Cash Flow Statement

Chapter 12: The Cash Flow Statement

Summary

The cash flow statement is a statement that analyzes the cash flows of a company, it reports cash flows which consist of cash receipts and cash payments. Understand cash flows is important for making good business decisions. There are two formats of the cash flow statement - the indirect approach which is used by the majority of companies and the direct approach. The statement serves four main purposes:

1. Predict future cash flows

2. Evaluate management decisions

3. Determine the company’s ability to pay dividends to shareholders and payments to creditors

4. Show the relationship of net income to the business’ cash flows.

There are three types of business activities a business engages in: operating activities, investing activities and financing activities. Operating activities are activities that create revenues, expenses, gains and losses. Investing activities increase and decrease long term assets. And finally, financing activities obtain cash from investors and creditors. Operating activities has two formats on the cash flow statement – the indirect method and the direct method. The indirect method reconciles from net income to net cash provided by operating activities and the direct method reports all cash receipts and cash payments from operating activities. Using the indirect method, there are items that are added and then there are items that are subtracted. The non cash revenue is subtracted from the net income while the non cash expenses are added to the net income. The equation to figure out the amount of money being made is:

Cash Revenue – Cash Expense = Net Income – Non Cash Revenue – Gain + Non Cash Expense + Loss

For financing activities, issuance of shares, sale of shares, and borrowing are added, while repurchase of shares, payment of notes or bonds payable, payment of dividends are subtracted.

Using the direct method for operating activities, all the cash collections from...