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

(a) The primary purpose of the statment of cash flows is to provide information about cash reciepts, cash payments and the net change in cash.

(b)Three categories are:

•Operating activities- It means flow of cash and cash equivalents from principal revenue generating activities and incidental items.

•Investing activities- It means cash and cash equivalents arising from flow of cash from fixed assets and investments.

•Financing activities-It means flow of cash and cash equivalents arising from cost of capital and loan.

(c) Two methods for operating activities are- direct and indirect method. Direct method ie easier, as it takes into account all major classes of cash reciepts and payments to arrive a net cash position. Whereas indirect method uses comapny's income statment as a starting point before making adjustments for all cash and non cash related items.

(d) Non cash investing- purchase of an asset by issuing stock or bonds

Non cash finance- Conversion of debt into stock