Chapter 16 - Reporting the statement of cash flows. After completing this chapter you should be able to: Distinguish between operating, investing, and financing activities, and describe how noncash investing and financing activities are disclosed; analyze the statement of cash flows and apply the cash flow on total assets ratio; prepare a statement of cash flows; compute cash flows from operating activities using the indirect method. | REPORTING THE STATEMENT OF CASH FLOWS Chapter 16 Chapter 16: Reporting the Statement of Cash Flows How does a company obtain its cash? Where does a company spend its cash? What explains the change in the cash balance? PURPOSE OF THE STATEMENT OF CASH FLOWS The Statement of Cash Flows helps users determine how a company obtains its cash and where it spends its cash. By providing this information, this statement helps explain the change in the cash balance from the beginning of the period to the end of the period. How did the business fund its operations? Did the business borrow any funds or repay any loans? Does the business have sufficient cash to pay its debts as they mature? Did the business make any dividend payments? IMPORTANCE OF CASH FLOWS While it is important for users to know how much cash a company has, it is also important to know how a company funded its operations. Did it have to borrow money or sell stock to help pay the operating expenses of the company? If so, users need to be aware of this so they can fully assess the cash flow position of the company. Cash flow information is also useful to determine if the business has sufficient cash to pay its debts or if the business paid dividends during the period. Cash Currency Cash Equivalents Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is unaffected by interest rate changes. MEASUREMENT OF CASH FLOWS Cash includes currency and cash equivalents. Cash equivalents are short-term, highly liquid investments that are easily converted into cash and that have very little risk of loss. An example of a cash equivalent would be a short-term Treasury Bill that is government issued, is very close to maturity, and has very little risk associated with it. CLASSIFICATION OF CASH FLOWS The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities C1 There are three basic . | REPORTING THE STATEMENT OF CASH FLOWS Chapter 16 Chapter 16: Reporting the Statement of Cash Flows How does a company obtain its cash? Where does a company spend its cash? What explains the change in the cash balance? PURPOSE OF THE STATEMENT OF CASH FLOWS The Statement of Cash Flows helps users determine how a company obtains its cash and where it spends its cash. By providing this information, this statement helps explain the change in the cash balance from the beginning of the period to the end of the period. How did the business fund its operations? Did the business borrow any funds or repay any loans? Does the business have sufficient cash to pay its debts as they mature? Did the business make any dividend payments? IMPORTANCE OF CASH FLOWS While it is important for users to know how much cash a company has, it is also important to know how a company funded its operations. Did it have to borrow money or sell stock to help pay the operating expenses of the company? If so, users .
