Chapter14outline - CHAPTER REVIEW Purpose and Usefulness of...

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CHAPTER REVIEW Purpose and Usefulness of the Statement of Cash Flows 1. (S.O. 1) The fourth basic financial statement is the statement of cash flows. The primary pur- pose of the statement is to provide information about an entity's cash receipts and cash pay- ments during a period. 2. The information in the statement of cash flows should help investors to assess the: a. entity's ability to generate future cash flows. b. entity's ability to pay dividends and meet obligations. c.reasons for the difference between net income and net cash flow from operating activities. d. cash investing and financing transactions during the period. Classification of Cash Flows 3. (S.O. 2) The statement of cash flows classifies cash receipts and cash payments by: a. Operating activities which include cash effects of transactions that create revenues and ex- penses and thus enter into the determination of net income. b. Investing activities which include (1) acquiring and disposing of investments and productive long-lived assets, and (2) lending money and collecting the loans. c. Financing activities which involve liability and stockholders' equity items and include (1) ob- taining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and providing them with a return on their investment. 4. Significant noncash transactions will include the conversion of bonds into common stock and the acquisition of assets through the issuance of bonds or capital stock. These transactions are individually reported at the bottom of the statement of cash flows or they may appear in a separ- ate note or supplementary schedule to the financial statements. General Format 5. The three classes of activities constitute the general format of the statement with the operating activities section appearing first, followed by the investing activities and financing activities sec- tions. a. The net cash provided or used by each activity is totaled to show the net increase (de- crease) in cash for the period. b. The net change in cash for the period is then added to or subtracted from the beginning-of- the-period cash balance. c.Finally, any significant noncash investing and financing activities are reported in a separate schedule at the bottom of the statement. Preparing the Statement of Cash Flows
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This note was uploaded on 07/18/2011 for the course ACCT 50 taught by Professor Lee during the Spring '11 term at UCLA.

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Chapter14outline - CHAPTER REVIEW Purpose and Usefulness of...

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