Original Question: (Do not reply to this one)
Define and discuss the three major sections of the statement of cash flows with appropriate examples.
Student Discussions:
Reply to each student posts by commenting about their posts and building on the subject (About 100 words each) APA reference.
APA reference. Any sources including, but not limited to:
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017).Financial accounting theory and analysis: Text and cases(12th ed.). Hoboken, NJ: Wiley.
1-Maurice Naylon
Define and discuss the three major sections of the statement of cash flows with appropriate examples.
“The cash inflows and outflows of a business are of primary importance to investors and creditors,” as this information should “enable investors to (1) predict the amount of cash that is likely to be distributed as dividends or interest in the future and (2) evaluate the potential risk of a given environment” (Schroeder et al, 2017, p. 227).Recognizing this importance, the SEC now mandates that publicly-traded companies publish a statement of cash flows quarterly – in addition to the other three financial statements.Specifically, SFAC No. 1 places significant emphasis on cash flows, stating that “effective financial reporting must enable investors, creditors, and other users to (1) assess the cash-flow prospects and (2) to evaluate the liquidity, solvency, and flow of funds” (Schroeder et al, 2017, p. 227). To accomplish these ends, the statement of cash flows is divided into three major sections: cash flow from operating activities, investing activities, and financing activities.
Cash flows from operating activities include “the cash effect from transactions that enter into the determination of net income exclusive of financing and investing activities” (Schroeder et al, 2017, p. 229).With some exceptions, this category represents change in cash caused by a company’s primary business operations.For an auto mechanic, cash receivedfor conducting an oil change would be accounted for in this statement. Similarly, cash spent for the oil used in that oil change would represent an outflow in the operating activities section.Next, investing activities include “making and collecting loans; acquiring and disposing of debt or equity securities of other companies; and acquiring and disposing of property, plant, and equipment as well as other productive resources” (Schroeder et al, 2017, p. 232).Extending the above example, if the owner of the auto shop used cash to purchase a new lift, that equipment purchase would be an outflow of cash in the investing activities section.Lastly, financing activities “result from obtaining resources from owners, providing owners with a return of and on their investment, borrowing money and repaying the amount borrowed, and obtaining and paying for other resources from long-term creditors” (Schroeder et al, 2017, p. 232).If the owner of the above garage wanted to expand by purchasing an adjacent lot – but didn’t have cash on hand for the purchase – securing a loan from a bank for the purchase would qualify as an investing activity. Similarly, if the owner preferred an equity-financing situation, raising money to buy the adjacent lot by selling shares in the business would also qualify as a financing activity.
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017). Financial accounting theory and analysis: Text and cases (12th ed.). Hoboken, NJ: Wiley.
2-Madeline Martin
The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period (Book). The three major sections of the statement of cash flows are cash from operating activities, cash from investment activities, cash from financing activities. According to an article written by Tara Kimball in Chron, cash from operating activities illustrates the cash a business received and used during normal operating activities. It also details the changes in the ledger account balances for current assets and current liabilities. Examples of cash from operating activities are cash paid to repurchase common stock, cash paid to retire debt or dividends paid.
Cash from investment activities, the second section is dedicated to investment activities (Book). This includes all of a company’s investments (inflows and outflows). An example would be if a company sells long-term investments, plant or property and receives cash, thus increasing the company cash.
Lastly, the third section, according to investor guide describes cash flow from financing activities as where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. Examples repayment of a long-term debt, paying cash dividends to shareholders or receiving cash from issuing debt.
http://www.investorguide.com/article/11625/the-three-parts-of-cash-flow-statements-explained-igu/
Kimball, Tara. (2019, January 28). The Three Parts of a Cash Flow Statement.Small Business - Chron.com. Retrieved fromhttp://smallbusiness.chron.com/three-parts-cash-flow-statement-43816.html
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017).Financial accounting theory and analysis: Text and cases(12th ed.). Hoboken, NJ: Wiley