Chapter 11: The Statement of Cash Flows

the net cash flow from operating activities is equal to cash basis net income or loss. Cash basis net income or loss is computed as follows:

- accrual basis net income or loss (from the income statement) - plus noncash expenses and losses (from the income statement) - minus noncash revenues and gains (from the income statement) - plus decreases in noncash current assets (from the balance sheet) - minus increases in noncash current assets (from the balance sheet) - plus increases in current liabilities (from the balance sheet) - minus decreases in current liabilities (from the balance sheet)

the statement of cash flows reports:

- all sources of cash during the period; in order words, it shows where a company got its cash during the year from operating, investing, and financing activities. - all uses of cash during the period; in other words, it shows where a company spent its cash during the year on operating, investing, and financing activities. - how the sources and uses of cash net to equal the change in the amount of cash a business holds between the beginning of period and the end of period.

investing activities occur when a business buys and sells long-term assets such as buildings, equipment, intangible assets, and securities. Investing activities also include when a business lends cash or collects cash on long-term receivables. Cash flows from investing activities are computed as follows:

- plus decrease and minus increase in long-term assets (from the balance sheet) - plus or minus noncash transactions that affect long-term assets (from the income statement and balance sheet)

the statement of cash flows shows:

1. the beginning cash balance 2. the sources of cash 3. the uses of cash 4. how these add up and become the ending cash balance.

Sources and Uses of Cash: Categorizing Changes as Operating, Investing, or Financing:

Sources of Cash: A business gets cash from one of the following activities: - operating the business - selling long-term assets for cash - long-term borrowing of cash or having stockholders invest cash in the business Uses of Cash: - operating the busines - buying long-term assets with cash - repaying long-term loans with cash, paying cash dividends, or repurchasing its stock with cash

statement of cash flows

a financial statement that shows all of the sources and all of the uses of cash for an accounting period; also called the cash flow statement.

cash conversion cycle

a measurement of the amount of time a company's cash is tied up in its operations.

financing activities

activities related to borrowing or repaying money, selling or repurchasing stock, or paying dividends

investing activities

activities related to purchasing or selling long-term assets or lending cash

operating activities

activities related to selling goods and services to customers

direct method

format of the operating activities section of the statement of cash flows; it lists the cash receipts and cash payments resulting from a company's day-to-day operations

indirect method

format of the operating activities section of the statement of cash flows; its starts with net income and reconciles to net cash provided by operating activities

free cash flow

the amount of cash available from operations after paying for investments in long-term assets