Analysis Using the Statement of Cash Flows

Read this chapter, which shows how to record cash flow from operating activities on the statement of cash flows. The chapter also provides an overview of cash flows from operating activities and steps in preparing a statement of cash flows, which will be covered in more detail in the resources that follow.

Key terms

Cash flow liquidity ratio Cash and marketable securities plus net cash provided by operating activities divided by current liabilities.

Cash flow margin ratio Net cash provided by operating activities divided by net sales.

Cash flow per share of common stock ratio Net cash provided by operating activities divided by the average number of shares of common stock outstanding.

Cash flows from operating activities The net amount of cash received or disbursed during a given period on items that normally appear on the income statement.

Direct method Deducts from cash sales only those operating expenses that consumed cash.

Financing activities Generally include the cash effects of transactions and other events involving creditors and owners. Cash payments made to settle current liabilities such as accounts payable, wages payable, and income taxes payable are not financing activities. These payments are operating activities.

Indirect method A method of determining cash flows from operating activities that starts with net income and indirectly adjusts net income for items that do not involve cash. Also called the addback method.

Investing activities Generally include transactions involving the acquisition or disposal of noncurrent assets. Examples include cash received or paid from the sale or purchase of property, plant, and equipment; available-for-sale and held-to-maturity securities; and loans made to others.

Noncash charges or expenses Expenses and losses that are added back to net income because they do not actually use cash of the company. The items added back include amounts of depreciation on plant assets, depletion that was expensed, amortization of intangible assets such as patents and goodwill, amortization of discount on bonds payable, and losses from disposals of noncurrent assets.

Noncash credits or revenues Revenues and gains included in arriving at net income that do not provide cash; examples include gains from disposals of noncurrent assets, income from investments carried under the equity method, and amortization of premium on bonds payable.

Operating activities Generally include the cash effects of transactions and other events that enter into the determination of net income.

Statement of cash flows A statement that summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period. Both inflows and outflows are included in each category. The statement of cash flows must be prepared each time an income statement is prepared.

Working capital Equal to current assets minus current liabilities.