Cash Flows

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Cash Flow Statement

Purposes of statement




The basic purpose of a statement of cash flow is to provide information about the cash receipts and cash payments of a business entity during the accounting period. The statement is intended to provide information about the investing and financing activities of the company during the period

Cash Flow statement assists
investors, creditor and others in assessing such factors as:
     

The company’s ability to generate positive cash flows in future periods. The company’s ability to meet its obligations and to pay dividends. The company’s need for external financing. Reason for differences between the amount of net income and the related net cash flows from operating activities. Both the cash and non cash aspects of the company’s investment and financing transaction for the period. Causes of the change in the amount of cash and cash equivalent between the beginning and end of the accounting period.

Classification of Cash flows
The cash flows shown in the statement are grouped into three major categories:  Operating Activities  Investing Activities  Financing Activities


Operating Activities
The operating activities section shows the cash effects of revenue and expense transactions.  In another way it includes the cash effects of those transactions reported in the income statement.


Cash flows from operating activity includes:
Cash Receipts and Cash Payments  Cash Receipts
 Collections

from customers for sales of goods and services  Interest and dividends received  Other receipts from operation; for example, proceeds from settlement of litigation.



Cash payments
 Payments

to suppliers of merchandise and services, including payment to employees  Payments of interest  Payments of income taxes  Other expenditures relating to operation; for example, payments in settlement of litigation. Receipts and payments of interest are classifies as operating activities, not as investing or financing activities.

Operating Activities


Accounts receivable increased by $2000 during the year.

      

   

Dividend revenue is recognized on the cash basis, . Accred interest receivable decreased by $ 1000 during the year. Inventory increased by $ 10000 and accounts payable increased by $ 15000 during the year. During the year, short term prepaid expenses increased by $ 3000 and accrued expenses payable (other than for interest or income taxes) decreased by $ 6000. Depreciation for the year amounted to $40000. The accrued liability for interest payable increased by $ 7000 during the year. The accrued liability for income taxes payable decreased by $ 2000 during the year.

Investing Activities


Cash flows relating to investing activities present the cash effects of transactions involving plant assets, intangible assets, and investment. They include:

Investing Activities


Cash Receipts
 Cash

proceeds from selling investments and plant assets  Cash proceeds from collecting principal amounts on loans


Cash payments
 Payments

to acquire investments and plant assets  Amounts advanced to borrowers

Investing Activities






Analysis of the Marketable securities account show debit entries of $65000, representing the cost of securities purchased, and credit entries of $44000, representing the cost of securities sold. (No marketable securities are classifies as cash equivalent.) Analysis of the Notes Receivable account shows $17000 in debit entries, representing cash loaned to borrowers by Allison Corporation during the year, and $ 12000 in credit entries, representing collections of notes receivable. (Collections of interest were recorded in the interest revenue account and are considered cash flows from operating activities.)

Allisons’ plant asset accounts increased by $116000 during the year. An analysis of the underlying transactions indicate the following Purchased $200000 in plant assets, paying $160000 cash and issuing a long-term note payable for the $40000 balance Sold for $75000 cash lplant assets with a book value of $44000 Recorded depreciation expenses for the period
$200000

(44000)

(40000)

Net change in plant asset controlling accounts

116000

Financing Activities




Cash flows classifies as financing activates include the following items that result from debt and equity financing transactions: Cash Receipts
 

Proceeds from both shor-term and long term borrowing Cash received from owners (for example, from issuing stock) Repayment of amounts borrowed (excluding interest payments) Payments to owners, such as cash dividends



Cash payments
 

Financing Activities


  

During the year , Allison corporation borrowed $45000 cash by issuing short-term notes payable to banks. Also, the company repaid $55000 in principal amount due on these loans and other notes payable. (Interest payments are classified as operating activities.) The company issued bonds payable for $100000 cash. The company issued for cash 1000 shares of $10 per value capital stock at a price of $50 per share. Cash dividends declared and paid to stockholders amounted to $40000 during the year.

Cash Received from customers = Net sales

+ Decrease in Account eceivalbe Or - Increase in Account Receivable + Decrease in Account eceivalbe Or - Increase in Account Receivable

Interest = Interest Revenue Received

Cash payment = cost of For purchase goods sold

+ increase in Inventory Or - Decrease in Inventory

+ Decrease in Account payable - Increase in Account payable

Statement of Cash Flows
Cash Payment for Expenses
+ Increases in Related Depreciation prepayments and or other Non – Decrease in cash Related expenses prepayments

Expenses

+ Decrease in Related Accrued liabilities Or - Increase in Related Accrued Liabilities

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