Exam 2 review notes
Chapter 12
Cash Flows and Accrual Accounting
Overview: a statement of cash flows complements an accrual-based income
statement by providing information on a company’s cash flows from operating,
investing, and financing activities.
External parties have an interest in a company’s cash flows because:
Stockholder’s need some assurance that enough cash is being generated from
operations to pay dividends and to invest in the company’s future.
Creditors want to know if cash from operations is sufficient to repay their loans
along with interest.
A company’s cash position can increase or decrease over a period and it can report a
net profit or net loss. 4 combinations are possible:
1. A company can report an increase in cash and a net profit.
2. A company can report a decrease in cash and a net profit.
3. A company can report an increase in cash and a net loss.
4. A company can report a decrease in cash and a net loss.
Statement of cash flows the financial statement that summarizes an entity’s cash
receipts and cash payments during the period from operating, investing and
financing activities.
Cash Equivalent cash equivalents are assets readily convertible to a determinable
amount of cash, with a maturity date of three months or less. They are combined
with cash on a statement of cash flows.
Classification of Cash Flows operating activities involve cash flows related to the
production of goods or services for customers. Investing activities arise from
acquiring and disposing of long-term assets, and financing activities relate to
generating funds through debt and equity securities and making payments related
to those securities.
Operating Activities activities concerned with the acquisition and sale of products
and services. (Inflows, outflows, net cash provided (used) by operating activities)
Investing Activities activities concerned with the acquisition and disposal of long
term assets. (Additions to property and equipment, purchases of investments, sales
of investments, acquisitions of businesses, net cash acquired)
Financing Activities activities concerned with the raising and repaying of funds in
the form of debt equity. (Issuance of common stock, dividends paid, repayments of
debt, proceeds from issuance of stock)
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