Capital Budgeting Decison
Revised Fall 2012
CHAPTER 12 STATEMENT OF CASH FLOWS
Key Terms and Concepts to Know
Basic Concepts The statement of cash flows highlights the major activities that impact cash flows and hence, affect the overall cash balance. Cash flows are important because they finance operations, pay bills, pay employees, pay dividends, repay loans and make investments. The statement analyzes the changes in the non-cash balance sheet from the perspective of whether the changes provided or used cash. In other words, the analysis seeks to explain the change in the cash balance by looking at the changes in the other balance sheet account. The term cash on the statement of cash flows refers broadly to both currency and cash equivalents such as certificates of deposit or money market instruments. Net income is not cash flow Net income is revenues less expenses Cash flows are the increases and decreases in the cash balance Cash does not always flow in the same accounting period as revenue is earned and/or expenses are incurred. This is why accrual basis accounting uses accounts such as accounts receivable and accounts payable to account for the difference in timing between revenue or expanse and cash inflows or outflows. Organizing the statement of cash flows The statement of cash flows is organized into three sections that report cash flows resulting from: o operating activities o investing activities o financing activities The statement of cash flows also has a fourth section for analyzing cash. Cash Flows from Operating Activities: Direct vs. Indirect Methods The section can be prepared using one of two methods: o Direct method o Indirect method. The two methods will always report the same amount of net cash provided by operating activities.
Revised Fall 2012
Key Topics to Know
Statement Layout
The cash flow statement is consists of four sections: three sections which analyze the changes in the accounts other than cash during the period and one
CHAPTER 12 STATEMENT OF CASH FLOWS
Key Terms and Concepts to Know
Basic Concepts The statement of cash flows highlights the major activities that impact cash flows and hence, affect the overall cash balance. Cash flows are important because they finance operations, pay bills, pay employees, pay dividends, repay loans and make investments. The statement analyzes the changes in the non-cash balance sheet from the perspective of whether the changes provided or used cash. In other words, the analysis seeks to explain the change in the cash balance by looking at the changes in the other balance sheet account. The term cash on the statement of cash flows refers broadly to both currency and cash equivalents such as certificates of deposit or money market instruments. Net income is not cash flow Net income is revenues less expenses Cash flows are the increases and decreases in the cash balance Cash does not always flow in the same accounting period as revenue is earned and/or expenses are incurred. This is why accrual basis accounting uses accounts such as accounts receivable and accounts payable to account for the difference in timing between revenue or expanse and cash inflows or outflows. Organizing the statement of cash flows The statement of cash flows is organized into three sections that report cash flows resulting from: o operating activities o investing activities o financing activities The statement of cash flows also has a fourth section for analyzing cash. Cash Flows from Operating Activities: Direct vs. Indirect Methods The section can be prepared using one of two methods: o Direct method o Indirect method. The two methods will always report the same amount of net cash provided by operating activities.
Revised Fall 2012
Key Topics to Know
Statement Layout
The cash flow statement is consists of four sections: three sections which analyze the changes in the accounts other than cash during the period and one