Format of the Statement of Cash Flows , Accounting standards demand that a statement of cash flows be included in a full set of financial statements. This statement must include information regarding a company's cash receipts and cash payments during the quarter. Exhibit 16.5 depicts the standard format. A business must Cash flows from three activities are reported: operating, investing, and financing. The statement shows how transactions and events affect the preceding period's end cash (and cash equivalents) balance to create the current period's end cash (and cash equivalents) balance.
Preparing the Statement of Cash FlowsA cash flow statement is created in five steps: 1- compute and report the net cash increase or decrease; 2 compute and report the net cash provided or used by operating activities (using either the direct or indirect method; both are explained); 3 compute and report the net cash provided or used by investing activities; 4 compute and report the net cash provided or used by financing activities; and 5 compute and report the net cash flow by combining net cash provided or used by operating, investing, and financing activities and then .
Computing the net growth or reduction in cash is a simple but important calculation. It is equal to the current period's cash amount minus the cash balance from the previous period. This is the bottom-line figure for the cash flow statement and serves as a quality control check. The information required to create a statement of cash flows comes from a variety of sources, including comparative balance sheets at the beginning and end of the period, as well as a period income statement. There are two techniques to crafting the statement: (1) Examining the Cash account and (2) Examining the Noncash accounts
Analyzing the Cash AccountCash revenues and payments are documented in the Cash account of a company's general ledger. As a result, the Cash account is an obvious place to look. cash flow information from operating, investing, and financing operations Consider the following example: Individual cash transactions are shown in Exhibit 16.6 as a summary of Genesis, Inc.'s Cash T-account. This Cash account summarizes the basic forms of cash revenues and cash payments. payments. For example, just the total cash receipts from all clients are shown. Individual funds These totals are supported by thousands of transactions. There is accounting software accessible. to deliver cash account summaries
Preparing a statement of cash flows from Exhibit 16.6 requires determining whether an individual cash inflow or outflow is an operating, investing, or financing activity, and then listing each by
Receipts from costomers
Receipts from asset sales
Receipts from stock issuance
|Payments for merchandise|
Payments for wages&operating expenses
Payments for interest
Payments for taxes
Payments for assets
Payments for notes retirement
Payments for dividends
|Debit balance (Balance c / d)||17,000|
Analyzing Noncash AccountsThe analysis of noncash accounts is a second method for constructing the statement of cash flows. This method makes use of the fact that when a corporation registers cash, it also tracks inflows and outflows via debits and credits to the Cash account (see Exhibit 16.6). Noncash account credits and debits (reflecting double-entry accounting). Many of these noncash payments Accounts are balance sheet accounts, such as those resulting from the monetary sale of land. Others include income. as well as expenditure accounts that have been closed to equity for example, the monetary sale of services generates a credit to Services Revenue for a firm that is closed to Retained Earnings
In sum, all cash transactions eventually affect noncash balance sheet accounts. Thus, we can determine cash inflows and outflows by analyzing changes in noncash balance sheet accounts.
Exhibit 16.8 uses the accounting equation to show the relation between the Cash account and the noncash balance sheet accounts. This exhibit starts with the accounting equation at the
top. It is then expanded in line (2) to distinguish between cash and noncash asset accounts. Line (3) shifts noncash asset accounts to the equality's right side, where they are deducted. This demonstrates that cash is equal to the total of the debt and equity accounts less the noncash asset accounts. Line (4) shows how modifications on one side of the accounting equation equal changes on the other. It demonstrates that changes in cash may be explained by examining changes in noncash accounts such as liability accounts, equity accounts, and noncash asset accounts. We can generate a statement of cash flows by evaluating noncash balance sheet accounts and any corresponding income statement accounts.