Cash payments includ
Note: While cash inflows from interest or dividends could be considered
investing or financing activities, the FASB classifies them as
operating activities (which means you should too!).
IV. Investing Activities
Investing activities include transactions and events involving the
purchase and sale of securities (excluding cash equivalents), land,
buildings, equipment, and other assets not generally held for resale.
It also covers the making and collecting of loans. Investing activities
are not classified as operating activities because they have an
indirect relationship to the central, ongoing operation of your
business (usually the sale of goods or services).
Cash receipts include:
Sale of plant assets
Sale of a business segment
Sale of investments in equity securities of other entities or debt securities (other than cash equivalents)
Collection of principal on loans made to other entities
Cash payments include:
Purchase of plant assets
Purchase of equity securities of other entities or debt securities (other than cash equivalents)
Loans to other entities
V. Financing Activities
All financing activities deal with the flow of cash to or from the
business owners (equity financing) and creditors (debt financing). For
example, cash proceeds from issuing capital stock or bonds would be
classified under financing activities. Likewise, payments to repurchase
stock (treasury stock) or to retire bonds and the payment of dividends
are financing activities as well.
Cash receipts include:
Issuance of own stock
Borrowing (bonds, notes, mortgages, etc.)
Cash payments include:
Dividends to stockholders
Repaying principal amounts borrowed
Repurchasing business' own stock (treasury stock)
VI. General Format for a Statement of Cash Flows
The Investing and Financing Activities sections of the statement of
cash flows are straightforward. The Operating Activities section,
however, is more complex. It requires analysis of operating accounts
that converts figures from an accrual to a cash format.
The following is the general format for a statement of cash flows:
Cash provided (or used) by:
Operating activities $XXX
Investing activities $XXX
Financing activities $XXX
Net increase (decrease) in cash and cash equivalents $XXX
Cash and cash equivalents at beginning of year $XXX
Cash and cash equivalents at end of year $XXX
There are two methods that are used in calculating and reporting the
amount of net cash flow from operating activities: the indirect method
and the direct method. Although both produce identical results, the
indirect method is used more often because it reconciles the difference
between net income and the net cash flow provided by operations.
TO BE CONTINUED
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