Chapter 14: Summary Handout for Students

1. Statement of cash flow reports cash receipts and cash payments and helps:
o

Predict future cash flows

Evaluate management decisions

Predict ability to pay debts and dividends

2. Cash includes cash and cash equivalents

o

The change in cash from the prior year is the key reconciling figure for the statement of
cash flows

3. Statement can be prepared using the indirect or direct methods which refers to how the net cash
flows provided by operating activities section is prepared
4. Three basic types of cash-flow activities
o

Operating activities (items illustrate indirect method)

Net Income

Depreciation, Depletion, and Amortization Expenses

Gains and Losses on the Disposal of Long-Term Assets

Changes in Current Assets and Current Liabilities

an increase in a current asset (other than cash) and a decrease in a current

liability both cause a decrease in cash

a decrease in a current asset (other than cash) and an increase in a current

liability both cause an increase in cash

Investing activities

Increase and decrease long-term assets

Include purchases and sales of long-term investments

Financing activities

Increase and decrease long-term liabilities and equity

Include issuing stock, paying dividends, and buying and selling treasury stock

Include borrowing money and paying off loans

Calculate the net change in cash and reconcile to the ending cash balance

In addition, report noncash investing and financing activities

5. Use Free Cash Flow to help evaluate and manage operations

o

Free cash flow = Net cash provided by operating activities Cash payments planned for
investments in long-term assets Cash dividends

6. Net cash flows from operating activities can also be determined using the direct method
o

Calculate cash receipts including collections from customers, interest, and dividends
received

Calculate cash payments including payments: to suppliers, to employees, for interest, and for
income tax