Acct 387 - Chapter 241 STATEMENT OF CASH FLOWS Analyzes the change in cash based on three possible...

Acct 387 - Chapter 24 1

STATEMENT OF CASH FLOWS

Analyzes the change in cash based on three possible sources or uses of cash:

• OPERATING SECTION• INVESTING SECTION• FINANCING SECTION


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


INVESTING SECTION

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


FINANCING SECTION

Shows changes in cash resulting from changes in noncurrent liabilities and equities.


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.


Summary journal entries can be used to determine operating cash flows for the direct method.

Example: Cost of goods sold $90,000Increase in Inventory 20,000Increase in A/P 12,000

What cash was paid to suppliers?

Cost of Goods sold 90,000Inventory 20,000

A/P 12,000Cash (plug) 98,000

Do this for each income statement line


For the indirect method, cash from operations can be calculated using the following format:

Net IncomePlus: depreciation and amortization of debit amountsLess: amortization of credit amountsPlus: decreases in current assetPlus: increases in current liabilitiesLess: increases in current assetsLess: decreases in current liabilities


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.)


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.


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.

Acct 387 - Chapter 241 STATEMENT OF CASH FLOWS Analyzes the change in cash based on three possible...

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