Statement of Cash Flows

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Purposes of the statement of cash flows

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1. Predict future cash flow 2. Evaluate management decisions 3. Determine ability to pay dividends and interest 4. Show the relationship of net income to cash flows

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Statement of cash flows reports

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- Cash receipts - Cash payments - Covers a span of time (month, quarter, and year)

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Importance of cash flow with high net income

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False, you need both net income and strong cash flow to succeed in business

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Investing activities

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Increase and decrease long-term assets

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Operating activities

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Create revenues, expenses, gains, and losses – reflect the core of the organization

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Financing activities

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Obtain cash from investors and creditors – relate to long-term liabilities and stockholders’ equity

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Steps to prepare a statement of cash flows using the indirect method

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1. Lay out the template. 2. Use the balance sheet to determine the increase or decrease in cash during the period. 3. Use the income statement and balance-sheet date to prepare the statement of cash flows. 4. From the income statement, take Net Income; Depreciation, depletion, and amortization expense; and any Gains or Losses on the sale of long-term assets.

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Classification of cash flow transactions

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- Payment of dividends: Financing (F) - Sale of plant assets: Investing (I) - Collections of loans receivable: Investing (I) - Depreciation/amortization: Operating (O) - Issuing stock: Financing (F) - Increases in current assets other than cash: Operating (O) - Decreases in current liabilities: Operating (O) - Selling treasury stock: Financing (F)

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Operating activities and net income

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Operating activities are related to the transactions that make up net income.

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Converting net income to cash flows

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To convert net income to cash flows, add depreciation to net income.