Chapter 12 the Statement of Cash Flows

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Learning Outcomes Exercises Minutes Level

1. Understand the concept of cash flows and accrual accounting, 15* 60 Diff and explain the purpose of a statement of cash flows.

2. Explain what cash equivalents are and how they are treated on 1 5 Easy the statement of cash flows. 12* 10 Easy

3. Describe operating, investing, and financing activities and give 2 10 Easy examples of each. 3 10 Mod 12* 10 Easy 13* 10 Easy 14* 25 Diff

4. Describe the difference between the direct and the indirect method of computing cash flow from operating activities.

5. Use T accounts to prepare a
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The purpose of the statement of cash flows is to summarize an entity’s cash flows from operating, investing, and financing activities during a period. Because it is concerned with activity for a specific period of time, the statement is similar to the income statement. However, they differ in two important respects. First, with a few exceptions, the income statement deals only with operating activities. Second, the income statement is on an accrual basis, while the statement of cash flows reports operating activities on a cash basis.

2. A cash equivalent is an item that is readily convertible to a known amount of cash and has an original maturity of three months or less. These items, such as Treasury bills and money market funds, present very little risk to the holder, and therefore they are included with cash for the purpose of preparing the statement of cash flows. That is, purchases and sales of cash equivalents are not considered significant activities to be separately reported on the statement.

3. The down payment of $20,000 is a cash outflow that would be reported in the investing activities section of the statement of cash flows. The issuance of the promissory note for $60,000 would appear in a supplemental schedule of noncash investing and financing activities.

4. A 60-day Treasury bill would be classified as a cash equivalent and combined with cash on the balance sheet. Therefore, the purchase of the treasury bill would not be
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