GLENCOE / McGraw-Hill

The Statementof Cash Flows

1. Distinguish between operating, investing, and financing activities.

Sources and Uses of Cash

Section Objective

A statement of cash flows is a financial statement that provides information about the cash receipts and cash payments of a business.

ANSWER:

QUESTION:

What is a statement of cash flows?

Page912

Statement of Cash Flows

Reviewed by creditors to determine how the firm will pay principal and interest on debts

Reviewed by investors to determine if the corporation will have the cash to pay dividends

Reviewed by management for information about cash to pay employees, suppliers, and other obligations

Page912

On the statement of cash flows, the term cash includes cash and cash equivalents.

Recall that cash consists of coin, currency, and bank accounts.

The Meaning of Cash

Page912

Cash equivalents are assets that are easily convertible into known amounts of cash.

ANSWER:

QUESTION:

What are cash equivalents?

Examples: CDs, U.S. Treasury bills, money market funds

Page912

Sources and Uses of Cash

The statement of cash flows reports:

Page912

cash inflowsSources of cash

cash outflowsUses of cash

Sources and Uses of Cash

Cash inflows and outflows are classified under three headings:

Page913

Operating Activities

Investing Activities

Financing Activities

Operating activities are routine business transactions.

ANSWER:

QUESTION:

What are operating activities?

Examples: Selling goods, paying operating expenses

Page912

Investing activities are transactions that involve the acquisition or disposal of long-term assets.

ANSWER:

QUESTION:

What are investing activities?

Examples: Buying bonds of other companies, selling land

Page913

Financing activities are transactions that provide cash to the business to carry on its activities.

ANSWER:

QUESTION:

What are financing activities?

Examples: Issuing capital stock, paying cash dividends

Page913

Sources of Cash Uses of Cash

Operating Activities

Sale of merchandise

Sale of services

Interest income

Dividend income

Miscellaneous income

Pay for merchandise

Pay taxes

Pay salaries and wages

Pay interest expense

Pay for other expenses

Page913

Sources of Cash Uses of Cash

Investing Activities

Sale of land, buildings, or equipment

Principal payments collected on receivable for long-term assets

Sale of investment in bonds or other securities

Pay for purchase of land, buildings, or equipment

Pay for the purchase of investments in bonds or other securities

Page913

Sources of Cash Uses of Cash

Financing Activities

Issuance of common stock

Issuance of preferred stock

Issuance of bonds payable Borrowing through

signing a note payable Resale of treasury stock

Pay cash dividends on common stock

Pay cash dividends on preferred stock

Repay bond indebtedness Repay notes payable or

other borrowing Purchase treasury stock

Page913

R

E

V

I

E

W

________________ are assets that are easily convertible into known amounts of cash.

The statement of cash flows shows the _______ and ____ of cash.

Cash inflows and outflows are classified under the headings _________________, _________________, and _________ _________.

Operating Activities

sources

Cash equivalents

Complete the following sentences:

uses

Investing Activities FinancingActivities

R

E

V

I

E

W

_________________ are transactions that involve the acquisition or disposal of long-term assets.

An example of a(n) _______________ is the issuance of capital stock for cash.

The sale of merchandise on credit is a(n) _______________.operating activity

financing activity

Investing activities

Complete the following sentences:

Thank Youfor using

College Accounting, Tenth Edition

Price • Haddock • Brock