Chapter 5 – Statement of Cash Flows

What is a statement of cash flows? What are the three major sections of the statement
Explain the importance of a statement of cash flows to users of financial information
What are cash equivalents? Give examples.
What are the two ways to calculate and report a company’s net cash flows from operating
activities? Briefly describe each method
5. Give at least three examples of (a) cash inflow from investing activities and (b) cash outflows for
investing activities
6. Give at least three examples of (a) cash inflow from financing activities and (b) cash outflows for
financing activities
7. Give examples of non-cash investing and financing activities included in the supplementary
disclosures of a statement of cash flows
A statement of cash flows is an essential component within the set of basic financial statements. It
provides information about the cash receipts and cash disbursements of an entity during a period. It
answers the questions of where the money came and where it went. As an analytical tool, it is useful in
determining the short-term viability of an entity particularly its ability to pay its obligations
Users of accounting information are particularly interested in the enterprise’s cash flow because they
need to assess the ability of the enterprise to remain solvent - to pay its expenses, repay debts and
provide returns to investors and creditors
Users of an enterprise’s financial statements are interested in how an enterprise generates and uses
cash and cash equivalents. This is the cash needed in the conduct of its operations, for payment of its
obligations, and in providing returns to its investors
Cash equivalents are short-term, highly liquid investments that are both  readily convertible to known amounts of cash, and
 are subject to an insignificant risk of changes in value
Examples of items considered as cash equivalents are treasure bills, commercial papers, and money
market instruments with original maturities of three months or less from the date of acquisition.
Cash flows from operating activities shall be reported using either:
a. the direct method, whereby major classes of gross cash receipts and gross cash payments are
disclosed; or
b. the indirect method, whereby the profit or loss is adjusted for the effects of transactions for a
non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments,
and items of income or expense associated with investing or financing cash flows.