Statement of Cash Flows LO 1 – Understanding the Types of Activities Reported in the Statement of Cash Flows

LO 1 Reporting Cash Flows The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a company’s ability to do the following: Generate cash from operations Maintain and expand its operating capacity Meet its financial obligations Pay dividends The statement of cash flows reports on the transactions that have increased or decreased cash during the accounting period. It summarizes the sources of and uses of cash during the accounting period.

LO 1 Reporting Cash Flows The statement of cash flows reports cash flows from three types of activities: Cash flows from operating activities are cash flows from transactions that affect net income. Cash flows from investing activities are cash flows from transactions that affect investments in the noncurrent assets of the company. On the statement, cash flows are grouped into three types of activities. The first section is cash flows from operating activities. These are the cash inflows and outflows that arise from transactions that affect net income. The second section, cash flows from investing activities, summarizes cash flows from transactions that affect the business’s investments in noncurrent assets. (continued)

LO 1 Reporting Cash Flows Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the company. The third section, cash flows from financing activities, reports transactions that affect the equity and debt of the business.

Reporting Cash Flows LO 1 On the left are the types of transactions that are sources of cash to business, by activity section. On the right are the transactions that decrease or use cash by activity section.

Cash Flows from Operating Activities The direct method reports operating cash inflows (receipts) and cash outflows (payments), as follows: The primary operating cash inflow is cash received from customers. The net cash flow from operations may be computed using two methods, the direct method or the indirect method. The direct method reports gross sources and uses of cash.

LO 1 Reporting Cash Flows The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash, as follows: The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.

LO 1 Reporting Cash Flows The primary advantage of the indirect method is that it reconciles the differences between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method. The primary advantage of the indirect method is that it focuses on the differences between net income and cash flows from operations. The indirect method begins with net income and then makes adjustments to net income to arrive at cash flows from operations. This type of information is more easily obtained and therefore less costly to use than the direct method. Over 99% of companies use the indirect method.

LO 1 Reporting Cash Flows Whether the direct or indirect method is used, the amount of net cash flow from operating activities will be the same. Both methods result in the same net cash flows from operations.

Reporting Cash Flows LO 1 Even though the approach is very different, both methods result in the same net cash flow from operating activities.

Cash Flows from Operating Activities Cash inflows from operating activities normally arise when cash is received from customers. Cash outflows from operating activities normally arise when cash is paid to suppliers for merchandise, supplies, and services and to employees for salaries and wages. Operating cash inflows result from the receipt of cash from customers. In addition, the receipt of other types of income, such as interest or dividends, is included in operating cash flow. Operating cash outflows arise from cash payments to suppliers, employees, and for services required to run a business. In addition, interest expense is classified as an operating outflow.

Cash Flows from Investing Activities Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets. Cash outflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets. Cash flows from investing activities can usually be identified by analysis of the changes in the non-current assets section of a comparative balance sheet.

Cash Flows from Financing Activities Cash inflows from financing activities normally arise from issuing long-term debt or equity securities. Cash outflows from financing activities normally include paying cash dividends, repaying long-term debt, and acquiring treasury stock. Cash flows from financing activities can usually be identified by analysis of the changes in the non-current liabilities and the stockholders’ equity sections of a comparative balance sheet.

Noncash Investing and Financing Activities LO 1 Noncash Investing and Financing Activities Noncash investing and financing activities are transactions that do not directly affect cash. The effect of such transactions is recorded in a separate schedule that appears at the bottom of the statement of cash flows. Changes in assets other than cash may be the result of investing and financing activities not affecting cash. An example of this type of transaction would be the acquisition of an asset by issuing common stock.