent securities include