COMMERCE 1AA3 Lecture Notes - Lecture 12: Cash Flow Statement, Treasury Stock, Cash Flow
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Statement of Cash Flows
Uses of the Statement of Cash Flows
1. Predict future cash flows
2. Evaluate management decisions
3. Determine ability to pay dividends and interest
4. Asses the relationship of net income to cash flows
5. Compare the operating performance of different companies
• All cash flows associated with day to day business (ex ingredients for
• Create revenue, expenses, gains and losses
• Mainly related income statement items, current assets, and current
liabilities. ex. Receiving cash dividends
• Operating activities are the most important of the three categories
because they reflect the core of the organization. A successful business
must generate most of its cash from operating activities.
• Non recurring always cash outflow first followed by a cash inflow later
• Mainly related to long-term assets and investments
• Activities increase and decrease long-term assets, such as computers,
land, buildings, equipment, and investments in other companies.
Purchases and sales of these assets are investing activities. Investing
activities are important, but they are less critical than operating activities.
• Non recurring cash inflow first and cash outflow later (ex. bank loan)
• Relate to long-term liabilities and owners’ equity
• Mainly related to long-term liabilities and owners’ equity
• Obtain cash from investors and creditors. Issuing stock, borrowing money,
buying and selling treasury stock, and paying cash dividends are financing
activities. Paying off a loan is another example. Financing cash flows
relate to long-term liabilities and owners’ equity
• ex. Paying cash dividends
Purpose of the Statement of Cash Flows
• To provide information about cash receipts, cash payments, and the net
change in cash resulting from the operating, investing, and financing
activities of a company during a specific period.
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The cash flow statement is prepared differently from other basic financial
• First, because the statement requires detailed information concerning the
changes in account balances that occurred between two periods of time,
an adjusted trial balance does not provide the data necessary for the
• Second, the cash flow statement deals with cash receipts and payments.
The accrual concept is not used in the preparation of a cash flow
Sources for Preparing the Statement
• Comparative balance sheet
• Current income statement
• Additional information
Cash from Operating Activities
• Cash from operating activities results from converting net income from the
accrual basis to the cash basis.
• Cash from operating activities can be calculated using one of two
▫ The indirect method
▫ The direct method
▫ Both methods give the same result
The Indirect Method
• Net income is adjusted for non-cash transactions, for any deferrals or
accruals of past or future operating cash receipts or payments, and for
items of income or expense associated with financing/investing activities
Most companies prefer this method because it:
• is easier to prepare,
• focuses on the differences between net earnings and net cash flow from
operating activities, and reveals less company information to competitors
The indirect method begins with net income, then adjust that number to calculate
operating cash flows Example:
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