Financial Acocunting

SUMMARY NOTES - STATEMENT OF CASH FLOWS

        Chapter 6 Weil/Schipper/Francis

I) INTRODUCTION

The statement of cash flows is required of all companies by Statement of Financial Accounting Standards #95 (SFAS 95).  The statement of cash flows details the causes of inflows and outflows of cash during the period.  SFAS 95 provided the following rationale for requiring firms to disclose cash information:

        .... a statement of cash flows should be required to help investors, creditors, and others assess future cash flows, provide feedback about actual cash flows, evaluate the availability of cash for dividends and investment and the enterprise's ability to finance growth from internal sources, and reasons for differences between net income and net cash flows (SFAS 95, Appendix B, paragraph 49).

Until 1987, different forms of the cash flow statement were acceptable :

1. Working capital  Funds Statement

2. Cash Basis  the statements we have today. Cash is cash and cash equivalents, which include shortterm highly liquid investments such as treasury bills and commercial paper.

3. SFAS 95 (Statement of Financial Accounting Standards No. 95) required the cash flow statement on a cash basis.

C. Three sections of the Cash Flow Statement

       1. Operating

           a. Cash receipts vs. cash expenditures of normal operating activities.

           b. Can be negative

           c. Most firms use the so-called "indirect method" to prepare this section

               of the statement.  This means that they start with net income to get

               cash from operations and "undo" accrual effects to get cash from

               operations.  (More shortly)

        2. Investing

           Cash effects of

           a. Purchases of PPE

           b. Purchase of debt and equity securities of other firms.

           c. Sale of PPE (cash received)

           d. Sale of debt and equity securities of other firms.

        3. Financing

           a. Issuance of debt

           b. Issuance of equity securities

           c. Payment of dividends

           d. Repurchase of stock

           e. Repurchase of debt

        4. Supplemental Information

           1. Cash paid for interest and taxes (not  the same as the expense)

           2. Noncash investing and financing activities

                       a) Buy equipment with debt; sign capital leases;

                        In theory the statement should help the user reconcile