Tuesday, September 1, 2015

Cash Flow Statement

The terms "Cash Flow Statement"&"Statement of Cash Flows" are interchangeable,

The Cash Flow Statement îs relatively easy to prepare, It îs better to use logic&"common sense" to understand what îs happening&how information should be presented în this statement,

The Income Statement&Balance Sheet are both prepared using Accrual Accounting, This involves making combination of adjustments tobooks, including accruals, deferrals, apportioning costs such as depreciation,&charging Income with future expenditure such as warranty claims&post retirement benefits, Every time we make adjustment inbooks&records,resulting financial statements comply with accrual accounting, but are also farther away from cash accounting,

Before 1987 we prepared third financial statement calledStatement of Changes în Financial Position, This was generally prepared on Working Capital basis, but could also be prepared on Cash Flow basis,

In 1987 FASB mandateduse ofCash Flow Statement, în place ofStatement of Changes, The Statement of Cash Flows removes all accruals, deferrals&other non cash adjustments,&provide investors&creditors with information about company's Sources&Uses of Cash, An Income Statement might show Profit Loss, but that says nothing about howcompany's Management managedcompany's money,

Today this îs more important than every, Managers are frequently caught "cookingbooks," hiding losses&liabilities, overstating understating Income, all forpurpose of influencingmarket price of company stock, Managers frequently benefit personally from increases în company stock prices, so there îs high incentive for these people to manipulate information,

The Cash Flow Statement îs fairly simple,There are only 3 sections, which report Increases&Decreases în Cash, The sections are always presented infollowing order,

Operating Cash Flows 
Inflows Money received from customers for sales of products services,
Outflows Money paid to suppliers, employees, etc, for normal business expenses,

Investing Cash Flows 
Inflows Money received from selling assets, including land, buildings equipment, stocks, bonds, Money received from loans made to others, such as Notes Receivable,
Outflows Money paid to purchase assets;&money paid out to make loans to others,

Financing Cash Flows 
Inflows Money received from stockholders purchasing company stock, from bondholders for bonds payable,&money borrowed from banks&other creditors,
Outflows Money paid to stockholders for dividends, to bondholders, banks&other creditors,

The Statement of Cash Flows also reconcilesCash balance frombeginning to end ofyear, The beginning&ending Cash balances can be found onBalance Sheet,

Direct&Indirect Method
There are 2 ways to presentStatement of Cash Flows Direct&Indirect, Your textbook presentsDirect Method, The Indirect Method îs illustrated inappendix atend ofchapter, FASB recommendsuse ofDirect Method, A recent survey of company showsfollowing:

Companies usingDirect Method 5%
Companies usingIndirect Method 95%
Despite these statistics, most accounting textbooks teachDirect Method,You should also note that whenDirect Method îs used,statement must also include supplemental calculation of Operating Cash Flows usingIndirect Method, Accountants should be able to do both methods,

PreparingStatement of Cash Flows
I generally includecash flow worksheet as part of my 13 column trial balance worksheet, I usespace infar right side oftrial balance worksheet to analyze cash flows for all accounts, Calculatedifference betweenbeginning&ending balances for all accounts,&determine ifchange reflects increase decrease în cash flow, Mark each account with&O for Operating cash flows, I for Investing cash flows&F for Financing cash flows,

Next lay outgeneral format ofstatement on piece of paper spreadsheet, I generally identifyInvesting&Financing activites first,&put them inappropriate place, There should only be few items that fall în these categories, Most ofaccounts will be Operating activities, These include all Income&Expense accounts majority of accounts ontrial balance,

You may need to look at few Ledger accounts, For instance,company may have purchased Land&also sold Land insame year, The purchases would be outflows of cash,&recorded as Debits inLand account, Sales would be inflows of cash,&recorded as Credits inLand account,

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