Chapter 14 - Financial Accounting Chapter 14 Notes The...

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Chapter 14 Author: Anna Rovira Beavers 1 Financial Accounting Chapter 14 Notes The Statement of Cash Flows Statement of Cash Flows overview The statement of cash flows shows how a company’s operating, investment and financing activities have affected cash during an accounting period. This statement explains how cash has increase or decrease during an accounting period. I. The purpose of the Cash Flows statement The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period. Secondly, the cash flow statements provides information about the operating, financing, and investments activities. Uses of the cash flow statement: Internally the cash flow statement help asses management liquidity, determine dividend policy, and to evaluate the effects of major policies regarding future investments. Externally, to help investors and creditors asses the ability of a company to managed cash. II. Classification of Cash Flows The statement of cash flow classifies cash receipts and cash payments into the following categories: 1. Operating activities Cash Inflow : Sales, interest received, sale of marketable securities Cash Outflows: Operating expenses such as wages and other administrative expenses, purchase of inventory, pay interest, pay taxes. 2. Investing Activities Cash Inflow : Selling long-term assets, marketable securities, collecting loans Cash Outflows: Cash spent in the purchase of long-term assets, marketable securities and cash loaned to borrowers.
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Chapter 14 Author: Anna Rovira Beavers 2 3. Financing Activities Cash Inflow : Cash received from issuing stock, short-term and long-term borrowing. Cash Outflows: Payment of loans with interest, purchase of treasury stock, Let’s take see an example of the classification of certain accounts: Transaction Type of Activity Repayment of long-term note payable Financing Depreciation Expense Will not appear in a cash flow statement Proceeds from sale of old equipment Investing Cash collected from customers Operating Payment of dividends Financing Amortization of a patent Will not appear in a cash flow statement Cash paid for interest Operating Purchase of land Investing Loss on sale of equipment Will not appear in a cash flow statement In-Class Exercise: SE1, E3 III. Preparation of a cash flow statement There is two cash flow methods preparation, Indirect Method and Direct Method. The Indirect Method is the procedure that converts the income statement from an
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Chapter 14 - Financial Accounting Chapter 14 Notes The...

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