Cash Flow
I. INTRODUCTION
Statement of Cash Flow (Cash Flow Statement) describes the changes in the cash position of a company during specific period of time.
In business as in personal finance, cash flows are essential to solvency.
Solvency can be described as the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.
Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time.
If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.
Basic Structure of Statement of Cash Flows
A. Operating
B. Investing
C. Financing
The indirect method (or reconciliation method) depicts net income as starting entry. It converts the net cash flow from operating activities. In other words, the indirect method adjusts net income for items that affected reported net income but did not affect cash. To compute net cash flow from operating activities, non-cash charges in the income statement are added back to net income and non-cash credits are deducted.
1. Prepare a cash flow statement using the indirect method of computing for cash flow from operations.
Starlight Company
Statement of Cash Flows
For the year ended December 31, xxxx
Operating Activities
Net Income
31,000,000.00
Adjusments to reconcile net income to net cash
Increase in Accounts Receivable
-6,000,000.00
Increase in Inventory
-7,000,000.00
Decrease in Prepaid Expenses
4,000,000.00
Increase in Accounts Payable
1,000,000.00
Decrease in Accrued Liabilities
-2,000,000.00
Decrease in taxes payable
-5,000,000.00
Increase in Deferred Taxes
5,000,000.00
Depreciation
11,000,000.00
Net cash provided by operating activities
1,000,000.00
Investing Activities
Statement of Cash Flow (Cash Flow Statement) describes the changes in the cash position of a company during specific period of time.
In business as in personal finance, cash flows are essential to solvency.
Solvency can be described as the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.
Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time.
If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.
Basic Structure of Statement of Cash Flows
A. Operating
B. Investing
C. Financing
The indirect method (or reconciliation method) depicts net income as starting entry. It converts the net cash flow from operating activities. In other words, the indirect method adjusts net income for items that affected reported net income but did not affect cash. To compute net cash flow from operating activities, non-cash charges in the income statement are added back to net income and non-cash credits are deducted.
1. Prepare a cash flow statement using the indirect method of computing for cash flow from operations.
Starlight Company
Statement of Cash Flows
For the year ended December 31, xxxx
Operating Activities
Net Income
31,000,000.00
Adjusments to reconcile net income to net cash
Increase in Accounts Receivable
-6,000,000.00
Increase in Inventory
-7,000,000.00
Decrease in Prepaid Expenses
4,000,000.00
Increase in Accounts Payable
1,000,000.00
Decrease in Accrued Liabilities
-2,000,000.00
Decrease in taxes payable
-5,000,000.00
Increase in Deferred Taxes
5,000,000.00
Depreciation
11,000,000.00
Net cash provided by operating activities
1,000,000.00
Investing Activities