Accounting Chapter 23

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CHAPTER 23
Statement of Cash Flows
LEARNING OBJECTIVES
1. 2. 3. 4. 5. 6. 7. 8. 9. Describe the purpose of the statement of cash flows. Identify the major classifications of cash flows. Differentiate between net income and net cash flows from operating activities. Contrast the direct and indirect methods of calculating net cash flows from operating activities. Determine net cash flows from investing and financing activities. Prepare a statement of cash flows. Identify sources of information for a statement of cash flows. Discuss special problems in preparing a statement of cash flows. Explain the use of a work sheet in preparing a statement of cash flows.

Copyright © 2010 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 13/e Instructor’s Manual

(For Instructor Use Only)

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CHAPTER REVIEW
1. Corporate investors and potential investors seek information about the financial position, results of operations, and cash flow. 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. Chapter 23 describes the significance of the statement of cash flows and all aspects of its preparation. Numerous examples are included which assist in an understanding of how the statement is prepared and presented. Purpose of the Statement of Cash Flows 2. (S.O. 1) 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. Classification of Cash Flows 3. (S.O. 2) 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 cash effects of transactions that enter into the determination of net income, such as cash receipts from the sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses. Investing activities include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets. Financing activities involve liability and owners’ 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. 4. The typical cash receipts and cash payments of a business entity classified according to operating, investing, and financing activities are shown below. Operating Activities Cash inflows From sale of goods or services. From returns on loans (interest) and on equity securities (dividends). Cash outflows To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses.

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Copyright © 2010 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 13/e Instructor’s Manual

(For Instructor Use Only)

Investing Activities Cash inflows 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. Cash outflows To purchase property, plant, and equipment. To purchase debt or equity securities of other entities. To make loans to other entities. Financing Activities Cash inflows From sale of equity securities. From issuance of debt (bonds and notes). Cash outflows To shareholders as dividends. To redeem long-term debt or reacquire capital stock. It should be noted that (1) operating activities involve income determination items, (2) investing activities involve cash flows generally...
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