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Cash Flow Statement

The document provides an analysis of cash flow statements, defining key concepts such as cash, net cash flows, and the purpose of cash flow statements. It outlines the differences between cash flows and accrual income measures, details the reporting activities of operating, investing, and financing activities, and explains the construction of cash flow statements using both indirect and direct methods. Additionally, it includes a practical example involving financial data for Gould Corporation and Zett Corporation to illustrate the preparation of cash flow statements.

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rammprasadsaha
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3 views

Cash Flow Statement

The document provides an analysis of cash flow statements, defining key concepts such as cash, net cash flows, and the purpose of cash flow statements. It outlines the differences between cash flows and accrual income measures, details the reporting activities of operating, investing, and financing activities, and explains the construction of cash flow statements using both indirect and direct methods. Additionally, it includes a practical example involving financial data for Gould Corporation and Zett Corporation to illustrate the preparation of cash flow statements.

Uploaded by

rammprasadsaha
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Analysis of Cash flow statement

Q1: What is Cash?


Answer: Cash is the residual balance from cash inflows less cash outflows for all prior
periods of the company.
Q2: Define Net cash flows.
Answer: Net cash flows or simply cash flows, refers to the current period’s cash inflows
less cash outflows.
Q3: How cashflows are different from accrual income measures of performance?
Answer: Cash flow measures recognize inflows when cash is received but not necessarily
earned, and they recognize outflows when cash is paid but the expenses are not necessarily
incurred.
Q4: Purpose of the statement of cash flows.
Answer: To provide information on cash inflows and outflows for a period. It is also
distinguishes among sources and uses of cash flows by separating them into operating,
investing, and financing activities.
Q5: Cash flow statement analysis helps in assessing liquidity, solvency, and financial
flexibility. – Do you agree or not
Answer:
Liquidity: is the nearness to cash of assets and liabilities.
Solvency: is the ability to pay liabilities when they mature.
Financial flexibility: is the ability to react and adjust to opportunities and adversities.
Q6: Reporting Activities
Answer:
Operating Activities: are the earning-related activities of a company. Beyond revenue and
expense activities represented in an income statement, they include the net inflows and
outflows of cash resulting from related operating activities like extending credit to
customers, investing in inventories, and obtaining credit from suppliers. Operating
activities relate to income statement items (with minor exceptions) and to balance sheet
items relating to operations—usually working capital accounts like receivables, inventories,
prepayments, payables, and accrued expenses.
[Notes: Income Statement, Current Assets, and liabilities of the Balance sheet.
Basic Items: (i) Non-cash operating expenses (depreciation, amortization),
(ii) Gain or loss of fixed assets and investment, and
(iii) Increase or decrease of current assets and current liabilities.
Shortcut: Favorable (-), Unfavorable (+)]

Investing Activities: Investing activities are means of acquiring and disposing of noncash
assets. These activities involve assets expected to generate income for a company, such as
purchases and sales of PPE and investment in securities. They also include lending funds
and collecting the principal on these loans.
[Notes: Investment and Fixed Assets of the Balance sheet
Basic Item: (i) Purchase or sale of Fixed assets (ii) Purchase or sale of investment.
Shortcut: Cash inflow (+), Cash outflow (-). ]
Financing Activities: Financing activities are means of contributing, withdrawing, and
servicing funds to support business activities. They include borrowing and repaying funds
with bonds and other loans. They also include contributions and withdrawals by owners
and their return (dividends) on investment.
[Notes: Long-Term liabilities and Owners Equity
Basic Items: (i) issue or redemption of debenture or bond., (ii) issue or repurchase of
common stock, (iii) Cash dividend paid, (iv) purchase or reissue of treasury stock
Shortcut: cash inflow (+), Cash outflow (-) ]
Q7: Constructing the Cash Flow Statement:
Answer:
There are two acceptable methods for reporting cash flows from operations, the indirect
and direct methods. While both methods yield identical bottom-line results, their format
differs.
With the indirect method, net income is adjusted for noncash income (expense) items and
accruals to yield cash flows from operations. An advantage of this method is the disclosure
of a reconciliation of differences between net income and operating cash flows. This can
aid some users that predict cash flows by first predicting income and then adjusting income
for leads and lags between income and cash flows— that is, using the noncash accruals.
The indirect method is most commonly employed in practice and we use it initially to
illustrate preparation of the statement of cash flows.
Computation of the statement of cash flows using the direct method is provided
subsequently for comparison. This method adjusts each income item for its related accruals
and, arguably, provides a better format to assess the amount of operating cash inflows
(outflows). The format for computing net cash provided by investing and financing
activities is the same for both methods. Only the preparation of net cash flows from
operations differs.
Q8: The income statement and Balance sheet of Gould Corporation are presented below,
respectively. The following additional information about Gould for Year 2 is available:
1. The company purchased a truck during the year at a cost of $30,000 that was financed
in full by the manufacturer.
2. A truck with a cost of $10,000 and a net book value of $2,000 was sold during the year
for $7,000. There were no other sales of depreciable assets.
3. Dividends paid during Year 2 are $51,000.

Balance Sheet:
Answer:
Q9: A colleague who is aware of your understanding of financial statements asks for help
in analyzing the transactions and events of Zett Corporation. The following data are
provided:

Continue:

Additional data for the period January 1, Year 2, through December 31, Year 2, are:
1. Sales on account, $70,000.
2. Purchases on account, $40,000.
3. Depreciation, $5,000.
4. Expenses paid in cash, $18,000 (including $4,000 of interest and $6,000 in taxes).
5. Decrease in inventory, $2,000.
6. Sales of fixed assets for $6,000 cash; cost $21,000 and two-thirds depreciated (loss or
gain is included in
income).
7. Purchase of fixed assets for cash, $4,000.
8. Fixed assets are exchanged for bonds payable of $30,000.
9. Sale of investments for $9,000 cash.
10. Purchase of treasury stock for cash, $11,500.
11. Retire bonds payable by issuing common stock, $10,000.
12. Collections on accounts receivable, $65,000.
13. Sold unissued common stock for cash, $1,000.

Required:
a. Prepare a statement of cash flows (indirect method) for the year ended December 31,
Year 2.
b. Prepare a side-by-side comparative statement contrasting two bases of reporting: (1) net
income and (2) cash flows from operations.
c. Which of the two financial reports in (b) better reflects profitability? Explain.

CA – CL =
CA/CL = C

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