121_12SG - Chapter 12Preparing and Using the Statement of...

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Preparing and Using the Statement of Cash Flows 309 Chapter 12—Preparing and Using the Statement of Cash Flows CHAPTER OVERVIEW In each of the preceding chapters, reference has been made to the statement of cash flows and the cash flow effects of selected transactions. Many people think the cash flows statement is more important than the income statement and the balance sheet, as demonstrated by the opening vignette to this chapter in your text. It is certainly the most complex of the published financial statements. The learning objectives for this chapter are to 1. Identify the purposes of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Prepare a statement of cash flows by the direct method. 4. Use the financial statements to compute the cash effects of a wide variety of business transactions. 5. Prepare a statement of cash flows by the indirect method. A1. Prepare a work sheet for the statement of cash flows - direct method. A2. Prepare a work sheet for the statement of cash flows - indirect method. CHAPTER REVIEW Objective 1 - Identify the purposes of the statement of cash flows. Cash flows are cash receipts and cash payments. The statement of cash flows reports all these receipts and disbursements under three categories (operating, investing, and financing) and shows the reasons for changes in the cash balance. The statement is used to: 1. Predict future cash flows 2. Evaluate management decisions 3. Determine the company’s ability to pay dividends to stockholders and interest and principal to creditors 4. Show the relationship of net income to changes in the business’s cash The term cash is used to include cash equivalents which are highly liquid short-term investments (such as T-bills and money market accounts). Objective 2 - Distinguish among operating, investing, and financing activities. Operating activities create revenues and expenses in the entity’s major line of business. Therefore, operating activities are related to the transactions that make up net income. Operating activities include: 1. Collections from customers 2. Payments to suppliers and employees 3. Interest revenue and expense 4. Taxes 5. Dividends received on investments
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310 Chapter 12 Operating activities are always listed first because they are the largest and most important source of cash for a business. Investing activities increase and decrease the assets with which the business works. Investing activities require analysis of the long-term asset accounts and include: 1. Buying and selling plant assets and investments 2. Lending money to others and collecting principal repayments Investing activities are critical because they help determine the future course of the business. Financing activities
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This note was uploaded on 10/24/2010 for the course ACCOUNTING 31609 taught by Professor R.ambrose during the Fall '09 term at San Mateo Colleges.

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121_12SG - Chapter 12Preparing and Using the Statement of...

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