Matching principle, match expenses to revenue
Chapter 18: The statement of Cash Flows
After studying this chapter, you should be able to:
1: indicate the primary purpose of the statement
2: distinguish among operating, investing, and financining activities.
3: prepare a statement of cash flows
Go to the Journal Entry and ask: where’s the cash?
Look at something at gross; you will have the balance sheet from the beginning of the year and
the end of the year (cash)
Operating, investing and the financing sections
2 out of the 3 are same regardless which method you’re using. Operating is the odd ball; the
input and output are computed are different
Accrual method: when it’s received or paid
AP and AR’s
Change from accrual to cash
Go to the journal entry if there’s any cash
Indirect v. direct: input and output methods
Primary purpose: provide info of cash, operating and investing; where did the cash come from during
the period? What was the cash used for? Was there a change in the cash balance in the period?
Statement of change ON MIDTERM; show structure
Dividends to your shareholders are financing activities; interest to your bondholders is an operating
Interest from another company is an operating activity for me
Operating activities shows the companies cash provided by the company
Inflow: sales of goods
Returns of loans
To suppliers for inventory
Employees for services
Noncash activities: on the bottom of the statement or a footnote but IT MUST BE NOTED SOMEWHERE
I.e.: insurance of common stock to purchase assets; Convert stock to bonds, issue debts to get
assets; exchange of plant assets
Compute the change between balance and the end of the year!
AR is revenues but they might not have been received; AP is operating expenses
Direct is more specific on the recording while indirect is less specific.
Purchasing equipment is an investing
Read but will not be held responsible of direct method
Methony and breeker