Basics of Cash Flow Reporting (LO1)

A.

Purpose of the Statement of Cash Flows to report detailed information about the major cash receipts and cash payments during a period. This report identifies cash flows from operating, investing, and financing activities. It answers important questions such as:

How does a company obtain its cash?

Where does a company spend its cash?

What is the change in the cash balance?

B.

Importance of Cash Flows Information about cash flows, and its sources and uses, can influence decision makers in important ways.

C.

Measuring Cash Flows- cash flows are defined to include both "cash and cash equivalents" in the statement of cash flows. A cash equivalent is an investment that must satisfy two criteria:

It must be readily convertible to a known amount of cash.

It must have a maturity of three months or less from its date of acquisition.

Classifying Cash Flows (LO2)

Cash receipts and payments are classified and reported in three categories and in the following order:

Note: Operating activities include the cash effects of transactions and events that determine net income (with some exceptions such as unusual gains and losses).

1. Operating activities include:

a. Inflows from cash sales, collections on credit sales, receipts of dividends and interest, refunds from suppliers, settlements of lawsuits.

b.

Outflows from payments to suppliers for goods and services, employees for wages, lenders for interest, government for taxes and fines, charities and customers for refunds.

2. Investing activities include:

1. The purchase and/or sale of property, plant and equipment.
2. The purchase and/or sale of investments other than cash equivalents.
3. Lending and collecting on loans (receivables)

3. Financing activities include: a. Issuing shares and /or repurchasing shares.

b. Issuing bonds and notes and/or repaying these instruments

1. Distributing cash dividends. (withdrawals in proprietorship or partnership)
2. Issuing short and long-term liabilities.

Non-cash Investing and Financing Activities (LO3)

Activities that do not affect cash receipts or payments but because of their importance and the full disclosure principle, they are disclosed in a note to the statement of cash flows.

Non-cash Investing and Financing Activities include:

1. Retirement of debt by issuing shares.
2. Conversion of preferred shares to common shares.
3. Purchase of an asset by issuing a long-term note payable.

Format of the Statement of Cash Flows (LO4)

Preparing the Statement of Cash Flow the five steps are: