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This entry was posted in Financial Statements and tagged cash flow statement, financial statements sample on September 18, 2013 by Bruce.
Among the three financial statements, the balance sheet is a stock concept while income statement and cash flow statement are flow concepts. This entry was posted in Financial Statements and tagged accounting, balance sheet, cash flow statement, flow variable, income statement, stock variable on April 3, 2013 by Bruce. In the statement of cash flow, individual cash flow items are classified according to three main activities: operating, investing, and financing.
We already know that the income statement depicts a company’s revenues, expenses, and profitability arising from its daily operations, while cash flow from operations attempts to capture cash movement associated with these daily activities. Accordingly, we must convert the income statement from accrual accounting (by which it is prepared) to cash accounting (which governs the cash flow statement). Indirect method:the indirect begins with net income as reported on the income statement and then details the adjustment made to arrive at cash flow from operations.
Direct method:using direct method, the operating activities section of a statement of cash flow is, in effect, a cash-basis income statement. The Financial Accounting Standards Board (FASB) allows companies to use both methods, which result in the same “Cash Flow from Operating Activities” figure; however, the indirect method is used by a majority of companies and will be our focus throughout this section. The two methods apply only to the preparation of the operating activities section of the cash flow statement. As mentioned earlier, the first line of the cash flow statement of most companies is net income from the income statement, which, as we know, is prepared in accordance with the accrual method of accounting. For example, since depreciation expense reduces net income on the income statement, but does not reduce cash, an adjustment must be made on the cash flow statement to exclude this noncash expense from net income since the ultimate goal of the cash flow statement is to determine how much cash was generated (vs.
Common adjustments made in the cash flow from operations section include depreciation, changes in working capital (calculated as current assets less current liabilities), and changes in deferred taxes. The primary investing activities are the purchase and sale of land, buildings, and equipment. Financing activities are those activities whereby cash is obtained from or repaid to owners and creditors.


Accordingly, many companies grant stock options to their employees, including top management, as compensation instead of cash, allowing employees to have a fractional ownership in their company.
A company’s income from its cash holdings and investments (stocks, bonds, and savings accounts). Unrealized gains and losses on Available-For-Sale Securities Most companies purchase a portfolio of stocks and bonds to maintain a liquid reserve of assets that can be sold into cash if needed. Current assets are expected to be convertible into cash within 12 months and include accounts receivable, inventory, and prepaid expenses. Noncurrent assets are not expected to be converted into cash during the company’s normal course of operations and include Property, Plant and Equipment (PP&E), goodwill and intangible assets, and other noncurrent assets.
Cash includes coins and currency as well as the balances in company checking and savings accounts. Cash equivalents are short-term, highly liquid investmens such as Treasury bills, commercial paper, and money market funds.
Accounts Receivable are amounts owed to a business by its credit customers and are usually collected in cash within 10 to 60 days. Liabilities are obligations to pay cash, transfer other assets, or provide service to someone else. Deferred Taxes are created and reported on the balance sheet when an asset or liability is valued differently under GAAP financial statements than it is on the company’s tax returns, and that difference results in a greater tax expense on the financial statements than accrual cash taxes payable on the tax return.
Pensions A pension plan is a contract by which an employer agrees to pay cash benefits to its employees upon their retirement. The statement reflects both the cash inflow and the cash outflow for a specific period of time. Cash receipts from selling good or from providing services are the major operating cash inflow.
The subsequent lines should be thought of as adjustments to this accrual net income, in order to arrive at the amount of cash generated from operations during the same period.
You can think of investing activities are those activities associated with buying and selling long-term assets.


For example, cash received from owners’ investments, cash proceeds from a loan, or cash payments to repay loans would all be classified under financing activities. To accurately reflect the interest expense associated with a given year, accrual accounting requires that a company report the entire amount of interest that has accumulated for the year, whether that interest has been paid in cash or not.
Net Interest Expense accounts for the interest income a company earns from its cash and investment holdings. Different companies may categorize their liquid holdings as either cash equivalents or marketable securities. This serves as an important link between the balance sheet and the income statement, allowing net income every year to flow through to the balance sheet. Investors also want to know how much actual cash a company’s operations generate during a period and how the cash is used.
Major operating cash outflow include payments to purchase investory and to pay wages, taxes, interest, utilities, rent and other expenses.
When a company sold goods or performed a service, the resulting revenue is in the form of cash or account receivable (a promise from the buyer to pay for the goods or services by a specified date in the future).
The statement of cash flow shows the cash inflows and cash outflows of a company during a period of time.
The cash flow from financing activities is composed of debentures, shares, notes, payments of dividends, interest on debts and loans (either long term or short term debts).3. The cash flow from investing activities usually reflects the change in company’s net fixed assets.



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