Statement of Cash Flows

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Statement of Cash Flows

• A. The statement of cash flows is one of the
  three primary financial statements that must be
  issued by publicly traded corporations in the
  USA.
• B. The purpose is to provide detailed cash flow
  information not available from other sources.

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STRUCTURE

• C. The statement is divided into three major
  sections for purposes of reporting cash flows.
  These are
• 1. Operating activities
• 2. Investing activities
• 3. Financing activities

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OPERATIONS

• D. The cash flow from operating activities is
  primarily the cash received from customers less
  the cash paid for the expenses, including
  interest and taxes, associated with those
  revenues or the reporting period.

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INVESTING

• E. The cash flows associated with investing
  activities include the purchase and sale of
  assets used in the business or held as
  investments. Investing activities are usually
  reflected in the noncurrent assets of a company.

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FINANCING

• F. Financing activities include borrowing
  transactions with lenders and transactions with
  stockholders. Borrowing activities and
  transactions involving the companys own
  securities are financing activities.

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OTHER FEATURES

• G. Other features of the statement of cash flows
  include the reconciliation of the beginning and
  ending balances of cash and cash equivalents as
  reported on the beginning and ending statements
  of financial position.

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OTHER FEATURES

• A second such feature is the reconciliation of
  net income with the cash flow from operations.
  Third, we report any major transactions that
  normally would involve cash payments, but were
  structured so that the reporting company did not
  make a cash payment directly.

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Differing Perspectives

• There are two different perspectives of the
  purpose of the statement of cash flows. One
  perspective is that investors would benefit from
  having information about the major sources and
  uses of cash. This includes the major sources
  and uses of cash for operations. The so-called
  direct method reflects this view.

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Differing Perspectives

• The other view is that the main purpose of the
  statement of cash flows is to reconcile the total
  cash flows from operations with net income, as
  well as providing cash flows from investments and
  financing, to explain the difference between cash
  flows and income.

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Differing Perspectives

• This latter perspective leads to the
  reconciliation view. In my opinion, the
  reconciliation focuses on explaining what
  happened, while the direct view better supports
  forecasts of future cash flows. Each method has
  its strengths.

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PREPARING STATEMENTS

• A. Companies have access to all the details
  needed to prepare a statement of cash flows.
• B. We are using only reported information to
  create statements of cash flow, so ours are less
  accurate.

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ASSUMPTIONS

• For problem and exam purposes, assume merchandise
  purchase transactions are the only ones affecting
  accounts payable. Thus, accounts payable is
  assumed to related to the cost of sales, but no
  other expenses.

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How-to-do-it

• Read the supplementary information to learn what
  has been provided in the problem or case.
• Work in SOE order, and find the related SFP
  accounts (e.g., Sales, Accounts receivable,
  Allowance for uncollectible accounts, etc.)

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More How-to-do-it

• Check-off the information you have used to avoid
  double counting.
• Analyze any changes in every SFP account to be
  sure you have considered all likely transactions.
  When every item is checked off, you should be
  finished!

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More How-to-do-it

• Reason through all the amounts to see if they
  make sense for the account information provided.
• Check your overall answer against the change in
  cash to see if you missed anything or made a
  calculation mistake.