Notesale: Turn your study into money

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The Statement of Cash Flows Revisited
The statement of cash flows (SCF) details the cash receipts and cash payments
during an accounting period
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Cash includes cash in hand, cash in bank and cash equivalents such as
money market investments and T-bills
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” The purposes of the SCF are:
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To predict future cash flows
To evaluate management’s decisions
To predict the ability of the business to pay dividends to shareholders
and make debt payments
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Operating Activities

These are cash flows, which relate to revenues and expenses reported in the
income statement and affect net income
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Operating
activities are the most important of all three categories
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Cash Inflows
 Cash received from sale of
goods or services
 Interest received on loans
made to outside entities
 Dividends received on
investments made in the
stock of other companies
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Cash Inflows
 Proceeds from collections on
loans made to borrowers
 Proceeds from the sale of P, P
&E, intangibles and other
productive assets
 Proceeds from the sale of
investments in debt and
equity securities

Cash Outflows
 Loans made by the company
to other parties
 Payment to acquire P, P&E
 Payment to acquire
investment in debt and
equity securities

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FAs deal with the exchange of cash between the company
and its owners and creditors, hence they relate to long-term liabilities and
owners’ equity
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 Proceeds from loans e
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mortgage, issuing bonds and
other short-term and longterm loans

Cash Outflows
 Payment of dividends to
stockholders or withdrawals
by the owner
 Repayment of the principal
on loans

The sum of the cash generated or used by each of the three activities should be
equal to the difference between the beginning and ending cash balances on the
cash account
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Cash generated from operating activities may be computed and reported using
one of two methods:
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A decrease in
receivables implies that cash was collected; hence a decrease in
receivables is added to NI
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An increase in CA implies a decrease in cash, as it takes cash to
acquire assets
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Decrease in CL means decrease in cash
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Increase in CL means increase in cash, as it means that cash was not
used up to pay liabilities, hence we have more cash
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Direct Method

Revenues and expenses are adjusted to find the cash received or paid for each
item
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The completed statement of cash flows
would appear as follows
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Non-cash investing and financing activities such as acquisition of plant
asset by the issuance of common stock are reported in a separate schedule
that accompanies the statement of cash flows or in a note to the statement
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