ch14OutlinesandTransparencies

ch14OutlinesandTransparencies - CHAPTER REVIEW Pur pose of...

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14-5 CHAPTER REVIEW Purpose of the Statement of Cash Flows 1. (S.O. 1) The fourth basic financial statement is the statement of cash flows. The primary purpose of the statement is to provide information about an entity s cash receipts and cash payments during a period. 2. The information in the statement of cash flows should help investors to assess the a. entity s ability to generate future cash flows. b. entity s ability to pay dividends and meet obligations. c. reasons for the difference between net income and net cash flow from operating activities. d. cash investing and financing transactions during the period. Classification of Cash Flows 3. (S.O. 2) The statement of cash flows classifies cash receipts and cash payments by: a. Operating activities which include cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. b. Investing activities which include (1) acquiring and disposing of property, plant, and equipment, (2) acquiring and disposing of investments, and (3) lending money and collecting the loans. c. Financing activities which involve liability and stockholders equity items and include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and providing them with a return on their investment. 4. Significant noncash transactions will include the conversion of bonds into common stock and the acquisition of assets through the issuance of bonds or capital stock. These transactions are individually reported at the bottom of the statement of cash flows or they may appear in a separate note or Supplementary Schedule to the financial statements. General Format 5. The three classes of activities constitute the general format of the statement with the operating activities section appearing first, followed by the investing activities and financing activities sections. a. The net cash provided or used by each activity is totaled to show the net increase (decrease) in cash for the period. b. The net change in cash for the period is then added to or subtracted from the beginning-of- the-period cash balance. c. Finally, any significant noncash investing and financing activities are reported in a separate schedule at the bottom of the statement. 6. The statement of cash flows is not prepared from the adjusted trial balance. The information to prepare this statement usually comes from three sources: (a) a comparative balance sheet, (b) the current income statement, and (c) additional information.
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14-6 The Major Steps 7. The major steps in preparing the statement are: Step 1: Determine net cash provided/used by operating activities.
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