Statement of Cash Flows | Intermediate Accounting | CPA Exam FAR | Chp 5 p 2
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The information in a statement of cash flows should help investors, creditors, and others to assess: (1) the entity’s ability to generate future cash flows; (2) the entity’s ability to pay dividends and meet obligations; (3) the reasons for the difference between net income and net cash flow from operating activities; and (4) the cash and noncash investing and financing transactions during the period. The required presentation of the statement of cash flows provides financial statement users with information about the major sources and uses of cash during the fiscal period.
Classification of Cash Flows
3. The statement of cash flows classifies cash receipts and cash payments by operating, investing, and financing activities. Operating activities include all transactions and events that are not investing and financing activities. Operating activities include the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services, and cash payments to suppliers and employees for acquisitions of inventory and expenses. Operating activities involve income determination items.
4. Investing activities include (a) making and collecting loans, and (b) acquiring and disposing of investments and productive long-lived assets. Investing activities involve cash flows generally resulting from changes in long-term asset items.
5. Financing activities involve liability and stockholders’ equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital from owners and providing them with a return on, and return of, their investment. Financing activities involve cash flows generally resulting from changes in long-term liability and stockholders’ equity items.
6. The typical cash receipts and cash payments of a business entity classified according to operating, investing, and financing activities are shown below.
From sales of goods or services.
From returns on loans (interest) and on equity securities (dividends).
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.
From sale of equity securities.
From issuance of debt (bonds and notes).
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock.
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