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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Statement of Cash Flows A friend of yours is taking an introductory accounting course. He says, “I understand the income statement and balance sheet, but I am confused by the statement of cash flows and accompanying schedule. What is this statement, what is it useful for, what are its major sections, and what items are reported in each section and the accompanying schedule? 1 need to understand this statement better so I can do well in my class.”

Required:

Prepare a written response to your friend’s questions.

To determine

Prepare a written response regarding the statement of cash flows.

Explanation

Statement of cash flows: Cash flow statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Usefulness of statement of cash flows.

The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over  a specific period of time (usually quarterly and annually). It is important for analyzing the liquidity and long term solvency of a company.

Operating Activities: Operating activities include cash inflows and outflows from business operations.

Investing Activities: Investing activities include cash inflows and cash outflows from purchase and sale of land or equipment, or investments.

Financing Activities: Financing activities include cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

The three major sections of statement of cash flows are:

  • Net cash flow from operating activities
  • Net cash flow from investing activities
  • Net cash flow from financing activities

Cash inflows from various activities:

The cash inflows of various activities are shown below:

 Cash flows from operating activitiesCash flows from investing activitiesCash flows from financing activities

Cash Inflows

  • Sale of goods and services.
  • Interest received and dividends received.
  • Sale of plant, property and equipment.
  • Collection of principal amount on loans to other entities.
  • Sale of investments in equity and debt of other entities.
  • Sale of common stock.
  • Issue of debt instruments such as bonds and notes...

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