11.6: Summary of Chapter 11 Learning Objectives
- Page ID
- 98200
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Summary of Chapter 11 Learning Objectives
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 can be prepared using the direct or indirect method. This textbook focuses only on the indirect method. The result of both methods is identical; it is only how the calculations are performed that differs. The operating activities section begins with accrual net income and, by adjusting for changes in current assets, current liabilities, adding back depreciation expense, and adding back/subtracting losses/gains on disposal of non-current assets, arrives at net income on a cash basis. The investing activities section analyzes cash inflows and outflows from the sale and purchase of non-current assets. The finance activities section details the cash inflows and outflows resulting from the issue and payment of loans, issue and 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 basis net income. 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.
Discussion Questions
- Using an example, explain in your own words the function of a statement of cash flows. Why is it prepared? What does it communicate to the reader of financial statements? What is its advantage over a balance sheet? over an income statement?
- Why are financing and investing activities of a corporation important to financial statement readers?
- How does an increase in accounts receivable during the year affect the cash flow from operating activities?
- What effect does the declaration of a cash dividend have on cash flow? the payment of a dividend declared and paid during the current year? the payment of a dividend declared in the preceding year?
- Why may a change in the Short-term investments account not affect the amount of cash provided by operations?
- Why is it possible that cash may have decreased during the year, even though there has been a substantial net income during the same period?
- Describe common transactions affecting balance sheet accounts that use cash. Explain how these items are analysed to identify cash flows that have occurred during the year.