The Statement of Cash Flows
This section exposes you to one of the four major financial statements, the "Statement of Cash Flows". It explains how to create and interpret the statement and discusses the three major activities that produce cash for a firm – operating, investing, and financing.
The operating cash flows refers to all cash flows that have to do with the actual operations of the business, such as selling products.
Distinguish events that would affect the operating section of the cash flow statement from all of the business's other transaction
- Operating cash flows refers to the cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities (these are investing or financing activities).
- GAAP and IFRS vary in their categorization of many cash flows, such as paying dividends. Some activities that are operating cash flows under one system are financing or investing in another.
- Major operating activities such as manufacturing products or selling a product may appear on the income statement but not on the cash flow statement, because cash has not yet changed hands.
International Financial Reporting Standards. The major accounting standards system used outside of the United States.
Generally Accepted Accounting Principles refer to the standard framework of guidelines, conventions, and rules accountants are expected to follow in recording, summarizing, and preparing financial statements in any given jurisdiction.
The operating cash flows component of the cash flow statement refers to all cash flows that have to do with the actual operations of the business. It refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities (these are investing or financing activities). Essentially, it is the difference between the cash generated from customers and the cash paid to suppliers.
Cash flows from operating activities can be calculated and disclosed on the cash flow statement using the direct or indirect method. The direct method shows the cash inflows and outflows affecting all current asset and liability accounts, which largely make up most of the current operations of the entity. Those preparers that use the direct method must also provide operating cash flows under the indirect method. The indirect method is a reconciliation of the period's net income to arrive at cash flows from operations; changes in current asset and liability accounts are added or subtracted from net income based on whether the change increased or decreased cash. The indirect method must be disclosed in the cash flow statement to comply with U.S. accounting standards, or GAAP.
|Transaction US GAAP||Classification||IF RS Classification|
|Interest Received||Operating||Operating or Investing|
|Dividends Received||Operating||Operating or Investing|
|Interest Paid||Operating||Financing or Operating|
|Dividends Paid||Financing||Financing or Operating|
|Income Taxes||Operating||Operating unless specifically associated with financing or investing activity|
US GAAP vs. IFRS Cash Flow Classification: Some transactions may be classified as different types of cash flows under GAAP and IFRS accounting standards.
One major difference between GAAP and IFRS is how interest paid is categorized. Under GAAP, a loan payment would have to be broken down into two parts: the payment on principal (financing) and the payment of interest (operating). Under IFRS, it is possible to categorize both as financing cash flows.
All of the major operating cash flows, however, are classified the same way under GAAP and IFRS. The most noticeable cash inflow is cash paid by customers. Cash from customers is not necessarily the same as revenue, though. For example, if a company makes all of its sales by extending credit to customers, it will have generated revenues but not cash flows from customers. It is only when the company collects cash from customers that it has a cash flow.
Significant cash outflows are salaries paid to employees and purchases of supplies. Just as with sales, salaries, and the purchase of supplies may appear on the income statement before appearing on the cash flow statement. Operating cash flows, like financing and investing cash flows, are only accrued when cash actually changes hands, not when the deal is made.
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