Statement of Cash Flows

What are the 5 basic steps followed in preparing a Statement of Cash Flows?

1. Compute the change in cash for the period. 2. Compute the cash flows from operating activities. 3. Identify the cash flows from investing activities. 4. Identify the cash flows from financing activities. 5. Prepare the Statement of Cash Flows based on the previous 4 steps.

How is CASH defined?

Cash is defined as both currency and cash equivalents. Cash equivalents are highly liquid investments such as T-bills, money market funds, and commercial paper.

What qualifies as a FINANCING activity?

Financing activities are those activities that raise (provide) cash from (to) creditors and owners. Although interest payments could be seen as financing outflows, the statement includes these payments in the operating section.

What qualifies as an INVESTING activity?

Investing activities are those activities that involve the acquisition or sale of long-term assets. Long-term assets may be productive assets (e.g. acquiring new equipment) or long-term activities (e.g., acquiring stock in another company).

What qualifies as an OPERATING activity?

Operating activities are the ongoing, day-to-day, revenue-generating activities of an organization. Cash inflows from operating activities come from the collection of sales revenues. Cash outflows are caused by payment for operating costs. The difference between the two produces the net cash inflow (outflow) from operations.

In what formats can the Statement of Cash Flows be presented in?

The Statement of Cash Flows can be presented in two different formats called the direct method and the indirect method.

What information does the Statement of Cash Flows provide?

The Statement of Cash Flows provides information about the entity's sources and uses of cash during an accounting period.

The difference between direct and indirect Statement of Cash Flow formats is found in one of the three categories only. Which is it?

The difference between direct and indirect Statement of Cash Flow formats is found in the Operating category only.

What accounts does the direct method Statement of Cash Flows summarize?

The direct method Statement of Cash Flows for an accounting period summarizes the transactions that have been posted to the cash account in the Ledger during the period.

When is the Statement of Cash Flows constructed using the direct method?

The direct method statement of cash flows is constructed at the end of an accounting period.

What is the key difference in the Operating category between the direct and indirect Statement of Cash Flows formats?

The key difference in the Operating category between the direct and indirect Statement of Cash Flow formats is that the former lists actual cash flows while the latter starts with a "Net Income" amount followed by adjustments to it that are not actual cash flows.

In what kinds of activities is the direct method Statement of Cash Flows information presented?

This information is presented as three activities: operating, investing and financing activities.