Introduction to Financial Accounting 13 Statement of Cash Flows Purposes 1 Easier to pay dividends 2 Sees the difference between net income and net cash 3 Investing and financing operations during a specific period Operating Activities income statement Cash inflow sale of goods and services interest and dividends Cash outflow inventory wages taxes interest and expenses to others Investing Activities long term assets Cash inflow sale of property plant and equipment equity securities and loans to entities Cash outflow purchase property plant and equipment make loans to entities investments in debt Financing Activities long term liabilities and stockholder s equity Cash inflow sale of common stock issuance of bonds and notes Cash outflow stockholders for dividends acquire capital stock and treasury stock Noncash Activity exchange plant assets debt to buy asset bonds into common stock common stock to buy assets Discrepancy of Net Income and Net Cash Accrual basis for accounting expenses recorded when incurred and revenues recorded when earned Format of Statement of Cash Flows 1 Operating Activities Direct and Indirect Methods 2 Investing Activities 3 Financing Activities Preparing Statement of Cash Flows Comparative Balance Sheet Income Statement etc Steps 1 Convert net income from accrual basis to cash basis 2 Record activities that are not assets and liabilities as financing transactions 3 Make sure that net change in cash on statement of cash flows is same as change in cash account Indirect Method Easier to prepare differences between net income and net cash flow from operating activities Adjustments to Net Income 1 Add non cash expense Depleting amortization depreciation expenses 2 Add losses loss on disposal of equipment but deduct gains 3 Changes in asset and liability accounts that are not related to cash Depreciation Expense reduces net income but increases cash Accounts Receivable receipts are higher than revenue earned only when balance decreases under accrual basis of accounting Inventory purchases exceed cost of golds sold only when the balance increases Noncash Current Asset prepaid expense increases more cash is paid than expenses Current Liabilities Accounts Payable increases more goods are received than money paid for Income Tax Payable decreases expense is less than paid Current Assets and Liabilities increase current asset and decrease in current liability must be deducted in order to convert net income to net cash Partial Statement Outline Net Cash Provided by Operating Activities Cash flows From Investing Activities purchase building equipment and sale equipment Net Cash Used by Investing Activities Cash flows from Financing Activities Issuance of Common Stock and payment of cash dividends Net Cash Used by Financing Activities Net increase in Cash Cash at Beginning of Period Cash At End of Period