LO1 – Explain the purpose of the statement of cash flows.
The statement of cash flows is one of the four financial statements. It highlights the net increase or decrease in the cash and cash equivalents balance during the accounting period, and details the sources and uses of cash that caused that change.
LO2 – Prepare a statement of cash flows.
The operating activities section of the statement of cash flows begins with net income calculated on the accrual basis and, by adjusting for changes in current assets, current liabilities, adding back depreciation expense, and adjusting for losses or gains on disposal of capital assets, arrives at cash flow from operating activities. The investing activities section analyzes cash inflows and outflows resulting from the sale and purchase of capital assets. The finance activities section discloses the cash inflows and outflows resulting from the assumption or payment of loans, issue or repurchase of shares, and payment of dividends.
LO3 – Interpret a statement of cash flows.
A statement of cash flows contributes to the decision-making process by explaining the sources and uses of cash. The operating activities section can signal potential areas of concern by focusing on differences between accrual net income and cash flow from operating activities. The investing activities section can highlight if cash is being used to acquire assets for generating revenue, while the financing activities section can identify where the cash to purchase those assets might be coming from. Those who use financial statements can focus on the effectiveness of management’s investing and financing decisions and how these may affect future financial performance.
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