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Understanding Cash Flow Statements: Complete Guide

This resource explains Statement of Cash Flows, its purpose, types of cash flow activities, method of reporting, noncash investing/financing, and the worksheet approach for preparing and analyzing cash flows.

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Understanding Cash Flow Statements: Complete Guide

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  1. Statement of Cash Flows Sid Glandon, DBA, CPA Associate Professor of Accounting

  2. Purpose • Reports on cash inflows and outflows for an accounting period • Provides information regarding • ability of firm to generate cash from operations • ability to maintain and expand operating capacity • ability to meet financial obligations and pay dividends

  3. Types of Cash Flow Activities • Cash Flows from Operating Activities • Cash Flows from Investing Activities • Cash Flows from Financing Activities

  4. Operating Activities • Receipts from revenues • Payments for expenses

  5. Investing Activities • Receipts from sale of noncurrent assets • Payments for acquisition of noncurrent assets

  6. Financing Activities • Receipts from issuance of equity and debt securities • Payments for • dividends • redemption of equity securities (treasury stock) • redemption of debt securities

  7. Noncash Investing/Financing • Supplementary schedule to the statement • Noncash Investing Activities • Acquisition of plant assets by issuing bonds or capital stock • Purchase a building through a mortgage loan • Noncash Financing Activities • Issuance of capital stock in exchange for convertible preferred stock or debt

  8. Method of Reporting Cash Flows from Operating Activities • Direct Method • Indirect Method (reconciliation method)

  9. Cash Flows from Operating Activities: Direct Method • Cash received from customers • Cash paid for inventory, labor, and services

  10. Cash Flows from Operating Activities: Indirect Method Net income • plus noncash charges to net income • plus/minus changes in current assets • plus/minus changes in current liabilities • plus/minus gains/losses on investing activities • plus/minus gains/losses on financing activities

  11. Cash Flows From Operating Activities-Indirect Method Net income (from the income statement) $ Add: Amortization + Depreciation + Changes in current assets: Increases - Decreases + Changes in current liabilities: Increases + Decreases - Gains from investing or financing - Losses from investing or financing + Net cash flows from operating activities $

  12. The Three FoolersReported as Operating Activities • Interest paid on debt • Interest received on investments • Dividends received on investments

  13. Using the Worksheet Approach • Prepare comparative balance sheets • Identify changes in cash for each account • Using income statement and T-account analysis • Spread changes in cash to appropriate columns • Reconcile balances of each type of activity

  14. Format for Operating Activities

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