Understanding the Statement of Cash Flows (Course Id 1870)

Accounting - Accounting for Course Id 1870

Cash flow is one of the most important long-term indicators for the overall financial health of a business. For a business to enjoy long-term success, sufficient cash must always be on-hand to accomplish various things including paying worker salaries, resolving immediate debts, and paying the company’s normal operating costs. Businesses also need cash on-hand to pay for expenses, repay bank loans, pay taxes, and to purchase new assets to fuel the company’s future growth. A company’s cash flow is documented in their cash flow statement. The cash flow statement, which is also known as a statement of cash flows, is a financial document that summarizes the amount of both cash and cash equivalents entering and exiting a company during a given time period. The cash flow statement provides useful context for both a company’s balance sheet and income statement and has been a mandatory part of all corporate financial reports since 1987. The cash flow report is important because it informs investors, creditors, company owners, and other interested parties of the business cash position of the company and can act as a strong indicator of a company’s overall financial health.

NASBA QAS - Text - Technical - NASBA Registry - 1870

Course Learning Objectives

• Identify the purpose of the statement of cash flows.
• Identify the major classifications of cash flows.
• Recognize the difference between net income and net cash flow from operating activities.
• Calculate net cash flows from operating activities using the indirect method and using the direct method.
• Recognize net cash flows from a company’s investing and financing activities.
• Identify sources of information for a company’s statement of cash flows.
• Recognize special problems that can surface when preparing a statement of cash flows.

Chapter 1 - Understanding the Statement of Cash Flows

Course Learning Objectives

Introduction

Preparing the Statement of Cash Flows

How Useful are Cash Flows?

Cash Flow Classification

Understanding Cash Flow Data

Statement of Cash Flow Format

Preparing the Statement of Cash Flows

First Example – ABC Corp. Year 1

Step 1: Determine the Company’s Change in Cash

Step 2: Determine Net Cash Flow from Operating Activities

Direct Method

Indirect Method

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Statement of Cash Flows

Second Example – ABC Corp. Year 2

Step 1: Determine the Company’s Change in Cash

Step 2: Determine Net Cash Flow from Operating Activities

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Statement of Cash Flows

Third Example – ABC Corp. Year 3

Step 1: Determine the Company’s Change in Cash

Step 2: Determine the Net Cash Flow from Operating Activities

Step 3: Determine Net Cash Flows from Investing and Financing Activities

Statement of Cash Flows

Part 1 Review Questions

Direct Method Versus Indirect Method – Net Cash Flow from Operating Activities

Indirect Method (Reconciliation Method)

Direct Method (Income Statement Method)

Cash Receipts to Customers

Cash Payments to Suppliers

Cash Payments for Operating Expenses

Cash Payments for Income Taxes

Calculating Net Cash Flow from Operating Activities – Direct Method

Controversy Surrounding Direct versus Indirect Method

Direct Method

Indirect Method

Special Problems Regarding the Preparation of Company Statements

Adjustments to Net Income

Depreciation and Amortization

Post-retirement Benefit Costs

Change in Deferred Income Taxes

Equity Method of Accounting

Losses and Gains

Stock Options

Other Extraordinary Items

Accounts Receivable (Net)

Indirect Method

Direct Method

Other Working Capital Changes

Net Losses

Significant Noncash Transactions

Summary

Part 2 Review Questions

Glossary