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 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 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. 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? The statement of cash flows can be used to answer crucial questions such as: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to repay its debts? Will the company . | Statement of Cash Flows Chapter 14 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 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. 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? The statement of cash flows can be used to answer crucial questions such as: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to repay its debts? Will the company be able to pay its usual dividend? To what extent will the company have to borrow money in order to make needed investments? Why do net income and net cash flow differ? 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. Managers prepare the statement of cash flows by applying a fundamental principle of double-entry bookkeeping—the change in the cash balance must equal the changes in all other balance sheet accounts besides cash. 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 .
