Cash Flow Statement(Quick Test #2 with Coaching)

The Financial Accounting Standards Board (FASB) permits the use of either the direct method or the indirect method of preparing the statement of cash flows.

The vast majority of U.S. corporations use the indirect method when preparing the statement of cash flows (SCF).

The statement of cash flows reports the cash flows occurring during the same period of time as the income statement.

(The balance sheet reports the assets, liabilities, and stockholders' equity at a point in time, such as the final moment of the accounting period.)

The sections of the cash flow statements are usually presented in this order: 1) cash flows from operating activities, 2) cash flows from investing activities, 3) cash flows from financing activities, 4) supplemental information such as an exchange of common stock for a significant asset.

The sections of the cash flow statements are usually presented in this order: 1) cash flows from operating activities, 2) cash flows from investing activities, 3) cash flows from financing activities, 4) supplemental information such as an exchange of common stock for a significant asset.

The sections of the cash flow statements are usually presented in this order: 1) cash flows from operating activities, 2) cash flows from investing activities, 3) cash flows from financing activities, 4) supplemental information such as an exchange of common stock for a significant asset.

Generally, the changes in current assets and current liabilities (other than loans payable) will be reported as cash flows from operating activities, which is the first section of the SCF.

Examples (sometimes referred to as operating assets and liabilities) include the changes in accounts receivable, inventory, prepaid expenses, accounts payable, wages payable, income taxes payable, etc.

The changes in noncurrent (or long-term) assets will be reported as cash flows from investing activities. (This is the second section of the SCF.)

The additions to noncurrent assets, such as capital expenditures, are shown in parentheses since it is assumed that cash was paid out.

The amounts received (the proceeds) from the sale of noncurrent assets are listed as positive amounts.

The additions to property, plant and equipment are usually described as capital expenditures and will be reported as a negative amount under investing activities. (Negative amounts are shown in parentheses to indicate they used cash, they are a cash outflow, or that they had a negative effect on the corporation's cash balance.)

When the accounts receivable (a current asset) have increased, it means that not all of the sales shown on the income statement were collected as of the balance sheet date. As a result, the increase in accounts receivable is reported as a negative amount on the SCF. The negative amount is shown as an adjustment to the amount of net income listed in the operating activities section of the SCF.

Viewed another way, having the balance in accounts receivable increase is unfavorable or negative for the company's cash position.

When the accounts receivable (a current asset) have decreased, it means that cash received on account was more than the sales shown on the income statement. Collecting amounts owed by customers is good for the company's cash balance. Hence, the decrease in accounts receivable is reported as a positive amount on the SCF. The positive amount is shown as an adjustment to the amount of net income listed in the operating activities section of the SCF.

Viewed another way, having the balance in accounts receivable decrease is favorable or positive for the company's cash position.

When the current asset inventory has increased, it is assumed that: cash was used, there was a cash outflow, cash was spent, cash decreased, or the transaction had a negative or unfavorable effect on the company's cash position. Therefore, the increase in inventory will be reported as a negative amount on the SCF. The negative amount is shown as an adjustment to the amount of net income listed in the operating activities section of the SCF.

When a company's current asset inventory has decreased, it is assumed that some of the inventory was sold and has turned into cash. In other words, the reduction of inventory had a positive effect on the company's cash balance and will be shown as a positive amount on the SCF. The positive amount is presented as an adjustment to the amount of net income listed in the operating activities section of the SCF.

Prepaid expenses (such as prepaid insurance) are most likely reported as current assets on the balance sheet. In order for the amount of the prepaid expenses to have increased, cash must have been used. Therefore, an increase in prepaid expenses is unfavorable for the company's cash balance and will be shown as a negative amount on the SCF. The negative amount is presented as an adjustment to the amount of net income listed in the operating activities section of the SCF.

Prepaid expenses (such as prepaid insurance) represent cash payments that were made in advance of becoming expenses on the income statement. Generally they are reported on the balance sheet as a current asset.

In order for the amount of the prepaid expenses to decrease, some of the prepaid expenses must have been used up or have expired. As they expire they become expenses on the income statement. This reduces the company's net income but these expenses did not use cash in the current accounting period. Therefore, the decrease in prepaid expenses will be shown as a positive adjustment to the net income shown in the operating activities section of the SCF.

