Financial Statements

Summarized Statement Format

Purposes and Uses

The purpose of the SCF is to provide information about the sources of cash (i.e., cash
receipts) and cash equivalents and the uses (i.e., cash disbursements) of cash and cash
equivalents. The cash basis is used because investors, creditors, shareholders, vendors,
regulators, taxing entites, and other interested parties need information about the entity's
available cash and cash needs (i.e., ability to pay obligations, dividends, etc.). Information
concerning an entity's cash inflows and outflows during the period aids in the assessment of
an entity's liquidity (how quickly items are converted into cash) and solvency (ability to
satisfy debt requirements). The statement can also provide answers to questions such as:
• How successful are the entity's operations at generating cash?
• Why is there a difference between net income and operating cash flows?
• Is the entity using investments to strengthen its operating capacity?
• Will vendors receive payments in a timely manner?
• Will the entity have the cash to make tax payments when they come due?
• Is cash being generated to cover future dividend payments?
• Why did the dividend payments not match the level of income earned?
• Will the entity have enough cash available to cover its principal and interest debt
obligations?
• How much outside financing is it using to support operations?
• How much cash was brought in because of operations as opposed to external
financing by
• using debt or equity, or both?
• Was cash used to purchase treasury stock?

Compiled by CA Aashish B Chandak

 • Is the entity building up its investment in long-term assets or liquidating them?
• What is the possibility of generating future cash inflows?
• Are those future cash flows able to satisfy the entity's obligations to its creditors?

Components and Classifications

The SCF includes three major sections: operating activities, investing activities, and
financing activities, and a separate schedule of significant noncash investing and financing
activities.

Operating Activities

The operating activities section relates to transactions involved in the production of goods
and the delivery of services to customers. Operating activities consist of cash receipts and
disbursements from transactions reported on the income statement and related to current
assets and liabilities, except those classified as investing or financing activities. Examples
include sales of products/services, payments to employees, inventory purchases, payment and
receipt of interest, purchases and sales of trading securities (if classified as current), payments
of account payables, and receipts of accounts receivable.

Investing Activities
This section includes cash flows from the purchase or sale of non-current assets. Some
examples are:
• making loans to other entities (cash outflow);
• purchasing (cash outflow) or disposing of (cash inflow) trading securities (if classified
as non-current), available-for-sale securities, and held-to-maturity investment
securities.
• acquiring (cash outflow) or disposing of (cash inflow) property, plant, and equipment
(productive assets); and
• acquiring another entity under the acquisition method using cash (cash outflow). The
payment for the acquisition is shown net of the cash acquired.

Compiled by CA Aashish B Chandak

Financing Activities
Financing activities include cash flows from non-current liability (creditor-oriented) and
equity (owner-oriented) transactions. Examples include:
• Non-current Liability (Creditor-Oriented) Activities
— Obtaining resources from creditors, such as issuing bonds, notes, and other borrowings
(cash inflow).
— Payments of principal (not interest, which is part of the operating activities section) on
amounts borrowed (cash outflow).
• Equity (Owner-Oriented) Activities
— Obtaining resources from owners, such as issuing stock (cash inflow).
— Providing owners with a return on their investment, such as paying cash dividends or
repurchasing stock (cash outflow).

Q.1 Cash Flow Classifications

Compiled by CA Aashish B Chandak

Q.2 Cash Flow from Operations

Facts: Fryar Corp., a wholesaler-retailer, is in the process of preparing its statement of cash

flows using the following balance sheet and income statement information for Year 2.

Required: Prepare the operating section of the statement of cash flows using the

indirect method from the following data.

Compiled by CA Aashish B Chandak

Q.3 Cash Flow from Investing and Financing

Facts: Fryar Corp. had the following investing and financing transactions during the period:

1. Equipment was sold that had a cost of $30,000 and accumulated depreciation of
$10,000. The equipment was sold for a $15,000 gain.
2. A building was sold at the beginning of the year at book value. The building had an
original cost of $120,000 with $40,000 of accumulated depreciation.
3. A note payable was issued in exchange for land in the amount of $100,000.
4. The company borrowed $60,000 by issuing a long-term note payable.
5. A $5,000 loss was recorded from the retirement of bonds, which the company had
previously issued. The net carrying value on the books at the time of retirement was
$100,000.
6. A purchase of held-to-maturity securities for $55,000 was made at the end of the
current year. The face value of these securities was $50,000.
7. A finance lease obligation was used to acquire equipment on the last day of the year.
The present value is equal to $125,000 and no down payment was required.
8. Sale of trading securities at $23,000 originally purchased at face value for $20,000.
9. Declaration and payment of a $10,000 cash dividend to common stockholders.

Required: Prepare the investing activities section and the financing activities section for the
year. Assume that investments in trading securities are classified as non-current assets.

Compiled by CA Aashish B Chandak

Q.4

Compiled by CA Aashish B Chandak