Understanding the Statement of Cash Flows: Methods, Sections,

School: Western Governors University - Course: ACCOUNTING IA1 - Subject: Accounting

Statement of Cash Flows Click onrecording link Hello and welcome to this recording on the Statement of Cash Flows. I am Dr. P, a CI for intermediate accounting one, D103. The statement is one of the three required financial statements by Generally Accepted Accounting Principles. Two methods: Direct-focuses entirely on the activity in the cash account, i.e. receipts and disbursements and is rarely used. Indirect-begins with net income on an accrual basis and reconciles to a cash basis, i.e. the difference between beginning and ending cash. A comparative accrual Balance Sheet is needed to prepare the indirect method. The indirect method is the preferred method and is widely used. I will be discussing only the indirect method in this cohort. The Statement of Cash Flows has three sections: operating, investing, and financing. a.Operating activities.Involve the cash effects of transactions that enter in the determination of net income. b.Investing activities.Involve making and collecting loans, and acquiring and disposing of debt and equity investments and property, plant, and equipment. c.Financing activities.Involve obtaining capital from owners and providing them a return on their investment, and borrowing money from creditors and repaying the amounts borrowed. The steps for preparing the Statement of Cash Flows are 1. determine net income. 2. Determine what noncash expenses to add back to net income such as depreciation, amortization, and depletion 3. Remove the effect of any gain and/or loss on net income. Losses are added to net income and gains are deducted from net income. 4. Calculate the change (increase or decrease) in the Balance Sheet accounts other than the cash account. 5.Classify each change as an operating, investing, or financing activity. 26. Calculate the net cash provided by or used for each activity section. 7. Verify that the sum of the net change in cash equates to the change in beginning and ending cash. The following diagram shows the relationship between the Balance Sheet and the Statement of Cash Flows.