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Since 1987, a Cash Flow Statement (CFS) has been required as part of a corporation's financial reporting. It is used in conjunction with the balance sheet and the income statement. It displays the sums of cash and equivalents collected and remitted by an agency. It is important because it allows stakeholders to consider the entity's everyday operations, the basis of its finances, and its spending. A cash balance statement is made up of operations, expenses, and borrowing (Weygandt et al. 656).
The CFS format differs from the income statement and balance sheet formats. Unlike the other two, the CFS format does not include the incoming and outgoing cash figures that are reduced to credit. Hence, cash cannot be considered as being similar to net income.
This item measures cash inflows and outflows caused by core business operations.it reflects how much cash is generated from a company’s products or services.it generally shows changes made in cash, accounts receivables, depreciation, inventory and accounts payable in cash.
Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions arising from one period to other. The adjustments are necessary because non-cash items are calculated into net income and total assets and liabilities. In short, because not all transactions involve actual cash items many items have to be re-evaluated when calculating cash flows from operations e.g. depreciation and it has to be added back into net sales for calculating cash flows (Weygandt et al. 656).
Cash from Investing affects changes in equipment, assets, or investments cash changes from investing are “cash out” item because cash is used to purchase new equipment, buildings, land etc. However, when a company divests of an asset the transaction represents cash in from calculating cash flows from investing.
Simply refers to changes in debt, loans or dividends which are accounted for in cash from investing. When capital is raised, changes in cash from financing are ‘cash in’ and they are “cash out” when dividends are paid.
Recording of transactions
In the second transaction, we can work out the depreciation to be $75500($158000-82500) depreciation is added to the net income because it represents the benefit enjoyed by use of the equipment. This recording will be done in cash from operation section of cash flows.
The loss of $22000 will be added to the net income in the operation section of the cash flows because it represents a decrease in net income
The cash received from this sale is reported as an investing activity. We add this amount because it was received from investing activity. We record this transaction in the investment section of the cash flows statement.in our case we will add $60500 (that is, 82500-22000) i.e. subtracting loss from the net book value to get the selling price.
Increase in current assets and current liabilities are recorded in the operating section of the cash flows statement since their effects arise from core operation activities of the business. Increases in current assets and current liabilities are subtracted while decreases of the same are added.in our case we will deduct $25000 and $5000(increase in merchandise inventory and prepaid insurance. These two items are current assets.
Increase in current liabilities is deducted. Examples of current liabilities include accounts payable, accrued liabilities, and Ir. A decrease in the current liabilities is added. In transaction 3 we have an increase in accounts payable by $12000 and a decrease in unearned sales by $8000.the increase in accounts payable ($12000) shall be deducted in the operation sections of the cash flows statement. On the other hand the decrease in unearned sales (8000) revenue will be added as they reduce cash flows from operation activities.
Normally, transactions involving general use of cash are recorded in the cash flows statement. But since we are dealing with a non-cash transaction we can’t use the exact same technique. Instead, we include a footnote on the bottom of the statement of cash flows or notes of the financial statements or disclose the non-cash investing and financing activity in a separate schedule or list.
In our transaction we will have a disclosure statement showing acquisition of land in exchange of 15000 shares with the corresponding value of the shares. The $10000 above will be treated as a gain on acquisition. i.e. FMV – value of the shares exchanged for the piece of land
The transaction leads to cash inflow from operating activities. We therefore add $500000 in operation section of the cash flows statement. The payment of $200000 dividends to the shareholders leads to cash outflows from operation activities. Therefore, we deduct this value in the operation section of the cash flows statement.
In the operation section, we add the $2500000 because this represents a cash inflow from operation activities. A gain on sale of property represents a cash inflow in the investment activities section of the cash flow statement. For this reason, we add the value ($250000) the depreciation of $300000 represents the benefits enjoyed by the business from use of the plant.so we add and record it in the operations section of the cash flows statement.
Weygandt, Jerry J., Paul D. Kimmel, and Donald E. Kieso. Financial & Managerial Accounting. John Wiley & Sons, 2015.
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