Acct Chapter 241 STATEMENT OF CASH FLOWS Analyzes the change in cash based on three possible sources or uses of cash: OPERATING SECTION INVESTING SECTION FINANCING SECTION

Acct Chapter 242 OPERATING SECTION Shows cash generated from ongoing activities of business Direct method converts the income statement to cash basis line by line. Indirect basis adjusts net income for items not involving cash

Acct Chapter 243 INVESTING SECTION Shows changes in cash result from buying and selling noncurrent assets, as well as the current portion of available for sale securities.

Acct Chapter 244 FINANCING SECTION Shows changes in cash resulting from changes in noncurrent liabilities and equities.

Acct Chapter 245 How to Prepare The cash flow statement says that the change in cash equals the change in all the other balance sheet accounts. You need to analyze and explain the changes in all other balance sheet as they relate to cash.

Acct Chapter 246 Summary journal entries can be used to determine operating cash flows for the direct method. Example:Cost of goods sold $90,000 Increase in Inventory20,000 Increase in A/P12,000 What cash was paid to suppliers? Cost of Goods sold90,000 Inventory20,000 A/P12,000 Cash (plug)98,000 Do this for each income statement line

Acct Chapter 247 For the indirect method, cash from operations can be calculated using the following format: Net Income Plus: depreciation and amortization of debit amounts Less: amortization of credit amounts Plus: decreases in current asset Plus: increases in current liabilities Less: increases in current assets Less: decreases in current liabilities

Acct Chapter 248 Investing: Examine all changes in noncurrent assets to see how cash was affected. Use summary entries or T accounts. Financing: Examine all changes in noncurrent liabilities and equities to see how cash was affected. Use summary entries or T accounts. Any financing and investing activities not involving cash should be disclosed. (This does not include stock dividends and splits.)

Acct Chapter 249 Unusual Items Purchase and sale of any available for sale securities is an investing activity. Purchase and sale of trading activities is an operating activity. Cash dividend declared but unpaid is not included. Under direct method, watch treatment of contra accounts. Summary journal entries can help.

Acct Chapter 2410 Unusual Items (continued) Gains and losses are pulled out of income for indirect method, and ignored on indirect method. They go with the financing or investing flow that created them. If the direct method is used, the reconciliation of net income to cash from operations (the indirect method) needs to be disclosed. This means that the use of the direct method effectively requires that both methods be used. This may be why it is less popular.