Summary financial accounting, Global edition (12th ed) Chapter 11

Chapter 11: cash flow
Learning objective 1: identify
Identify the purpose of the statement of cash flow
Statement of cash flow reports cash receipts and cash payment
 where did the money come from and where did it go
Not only cash but also cash equivalents
Purpose:
 Predicts future cash flow
 Determines a company’s ability to pay dividends and interest
 Evaluates management decisions
 Shows the relationship of net income and cash flows
 Enhances comparability

Learning objective 2: distinguish
Distinguish among operating, investing, and financing cash flow
activities
Operating; investing, and financing activities
Operating activities
 Create revenues, expenses, gains and losses  net income
 Reports revenue-generating activities
 A successful business must generate most of its cash from operating
activities
Investing activities
 Increase and decrease noncurrent assets (PPE, intangible assets,
investments
 Important for medium- and long-term operations
Financing activities
 Obtain cash from, and pay cash to investors and creditors
 issuing shares, borrowing money, buying and selling treasury
shares
 Relates to non-current liabilities and shareholder’s equity
 Help readers predict claims on future cash flows by providers of capital to
the entity

, Two formats for operating activities
 Indirect method
o Reconciles from net income to net cash provided by operating
activities
o Total – what you don’t need
o More common method  more detail
 Direct method
o Reports all cash receipts and cash payments from operating
activities
o Search for all the needed information and add them