21 - Chapter 21 - Statement of Cash Flows Revisited Every...

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Unformatted text preview: Chapter 21 - Statement of Cash Flows Revisited Every cash flow eventually affects the balance of one or more accounts on the balance sheet, and the cash flows related to income-producing activities also are represented on the income statement. The cash flows, though, are not necessarily reported in the period the cash flows occur. This is because the income statement measures activities on an accrual basis rather than a cash basis. The Statement of Cash Flows fills the information gap by reporting the cash flows directly and in the period the cash flows occur. The informational value of the presentation is enhanced if the cash flows are classified according to the nature of the activities that create the cash flows. The three primary classifications of cash flows are (1) cash flows from operating activities, (2) cash flows from investing activities, and (3) cash flows from financing activities. Categorizing each cash flow by source (operating, investing, or financing activities) is more informative than simply listing the various cash flows. No, an investment in treasury bills need not always be classified as a cash equivalent. A guideline not a rule for cash equivalents is that these investments must have a maturity date not longer than three months from the date of purchase. However, flexibility is permitted and each company must establish a policy regarding which short- term, highly liquid investments it classifies as cash equivalents. The designation must be consistent with the company's customary motivation for acquiring various investments and the policy should be described in disclosure notes. Transactions that involve merely transfers from cash to cash equivalents such as the purchase of a three-month treasury bill, or from cash equivalents to cash such as the sale of a treasury bill, should not be reported on the Statement of Cash Flows. A dollar amount is simply transferred from one cash account to another cash account so that the total of cash and cash equivalents is not altered by such transactions. An exception is the sale of a cash equivalent at a gain or loss. In this case, the total of cash and cash equivalents actually increases or decreases. The increase or decrease is reported as a cash flow from operating activities. "Cash flows from operating activities" are both inflows and outflows of cash that result from the same activities that are reported on the income statement. However, the income statement reports the activities on an accrual basis (revenues earned during the reporting period, regardless of when cash is received , and the expenses incurred in generating those revenues, regardless of when cash is 21-1 Chapter 21 Statement of Cash Flows Revisited (Spiceland, 6 th ed) QUESTIONS FOR REVIEW OF KEY TOPICS Question 21-1 Question 21-2 Question 21-3 Question 21-4 Answers to Questions (continued) Question 21-5 Chapter 21 - Statement of Cash Flows Revisited paid). Cash flows from operating activities, on the other hand, report those activities when the cash...
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21 - Chapter 21 - Statement of Cash Flows Revisited Every...

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