Question

(Purpose and Elements of SCF)

GAAP requires the statement of cash flows be presented when financial statements are prepared.

Instructions

(a)  

Explain the purposes of the statement of cash flows.

(b)  

List and describe the three categories of activities that must be reported in the statement of cash flows.

(c)  

Identify and describe the two methods that are allowed for reporting cash flows from operations.

(d)  

Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a noncash investing and financing transaction.

Answer 1

As per GAAP Financial statement includes statement of cash flows, because statement of cash flows should be presented when financial statement are prepared. Financial statement consists of profit and loss account, balance sheet, change in equity, statement of cash flows and other notes to accounts.

Statement of cash flows presents movement of cash and cash equivalents of the entity, change in cash and cash equivalents are dividend into three categories.

Statement of cash flows are prepared in 3 different activities, which are 1, Operating activity 2, Investing activity and 3, Financing activity. Operating activity in which daily operating cash flows are reported, investing activity in which all assets related cash flows are reported, Financial activity in which liabilities and owner's equity related cash flows are reported.

Statement of cash flows may be presented in one of two different methods 1, Direct method and 2, Indirect method. In two methods only difference is presentation of operating activities. direct method operating activities section is start off receipts from customers and payment to suppliers. And indirect method operating activities section is start off net profit and additions of non cash transaction and non operating transaction and so on.

Cash flows statement Never present non cash transaction but where as financial statement should present every transaction irrespective of cash transaction or non cash transaction, non cash investing and financing transaction should present in financial statement, examples of those transaction : Purchase of equipment in exchange of own shares, repayment of long term debt with own shares and securities and sales of machinery for a consideration of shares and securities.