ch23Summary - CHAPTER 23 Statement of Cash Flows LEARNING...

CHAPTER 23
Statement of Cash Flows
LEARNING OBJECTIVES
1. Describe the purpose of the statement of cash flows.
2. Identify the major classifications of cash flows.
3. Differentiate between net income and net cash flows from operating activities.
4. Contrast the direct and indirect methods of calculating net cash flows from
operating activities.
5. Determine net cash flows from investing and financing activities.
6. Prepare a statement of cash flows.
7. Identify sources of information for a statement of cash flows.
8. Discuss special problems in preparing a statement of cash flows.
9. Explain the use of a work sheet in preparing a statement of cash flows.
CHAPTER REVIEW
1. Corporate investors and potential investors seek information about the financial position,
results of operations, and cash flow. The required presentation of the statement of cash flows
provides financial statement users with information about the major sources and uses of cash
during the fiscal period. Chapter 23 describes the significance of the statement of cash flows
and all aspects of its preparation. Numerous examples are included which assist in an
understanding of how the statement is prepared and presented.
Purpose of the Statement of Cash Flows
2. (L.O. 1) The information in a statement of cash flows should help investors, creditors, and
others to assess: (1) the entity’s ability to generate future cash flows; (2) the entity’s ability to
pay dividends and meet obligations; (3) the reasons for the difference between net income
and net cash flow from operating activities; and (4) the cash and non-cash investing and
financing transactions during the period.
Classification of Cash Flows
3. (L.O. 2) The statement of cash flows classifies cash receipts and cash payments by operating,
investing, and financing activities. Operating activities include all transactions and events that
are not investing and financing activities. Operating activities include cash effects of
transactions that enter into the determination of net income, such as cash receipts from
the sales of goods and services and cash payments to suppliers and employees for
acquisitions of inventory and expenses. Investing activities include (a) making and collecting
loans and (b) acquiring and disposing of investments and productive long-lived assets.
Financing activities involve liability and owners’ equity items and include
(a) obtaining cash from creditors and repaying the amounts borrowed and (b) obtaining capital
from owners and providing them with a return on, and return of, their investment.
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4. The typical cash receipts and cash payments of a business entity classified according to
operating, investing, and financing activities are shown below.
Operating Activities
Cash inflows
From sale of goods or services.