Concept explainers
Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.
Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Cash flows from operating activities: These are the cash produced by the normal business operations.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Indirect method) |
Add: Decrease in current assets |
Increase in current liability |
|
Loss on sale of plant assets |
Deduct: Increase in current assets |
Decrease in current liabilities |
Gain on sale of plant assets |
Net cash provided from or used by operating activities |
Table (1)
Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.
The below table shows the way of calculation of cash flows from investing activities:
Cash flows from investing activities |
Add: Proceeds from sale of fixed assets |
Sale of marketable securities / investments |
Interest received |
Dividend received |
Deduct: Purchase of fixed assets/long-lived assets |
Purchase of marketable securities |
Net cash provided from or used by investing activities |
Table (2)
Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.
The below table shows the way of calculation of cash flows from financing activities:
Cash flows from financing activities |
Add: Issuance of common stock |
Proceeds from borrowings |
Proceeds from issuance of debt |
Issuance of bonds payable |
Deduct: Payment of dividend |
Repayment of debt |
Interest paid |
Redemption of debt |
Repurchase of stock |
Net cash provided from or used by financing activities |
Table (3)
To List: The errors in the statement of cash flows.
To Prepare: A corrected statement of cash flows.
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Financial & Managerial Accounting
- Statement of cash flowsindirect method The comparative balance sheet of Yellow Dog Enterprises Inc. at December 31, 20Y8 and 20Y7, is as follows: Additional data obtained from the income statement and from an examination of the accounts in the ledger for 20Y8 are as follows: a. Net income, 250,000. b. Depreciation reported on the income statement, 135,000. c. Equipment was purchased at a cost of 420,000 and fully depreciated equipment costing 90,000 was discarded, with no salvage realized. d. The mortgage note payable was not due for six years, but the terms permitted earlier payment without penalty. e. 30,000 shares of common stock were issued at 20 for cash. f. Cash dividends declared and paid, 45,000. Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.arrow_forwardPartial Statement of Cash Flows Service Company had net income during the current year of $65,800. The following information was obtained from Services balance sheet: Accounts receivable $26,540 increase Inventory 32,180 increase Accounts payable 9,300 decrease Interest payable 2,120 increase Accumulated depreciation (Building) 14,590 increase Accumulated depreciation (Equipment) 32,350 increase Additional Information: 1. Equipment with accumulated depreciation of $18,000 was sold during the year. 2. Cash dividends of $29,625 were paid during the year. Required: 1. Prepare the net cash flows from operating activities using the indirect method. 2. CONCEPTUAL CONNECTION How would the cash proceeds from the sale of equipment he reported on the statement of cash flows? 3. CONCEPTUAL CONNECTION How would the cash dividends be reported on the statement of cash flows? 4. CONCEPTUAL CONNECTION What could the difference between net income and cash flow from operating activities signal to financial statement users?arrow_forward
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