The Statement of Cash Flows
0REVIEWING THE CHAPTER
Objective 1: Describe the principal purposes and uses of the statement of cash flows, and
identify its components.
statement of cash flows
focuses on a company’s liquidity and contains much
information not found in the income statement, balance sheet, or statement of stockholders’
equity. It explains the changes in cash and cash equivalents from one accounting period to
the next by showing the cash inflows and outflows from a company’s operating, investing,
and financing activities during an accounting period. For the statement of cash flows,
is defined as including both cash and cash equivalents.
highly liquid investments, such as money market accounts, commercial paper (short-term
notes), and U.S. Treasury bills. Marketable securities are not considered cash equivalents.
The principal purpose of the statement of cash flows is to provide information about a
company’s cash receipts and cash payments during an accounting period. A secondary
purpose is to provide information about a company’s operating, investing, and financing
Management uses the statement of cash flows to assess the company’s debt-paying ability,
to determine dividend policy, and to plan for investing and financing needs. Investors and
creditors use the statement to assess such things as the company’s ability to manage cash
flows, to generate positive future cash flows, to pay its liabilities, to pay dividends and
interest, and to anticipate its need for additional financing.
The statement of cash flows classifies cash receipts (inflows) and cash payments (outflows)
as stemming from operating, investing, and financing activities. The statement may be
accompanied by a schedule of significant noncash transactions.0
include receiving cash from the sale of goods and services,
receiving interest and dividends on loans and investments, receiving cash from the sale
of trading securities, and making cash payments for wages, goods and services,