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ACCO 310 NOTES_Chapter 22.docx

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ACCO 310
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ACCO 310 NotesChapter 22 Statement of Cash FlowsThe purpose of a cash flow statement is to determine a companys sources and uses of cash and cash equivalents Cash equivalents refers to nearcash items that are convertible to cash on short notice say 90 days such as TBills GICs and other lowrisk guaranteed shortterm investments readily convertible to cashA Statement of Cash Flows has 3 partsCash flows from Operating Activities relate to current assetsliabilitiesCash flows from Investing Activities relate to noncurrent assetsCash flows from Financing Activities relate to noncurrent liabilities and equity items such as share issue retirementdividendsNB Interest expense may be an operating or financing item but most examples treat this as an operating itemThe Direct Method and Indirect Method differ only with respect to the presentation of Operating Cash Flows The amount of the operating cash flows is the sameCash Flow Statement ExampleDirect and Indirect MethodUnlike the major financial statements cash flow statement is not prepared from the adjusted trial balance The information to prepare this statement usually comes from three sources1Comparative balance sheets provide the amount of the changes in assets liabilities and equities from the beginning to the end of the period2Current income statement data help the reader determine the amount of cash provided by or used by operations during the period3Selected transaction data from the general ledger provide additional detailed information needed to determine how cash was provided or used during the periodPreparing the statement of cash flows from the data sources above involves three major stepsStep 1 Determine the change in cashcash equivalents if anyThis procedure is straight forward because the difference between the beginning and the ending cash balance can be easily computed from an examination of the comparative balance sheetStep 2 Determine the net cash flow from operating activitiesThis procedure is complex It involves analyzing not only the current years income statement but also comparative balance sheets and selected transitions dataStep 3 Determine net cash flows from investing and financing activitiesAll other changes in the balance sheet accounts must be analyzed to determine their effects on cashCash Flow Statement ExampleA Comprehensive illustrationTo illustrate a statement of cash flows we will use the first year of operations for Tax Consultants Inc The company started on January 1 2003 when it issued 60000 shares of 1 par value 1
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