The statement of cash flows provides information that is not readily apparent by looking at just the balance sheet and the income statement. T/F
True
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Cash flows are partitioned into what three categories?
operating, investing, and financing.
In normal circumstances, a company has positive cash from operations and negative cash from investing activities. T/F
True
Knowledge of how the three primary financial statements tie together allows one to forecast how interactions among management decisions might affect a company's future financial position. T/F
True
When a company files for Chapter 11 bankruptcy, the courts allow the company to cease making interest payments on its old debts.
True
Statement of Cash Flows
The financial statement that summarizes a company's cash receipts and cash payments during the period from operating, investing, and financing activities.
Operating Activities
Things the company does routinely every day, the reason the company is in business.
Investing Activities
Expanding the productive capacity of the business
Financing Activities
Getting the cash for new expansion and distributing cash to those who have provided financing in the past.
Why was the statement of cash flows created?
It puts everything on one page. Is a forecasting tool.
Pro Forma
A prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented.
A forcasted statement of cash flows imposes practical __________________ ____________________ on exciting entrepreneurial plans for the future.
numerical discipline
The statement of cash flows replaces the
* Balance sheet
* Statement of financial position
* Income statement
* None of these
None of these
The statement of cash flows
* Provides a connecting link between two consecutive income statements
* Is intended primarily to provide necessary information for assessing the profitability of an entity
* Summarizes all cash inflows and outflows of an entity for a given period of time
* Is a required statement only for those companies using cash-basis accounting
Summarizes all cash inflows and outflows of an entity for a given period of time
Which of the following is NOT a purpose of the statement of cash flows?
* It measures the profitability of an entity.
* It provides investors with information about the investing and financing activities of an entity.
* It provides information about an entity's cash receipts and payments over a period of time.
* It highlights changes in managerial strategy regarding investments and finances.
It measures the profitability of an entity.
Which of the following statements is NOT true?
* The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement.
* The statement of cash flows does not replace the income statement.
* The statement of cash flows provides details as to how the cash account changed during a period.
* The statement of cash flows sheds some light on a company's ability to generate income in the future.
The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement.
cash equivalents
Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.
Cash equivalents include
coins and currency, checking and savings accounts, CD's and other short term interest bearing securities (maturity in 3 months or less)
Reasons for cash decreases?
paying off loans, debts
common cash inflow (receipts)
receive investments from owners
receive money from borrowing
collect from customers
collect from sale of old machines and buildings, etc.
common cash outflow (payments)
pay to buy new machines and buildings, etc.
pay wages
pay suppliers
pay interest on loans
pay principal on loans
pay dividends to owners
Three Categories of Cash Flows
In the statement of cash flows, cash receipts and payments are classified according to 3 main categories:
1. Operating activities
2. Investing activities
3. Financing activities
Operating activities include
Cash receipts from: sale of goods or services, sale of trading securities, interest revenue, dividend
Cash payments for: inventory purchases wages and salaries, taxes, interest expenses, other expenses (e.g. utilities, rent) purchase of trading securities,
Investing activities include
Cash receipts from:
sale of plant assets, sale of a business segment, sale of nontrading securities, collection of principal on loans
Cash payments for:
purchase of plant assets, purchase of nontrading securities, making loans to other entities
Financing activities include
Cash receipts from: issuance of stock, borrowing (e.g., bonds, notes, mortgages)
Cash payments for: cash dividends, repayment of loans, repurchase of stock (treasury stock)
The normal pattern of positive inflows or negative outflows of cash reported in the cash flow statement is as follows:
Cash from operating activities +
Cash from investing activities −
Cash from financing activities + or −
Non-cash Investing and Financing Activities
Some investing and financing activities affect a company's financial position but not the company's cash flows during the period.
Which of the following would NOT be considered cash or cash equivalents for purposes of preparing a statement of cash flows?
Notes receivable
Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows?
Operating activities
Which of the following would be reported as a cash flow from financing activities?
Cash receipts from the issuance of long-term debt
Which of the following is the typical sequencing of activities on the statement of cash flows?
Operating, investing, and financing
Which of the following would be classified as an operating activity on a statement of cash flows?
Cash received as dividends on investments
When preparing a Statement of Cash Flows, do the following:
1. Identify all the cash inflows and outflows
2. Separate them into the Operating Investing and Financing activities categories
3. Prepare the formal statement
Why learn to prepare a Statement of Cash Flows using summary data?
1. To understand the very important Indirect Method
2. To see the connections among all 3 financial statements
3. Many companies, especially small ones, provide only a balance sheet and an income statement.
The following financial information is available for the year 2012:
Operating activities $ 309,800
Investing activities ($118,000)
Financing activities ($190,000)
Ending cash balance $ 5,600
Given this information, what is the beginning cash balance?
Beginning cash balance:
x + $309,800 - $118,000 - $190,000 = $5,600
x = $3,800
Avondale Inc. had the following cash transactions during 2012:
Sales receipts $2,000,000
Inventory payments 1,500,000
Interest payments 20,000
Wage payments 120,000
Dividend receipts 10,000
Interest receipts 6,000
Equipment purchased 150,000
Stock of Canton Company purchased 50,000
Stock issued 300,000
Repaid a note (nonoperating) 100,000
What was Avondale's net cash provided by (used in) operating activities?
Cash provided by operating activities: $2,000,000 - $1,500,000 - $20,000 - $120,000 + $10,000 + $6,000 = $376,000
Avondale Inc. had the following cash transactions during 2012:
Sales receipts $2,000,000
Inventory payments 1,500,000
Interest payments 20,000
Wage payments 120,000
Dividend receipts 10,000
Interest receipts 6,000
Equipment purchased 150,000
Stock of Canton Company purchased 50,000
Stock issued 300,000
Repaid a note (nonoperating) 100,000
What was Avondale's total net increase in cash for the year provided by (used in) financing activities?
Cash provided by financing activities: $300,000 - $100,000 = $200,000 [Show Less]
