Cash flow concept.
Hope this will simplifies the cash flow concept for students, this is one of the important questions in the view point of examination.
* When an asset (other than cash) increases, the Cash account decreases.
* When an asset (other than cash) decreases, the Cash account increases.
* When a liability increases, the Cash account increases.
* When a liability decreases, the Cash account decreases.
* When owner's equity increases, the Cash account increases.
* When owner's equity decreases, the Cash account decreases.
Real Accounts-
Debit
What comes in
Credit
What goes out
Personal Accounts
Debit
The receiver
Credit
The giver
Nominal Accounts
Debit
Expenses and losses
Credit
Incomes and gains
Format of the Statement of Cash Flows
The statement of cash flows has four distinct sections:
1. Cash involving operating activities
2. Cash involving investing activities
3. Cash involving financing activities
4. Supplemental information.
Assuming that the cash flow statement is being prepared using the indirect method (the method used by most companies) the differences in a company's balance sheet accounts will provide much of the needed information. For example, if the statement of cash flows is for the year 2012, the balance sheet accounts at December 31, 2012 will be compared to the balance sheet accounts at December 31, 2011. The changes—or differences—in these account balances will likely be entered in one of the sections of the statement of cash flows.
Shown below is each of the four sections of the statement of cash flows, followed by a list of those balance sheet accounts which affect it.
1. Cash Provided From or Used By Operating Activities
This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as:
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Other Current Assets
Notes Payable (generally due within one year)
Accounts Payable
Wages Payable
Payroll Taxes Payable
Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities
In addition to using the changes in current assets and current liabilities, the operating activities section has adjustments for depreciation expense and for the gains and losses on the sale of long-term assets.
2. Cash Provided From or Used By Investing Activities
This section of the cash flow statement reports changes in the balances of long-term asset accounts, such as:
Long-term Investments
Land
Buildings
Equipment
Furniture & Fixtures
Vehicles
In short, investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment.
3. Cash Provided From or Used By Financing Activities
This section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as:
Notes Payable (generally due after one year)
Bonds Payable
Deferred Income Taxes
Preferred Stock
Paid-in Capital in Excess of Par-Preferred Stock
Common Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital from Treasury Stock
Retained Earnings
Treasury Stock
In short, financing activities involve the issuance and/or the repurchase of a company's own bonds or stock. Dividend payments are also reported in this section.
4. Supplemental Information
This section of the cash flow statement discloses the amount of interest and income taxes paid. Also reported are significant exchanges not involving cash. For example, the exchange of company stock for company bonds would be reported in this section.
Where To Enter The Balance Sheet Changes
Take a look at the summary below—it shows where the changes in balance sheet accounts should be entered on your statement of cash flows:
A change in this
balance sheet category
...is reported in this section
of the cash flow statement
Current Assets*
Operating Activities
Current Liabilities
Operating Activities
Long-term Assets
Investing Activities
Long-term Liabilities
Financing Activities
Stockholders' Equity
Financing Activities
*This refers to current assets other than Cash.
* When an asset (other than cash) increases, the Cash account decreases.
* When an asset (other than cash) decreases, the Cash account increases.
* When a liability increases, the Cash account increases.
* When a liability decreases, the Cash account decreases.
* When owner's equity increases, the Cash account increases.
* When owner's equity decreases, the Cash account decreases.
Real Accounts-
Debit
What comes in
Credit
What goes out
Personal Accounts
Debit
The receiver
Credit
The giver
Nominal Accounts
Debit
Expenses and losses
Credit
Incomes and gains
Format of the Statement of Cash Flows
The statement of cash flows has four distinct sections:
1. Cash involving operating activities
2. Cash involving investing activities
3. Cash involving financing activities
4. Supplemental information.
Assuming that the cash flow statement is being prepared using the indirect method (the method used by most companies) the differences in a company's balance sheet accounts will provide much of the needed information. For example, if the statement of cash flows is for the year 2012, the balance sheet accounts at December 31, 2012 will be compared to the balance sheet accounts at December 31, 2011. The changes—or differences—in these account balances will likely be entered in one of the sections of the statement of cash flows.
Shown below is each of the four sections of the statement of cash flows, followed by a list of those balance sheet accounts which affect it.
1. Cash Provided From or Used By Operating Activities
This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as:
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Other Current Assets
Notes Payable (generally due within one year)
Accounts Payable
Wages Payable
Payroll Taxes Payable
Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities
In addition to using the changes in current assets and current liabilities, the operating activities section has adjustments for depreciation expense and for the gains and losses on the sale of long-term assets.
2. Cash Provided From or Used By Investing Activities
This section of the cash flow statement reports changes in the balances of long-term asset accounts, such as:
Long-term Investments
Land
Buildings
Equipment
Furniture & Fixtures
Vehicles
In short, investing activities involve the purchase and/or sale of long-term investments and property, plant, and equipment.
3. Cash Provided From or Used By Financing Activities
This section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as:
Notes Payable (generally due after one year)
Bonds Payable
Deferred Income Taxes
Preferred Stock
Paid-in Capital in Excess of Par-Preferred Stock
Common Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital from Treasury Stock
Retained Earnings
Treasury Stock
In short, financing activities involve the issuance and/or the repurchase of a company's own bonds or stock. Dividend payments are also reported in this section.
4. Supplemental Information
This section of the cash flow statement discloses the amount of interest and income taxes paid. Also reported are significant exchanges not involving cash. For example, the exchange of company stock for company bonds would be reported in this section.
Where To Enter The Balance Sheet Changes
Take a look at the summary below—it shows where the changes in balance sheet accounts should be entered on your statement of cash flows:
A change in this
balance sheet category
...is reported in this section
of the cash flow statement
Current Assets*
Operating Activities
Current Liabilities
Operating Activities
Long-term Assets
Investing Activities
Long-term Liabilities
Financing Activities
Stockholders' Equity
Financing Activities
*This refers to current assets other than Cash.
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