What is the primary purpose of the statement of cash flows?
- Provide information regarding cash receipts and cash payments made by an entity during a period.
- Help assess the entity’s ability to generate positive future net cash flows.
- Evaluate the entity’s ability to meet its obligations and pay dividends.
- Understand reasons for differences between net income and associated cash flows.
- Analyze the effects on the entity’s financial position of its cash and noncash investing and financing activities.
What are the three main categories of activities in the statement of cash flows?
- Operating activities
- Investing activities
- Financing activities
What items are included in cash flows from operating activities?
- Cash received from customers from sales of goods or services
- Cash receipts—interest and dividends—from returns on loans, other debt instruments, and equity securities
- Cash paid to suppliers to acquire materials for manufacture or goods for sale
- Cash payments to other suppliers and employees
- Cash paid to governments for taxes and other fees
- Cash interest paid
What are typical cash flows from investing activities?
- Purchase and sale of property, plant, and equipment
- Making and collecting loans made by the entity
- Purchase and sale of most equity and debt investments
What are common events classified as financing activities?
- Proceeds from issuance of stock
- Borrowing and repayment of money through bank loans, issuing bonds, mortgages, notes
- Payments of cash dividends or other distributions to owners
- Payments to reacquire the entity’s equity instruments (treasury stock purchases)
What adjustments are made to net income under the indirect method for cash flows from operating activities?
- Eliminate noncash income and expense items such as depreciation expense.
- Eliminate investing and financing activity events included in the income statement.
- Include the effect of any operating activities not included in net income but that had a cash effect.
- Exclude the effect of any events included in net income but that did not have a cash effect.
How are noncash items like depreciation handled in the indirect method?
Depreciation and amortization expenses are added back to net income.
How are realized gains and losses on the sale of assets treated in the indirect method?
- Realized gains are subtracted from net income.
- Realized losses are added back to net income.
What adjustment is made for changes in net accounts receivable in the indirect method?
If net accounts receivable increases, it indicates lower cash collections than revenue recognized, requiring an adjustment to decrease net income.
What adjustment is needed if net accounts receivable increases during a period?
Subtract the increase from net income.
This adjustment is necessary because an increase in net accounts receivable indicates that cash collections were lower than the revenue recognized during the period.
How should an increase in inventory be adjusted in the indirect method?
Subtract the increase from net income.
This adjustment reflects that cash was paid for inventory items that have not yet been expensed as cost of goods sold.
What adjustment is needed if accounts payable increases during a period?
Add the increase to net income.
An increase in accounts payable indicates that expenses have been recognized but not yet paid, thus increasing cash flow.
What is the rule for adjusting net income with changes in operating asset accounts?
- Deduct increases from net income.
- Add decreases to net income.
This rule helps adjust net income to reflect cash flow accurately.
What is the rule for adjusting net income with changes in operating liability accounts?
- Add increases to net income.
- Deduct decreases from net income.
This rule ensures that net income reflects cash flow changes due to liabilities.
What are the steps to prepare the operating activities section under the indirect method?
- Add depreciation and amortization expenses back to net income.
- Add non-operating losses back to net income.
- Subtract non-operating gains from net income.
- Adjust for changes in balance sheet accounts related to operating activities.
These steps ensure that net income is adjusted to reflect actual cash flows from operating activities.
How do the direct and indirect methods of preparing the SCF differ?
- Direct method adjusts each income statement line.
- Indirect method adjusts net income to present net operating cash flow.
Both methods result in the same net cash provided by operating activities.
What is the main issue in calculating net cash provided by investing and financing activities?
The cash paid or received is the amount that is recorded in the SCF.
The focus is on the cash received or paid for these transactions, not the gain or loss.
What should be disclosed in the SCF for noncash investing and financing activities?
- Debt converted to equity.
- Borrowing to purchase a fixed asset.
- Obtaining a right-of-use asset in exchange for a lease liability.
- Buying or selling fixed assets for non-cash consideration.
These disclosures are important for understanding the full financial picture, even though no cash is involved.
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Accounting Foundations & Terminology46
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Recording Transactions & the Accounting Cycle13
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T-Accounts and Journalizing10
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Business Transactions in Practice14
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Trial Balances and Comprehensive Income6
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Subsidiary Ledgers and Revenue Examples24
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Advanced Transactions and Adjusting Entries21
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Adjusted Trial Balance to Year-End Close36
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Financial Statement Types and Elements28
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Statement of Cash Flows18
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Internal Controls18
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Managing Daily Finances45
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Valuing Assets, Liabilities & Equity42
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Revenue Recognition & Income Measurement12
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Financial Statement Analysis8
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Financial Ratios Overview43
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Budgeting Principles and Practices23
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Budgeting Methodologies and Cycles16
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Master Budget & Supporting Schedules24
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Cost Classifications & Costing Systems29
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Manufacturing Overhead and ABC22
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Variance Analysis23
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Performance Measurement & Decision Making27
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Business Ethics & Professional Conduct40
