Intermediate Accounting

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5 The Statement of Cash Flows Overview You have finally arrived at the third of the “big three” required financial statements. The statement of cash flows is the newest of the three, having only been required since 1988. Although it usually isn’t given as much weight as the balance sheet or income statement, it can be a very useful statement for decision makers. Like the other two statements, items are grouped according to categories. In the case of the statement of cash flows, the categories are referred to as activities: operating, investing, and financing. There is one standard format for the investing and financing sections of the statement of cash flows. For the operating activities section, however, there are two possible methods: direct and indirect. Many people feel that the direct method is the better of the two methods. However, nearly all companies use the indirect method, so this method is the manner of the operating activities section that we will place our focus. In addition, the few companies that do use the direct method must perform a reconciliation, which essentially is the indirect method. By analyzing a statement of cash flows, you can begin to understand where a company may be headed in the future or at what point in a company’s life cycle it is currently functioning. These pieces of information are sometimes easier to glean from a statement of cash flows than from a balance sheet or income statement (the latter two of which are prepared using the accrual method). The statement of cash flows is the only one of the required financial statements not prepared on an accrual basis. It is prepared for a period of time, similar to the income statement and different from the balance sheet.
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5-2 Chapter 5 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook. Tips, Hints, and Things to Remember LO1 – Describe the circumstances in which the cash flow statement is a particularly important companion of the income statement. Why?
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032459237X_174364 - 5 The Statement of Cash Flows Overview...

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