ac101_ch12 - Revised July 2008 ACC101 CHAPTER 12 Statement...

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Revised July 2008 Page 1 of 17 ACC101 – CHAPTER 12 Statement of Cash Flows
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Revised July 2008 Page 2 of 17 Key Terms and Concepts to Know The Statement of Cash Flows reports the sources of cash inflows and cash outflow during an accounting period. The inflows and outflows are divided into three sections or categories based on the underlying cause or nature of the cash flows: Operating Activities Investing Activities Financing Activities Because the statement explains the changes in the cash balance during the period, the beginning and ending balances in Cash are not included in these three sections. The beginning cash balance is added to the total of the three sections to determine the ending balance for cash in what could be considered a fourth section of the statement. At times, companies enter into investing and financing transactions that do not involve cash, such as issuing common stock to purchase land. These transactions are not reported on the statement of cash flows because they do not provide or use cash. Instead, they are reported in a separate section or note which is presented after the ending cash balance.
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Revised July 2008 Page 3 of 17 Operating Activities Operating Activities include the events and transactions that determine net income. Those transactions and events that do not provide or use cash are excluded to determine cash flows from operating activities. Examples of non-cash transactions include depreciation, depletion and amortization expense and gains and losses from the sale of plant assets and the retirement of bonds. There are two methods of preparing the operating activities section: Indirect Method and Direct Method. Both methods calculate the same total of cash flows from operating activities, although the methodologies are considerably different. Indirect Method The indirect method starts with net income and adjusts it for non-cash transactions and other cash used by or provided by normal daily activities. Net Income Add: Noncash expenses (i.e., depreciation and amortization) Losses on sales or retirements Decreases in Current Assets Increases in Current Liabilities related to operations* Deduct: Increases in Current Assets Decreases in Current Liabilities related to operations* Gains on sales or retirements =Net Cash Flows from Operating Activities *Note that changes in non-operating current liabilities are included elsewhere on the statement. For example, changes in dividends payable are combined the dividends declared to calculate dividends paid in the financing section. Direct Method The direct method starts with the entire accrual-basis income statement (not just net income) and converts it line-by-line to the cash basis. The resulting cash inflows and outflows are the cash flows used by or provided by normal daily activities. For example, accrual-basis sales are converted to cash collected from customers by adding the decrease or deducting the increase in trade accounts receivable.
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ac101_ch12 - Revised July 2008 ACC101 CHAPTER 12 Statement...

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