CASH FLOW STATEMENT
Cash Flow Statement deals with flow of cash which
includes cash equivalents as well as cash. This statement
is an additional information to the users of Financial
Statements. The statement shows the incoming and
outgoing of cash.
CASH FLOW STATEMENT
1.Cash is the centre of all financial decisions.
2. It is used as the basis for the projection of future investing and
financing plans of the enterprise.
3.Cash flow statement helps to ascertain the liquid position of the firm in
a better manner.
4.Banks and financial institutions mostly prefer cash flow statement to
analyse liquidity of the borrowing firm.
5.Cash flow Statement helps in efficient and effective management of
cash.
Cash Flows are inflows and outflows of cash and cash
equivalents.
The statement of cash flow shows three main categories of cash
inflows and cash outflows, namely : operating, investing and
financing activities.
(a) Operating activities are the principal revenue generating
activities of the enterprise.
(b) Investing activities include the acquisition and disposal of
longterm assets and other investments not included in cash
equivalents.
(c) Financing activities are activities that result in change in the
size and composition of the owner’s capital (including Preference
share capital in the case of a company) and borrowings of the
enterprise.
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The net Income reported in the Income Statement for the year was Rs. 110,000 and
depreciation of fixed assets for the year was Rs. 44000. The balances of the current assets
and current liabilities at the beginning and end of the year are as follows. Calculate cash
from operating activities.
When preparing a statement of cash flows, a company must make
an adjustment to net income for sales that have been made but for
which cash collections have not yet been received. Which of the
following describes this circumstance?
An increase in accounts receivable account during the year
A decrease in accounts payable account during the year
A decrease in accounts receivable account during the year
An increase in accounts payable account during the year
Your boss at Trinitron Inc. wants to discuss the origin of the company's
cash in the last year and how it was used. What documents should you
bring to the meeting?
a. The comparative balance sheet and the retained earnings
statement
b.The income statements from last year and the year
before
c.The statement of cash flows and supplementary
schedules
d.The balance sheet and the income statement
The statement of cash flows provides information about the
amount of cash generated by and used in operating, investing,
and financing activities for a given period of time.
Maxwell Foods purchased raw materials from a local
farm and also redeemed bonds that they issued eight
years ago. How do these transactions compare when
reported in the statement of cash flows?
A. Both transactions result in cash outflow, but the purchase of raw materials is
a financing activity and the redemption of bonds is an investing activity.
B.Both transactions result in cash inflow, but the purchase of raw materials
is an operating activity and the redemption of bonds is an investing activity.
C.Both transactions result in cash inflow, but the purchase of raw materials
is an investing activity and the redemption of bonds is an operating activity.
D.Both transactions result in cash outflow, but the purchase of raw materials
is an operating activity and the redemption of bonds is a financing activity.
When using the indirect method, which statement provides the most
accurate description of the relationship between accounts receivable
and the operating activities section on the statement of cash flows?
An increase in accounts receivable results in an increase in
the operating activities section on the statement of cash flows.
An increase in accounts receivable results in a decrease in the
operating activities section on the statement of cash flows.
A decrease in accounts receivable results in a decrease in the
operating activities section on the statement of cash flows.
A decrease in accounts receivable results in no change in the
operating activities section on the statement of cash flows.
increase in accounts receivable must be
subtracted when calculating cash flow from
operating activities
Which of the following would be in the
investing section of the statement of cash
flows?
Depreciation expense
Conversion of bonds into common
stock
Issuing shares of common stock
Proceeds from selling equipment
Investing cash flows are cash flows that involve the
purchase and sale of long-term assets. Since
equipment qualifies as a long-term asset, cash
received from selling equipment is an investing activity
In the Lucas Company, there was an increase in the land account during
the year of $24,000. Analysis reveals that the change resulted from a cash
sale of land at cost $55,000, and a cash purchase of land for $79,000. In the
statement of cash flows, how should the change in the land account be
reported in the investment section?
Only as a sale of land $55,000
Only as a purchase of land $79,000
As a net purchase of land, $24,000
As a purchase of land $79,000 and a sale of land $55,000
The following information is available for Mercer Industries.
Net income $240,000
Depreciation expense $72,000
Dividends paid $108,000
Gain on sale of land $18,000
Increase in accounts receivable $36,000
Increase in accounts payable $108,000
What is Mercer's net cash provided by operating activities?
$258,000
$150,000
$384,000
$366,000
The starting point for calculating cash flow from operating activities is net
income. The next step is to add back the non-cash depreciation expense of
$72,000. It has to be added back since it was subtracted when net income
was calculated, but it does not involve a cash outflow. The next step is to
subtract the gain on the land sale of $18,000. This has to be subtracted
since it was added when net income was calculated, but it does not involve
a cash outflow. The increase in accounts receivable is subtracted since
credit sales exceeded cash collections. This means net income overstates
cash provided by operating activities. The increase in accounts payable is
added since inventory purchases exceeded payments for inventory. This
means that cost of goods sold overstates cash used to purchase inventory,
which means net income understates cash provided by operating
activities. The final result is a net inflow from operating activities of
$366,000 ($240,000 + $72,000 − $18,000 − $36,000 + $108,000).
