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
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
