Chapter 12
Statement of Cash Flows
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The primary purpose of the statement of cash flows is 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 the period.
o Operating Activities: include the cash effects of transactions that create
revenues and expenses and thus enter into the determination of net
income.
 Usually involve income statement items
o Investing Activities: include (a) purchasing and disposing of
investments and productive long-lived assets using cash and (b) lending
money and collecting the loans.
 Usually involve changes in investments and long-term assets
o Financing Activities: include (a) obtaining cash from issuing debt and
repaying the amounts borrowed and (b) obtaining cash from stockholders
and paying them dividends.
 Usually involve long-term liability and stockholder’s equity items
Please, carefully look over Illustration 12-1, page 588
Significant financing and investing activities that do not affect cash are not
reported in the body of the statement of cash flows, rather they are reported at
the bottom of the statement as a note or supplementary schedule. Examples:
o Issuance of common stock to purchase assets
o Conversion of bonds into common stock
o Issuance of debt to purchase assets
o Exchanges of plant assets
There are two ways to compute statement of cash flows:
o The Indirect Method: is the most commonly used because it is easier to
prepare, it focuses on the differences between net income and net cash
flow from operating activities, and it tends to reveal less company
information to competitors. (Example: page 602)
o The Direct Method: this is the method FASB prefers, but is not
commonly used it practice. The only difference between the two methods
lies in the operating activities section. All the other parts of the statement
remain the same. (Example: page 618)
 HOMEWORK:
o Brief Exercises: 1, 2
o Exercise: 1, 2