Statement of Cash Flows
The statement of cash flows reports cash inflows and outflows during a period, classified into operating, investing, and financing activities.
Explanation
Operating activities include cash effects of transactions that enter into the determination of net income — customer collections, payments to suppliers, interest and taxes. Investing activities involve acquiring and disposing of long-term assets and investments. Financing activities relate to obtaining and repaying capital from owners and creditors.
The operating section can be prepared using the direct method (reporting major classes of receipts and payments) or the indirect method (adjusting net income for non-cash items and working capital changes). The indirect method is far more common in practice. The statement must also disclose significant noncash investing and financing activities separately.
Key Points
- •Three classifications: operating, investing, financing
- •Indirect method adjusts net income for non-cash items and working capital changes
- •Interest paid and received are operating activities under U.S. GAAP
- •Dividends paid are financing; dividends received are operating
Exam Tip
Know the indirect method cold — especially how to adjust for depreciation, gains/losses on asset sales, and changes in working capital accounts.
Frequently Asked Questions
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Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
Bonds and Long-Term Debt
Bond accounting involves recording the issuance, interest expense, amortization of premiums or discounts, and retirement of bonds payable using the effective interest method.
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