Chapter 5 Lecture-1

Chapter 5 Lecture-1 - CHAPTER 5 CLASS NOTES STATEMENT OF...

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CLASS NOTES STATEMENT OF CASH FLOWS The Statement of Cash Flow is one of the four basic financial statements, but unlike the others the amounts do not come directly from the trial balance. The amounts must be researched and/or calculated from the accounting records. The statement summarizes the Operating, Investing and Financing activities of the business over a time period. The time period will correspond to the same time period that is used for the Income Statement and the Statement of Retained Earnings with the ending date being the same as the Balance Sheet. The Statement of Cash Flow (SOCF) shows these activities in terms of cash inflow and outflow. You need to remember that: 1. Operating activities involve the acquiring and selling of products and services . The SOCF shows the cash inflows and outflows associated with these activities. 2. Investing activities involve the acquiring and disposing of long-term assets, such as property, plant and equipment or investments. 3. Financing activities are associated with the inflow of cash from owners and creditors and the outflow of cash to repay owners and creditors. The sum of the net cash outflow or inflow from these three activities will equal the change to cash for the period. There is one section of the SOCF related to each of these categories and a fourth section related to the reconciliation of cash. There are two methods used in preparing the SOCF as follows: 1. Direct Method- Involves reporting the major sources of gross cash receipts and cash payments in the operating activity section. 2. Indirect Method- The net cash flow from operating activities is computed by adjusting the company’s net income to get to the equivalent of cash basis income by using the differences in the balances of current assets and liabilities at the beginning and end of the period. Remember that under either method, the sections of the SOCF that deal with investing activities, financing activities, and the reconciliation of cash will be identical under either method. The only section that changes in the SOCF is the operating activities section. -2-
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Chapter 5 Lecture-1 - CHAPTER 5 CLASS NOTES STATEMENT OF...

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