For Black

Chapter 12: Statement of Cash Flows
Pre-Statement of Cash Flows (before 1987)
Statement of Cash Flows (1987)
Research

Statement of Changes in Financial Position
Reported on changes in assets, liabilities, and owners’ equities account balances
Recommended, but not required for inclusion in the annual report until 1971
Objectives
Disclosure of changes in financial position
Summarize financing and investing activity
Report funds flow from operations

Statement of Changes in Financial Position
Sources of resources
Transaction credits
Arise from increases in liabilities and owners’ equity and decreases in assets
Uses of resources
Transaction debits
Arise from decreases in liabilities and owners’ equity and increases in assets

Standard Format of the Statement of Changes in Financial Position
Increases to fund balance accounts
From net income
From other sources
Other sources of resources
Decrease, if any, in the fund balance for the period
Decreases to the fund balance accounts
From net losses
From other sources
Other uses of resources
Increase, if any, in the fund balance for the period
Sources of Resources Uses of Resources

Early FASB Discussion Memo
Provide feedback on actual cash flows
Help to identify the relationship between accounting income and cash flows
Provide information about the quality of income
Improve comparability of information in financial reports
Aid in assessing flexibility and liquidity
Assist in predicting future cash flows

Statement of Cash Flows Cash & Cash Equivalents at Beginning of Year Cash & Cash Equivalents at End of Year Cash Flows from Operating Activities Net Change in Cash & Cash Equivalents Cash Flows from Investing Activities Cash Flows from Financing Activities

Definition: Cash
Literal cash on hand or on demand deposit plus cash equivalents
Cash equivalents are highly liquid assets that are convertible to known amounts of cash and have short-term maturities

Operating Activities Section
Direct method reports literal cash flows related to income statement classifications
FASB appears to favor
Cost to prepare > than with indirect method
Indirect or reconciliation method starts with accrual income and adjusts it for the noncash items in it
In 1996, 98% of American firms use
Nonarticulation problems

Direct vs. Indirect Method
Operating activities section is the only section that differs
The investing and financing activities sections are the same under both methods

Investing Activities Section: Examples
Proceeds from sale of facility
Payment received on note for sale of plant
Capital expenditures
Payment for purchase of company X, net of cash acquired

Financing Activities Section: Examples
Net borrowings under line-of-credit agreement
Principal payments under capital lease obligation
Proceeds from issuance of long-term debt
Proceeds from issuance of common stock
Dividends paid

SFAS No. 95 Classification Issues
Appearing in operating activities section
Interest expense
Interest revenue
Dividend revenue
Related balance sheet items (bonds payable, stock investments, and long-term notes receivable) are either financing or investing elements

Ingram and Lee (1997)
1,000 firms over the period 1974-1992
Use the income statement and the cash flow statement together
Over time growing firms will have higher income and lower cash flows
Reverse occurs for shrinking firms

Chapter 12: Statement of Cash Flows
Pre-Statement of Cash Flows (before 1987)
Statement of Cash Flows (1987)
Research

For Black

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