Accounts payable is a current liability that reports the amount a company owes to its vendors or suppliers.

If the amount of accounts payable has increased, it means that the company did not pay for all of the goods and services that are shown as expenses on the income statement. By not paying the bills and invoices from vendors, it helps the company's cash balance. Hence, an increase in accounts payable will be shown on the SCF as a positive adjustment to the net income that appears in the operating activities section of the SCF.

Accounts payable is a current liability that reports the amount a company owes to its vendors or suppliers.

If the amount of accounts payable has decreased, the company must have paid an additional amount of cash to its suppliers. The additional payment has a negative effect on the company's cash balance. Therefore, the decrease in accounts payable will be shown on the SCF as a negative adjustment to the net income that appears in the operating activities section of the SCF.

The repayment of a short-term or long-term loan means the company paid some or all of the principal amount that it owes to a lender. This principal payment means an outflow of cash which has a negative effect on the company's cash balance. Thus, the negative amount is reported in the financing activities section of the SCF.

Depreciation expense reduces the amount of a corporation's net income, but this expense does not reduce the cash balance in the current accounting period. (The entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation).

Therefore the corporation's net income must be increased in order to show the total amount of cash that flowed during the accounting period. This is accomplished by adding the amount of depreciation expense as a positive adjustment to the net income that appears in the operating activities section of the SCF.

The cash proceeds (money received) from the sale of long-term assets such as property, plant or equipment is reported as a positive amount in the investing activities section of the SCF.

If there was a gain on the sale, the gain is reported on the income statement and requires a negative adjustment in the operating activities section of the SCF.

If there was a loss on the sale, the loss is reported on the income statement and requires a positive adjustment in the operating activities section of the SCF.

The cash proceeds (money received) from the sale of long-term assets such as property, plant or equipment is reported as a positive amount in the investing activities section of the SCF.

If there is a gain on the sale, the gain will be reported as a negative adjustment to the net income in the operating activities section of the SCF.

The cash proceeds (money received) from the sale of long-term assets such as property, plant or equipment is reported as a positive amount in the investing activities section of the SCF. However, if there was a loss on the sale, the loss will have reduced the net income reported on the income statement. Since this loss did not represent a cash outflow, there will need to be a positive adjustment to the net income that is listed in the operating activities section of the SCF.

(The positive adjustment is necessary to offset the loss being reported within the income statement, since the loss did not use any cash.)

When a corporation pays a cash dividend to its stockholders, cash flows out and it has a negative effect on the corporation's cash balance. This negative effect is reported as a negative amount in the financing activities section of the SCF.

(Investing activities are not relevant since they involve acquiring and disposing of long-term assets.)

The cash flows provided (used) by operating activities include:

The cash flows provided (used) by operating activities include:

Under the indirect method the first section of the SCF, cash from operating activities, begins with the net income shown on the corporation's income statement. Since the income statement (and therefore the net income) includes interest expense, the interest expense is included in the operating activities section of the SCF.

The entire amount received (cash proceeds) from the sale of a noncurrent asset is reported as a positive amount in the investing activities section of the statement of cash flows (SCF).

In this question, the entire amount received is $5,000. Hence the $5,000 will appear as a positive amount in the investing activities section of the SCF.

(The gain of $2,000 is reported as a negative amount in the operating activities section of the SCF, since the $2,000 gain was included in the corporation's net income.)

The gain of $2,000 is reported as a negative amount in the operating activities section of the SCF. The reason is that the $2,000 gain was included in the corporation's net income, and all $5,000 of cash is reported in investing activities.

When a transaction has a significant effect on a corporation's financial position (or balance sheet), but the transaction does not involve cash, a supplementary (or supplemental) disclosure is needed as part of the SCF.

Free cash flow is likely to be calculated by taking the net cash provided by operating activities and then subtracting the necessary amount of capital expenditures.

Total capital expenditures are listed in the investing activities section of the SCF.

(Some analysts also subtract dividends from the above calculation when the dividends are considered to be a requirement.)