Statement Of Cash Flows Essays Examples

Cash flow statement

Comparison of income statement and statement of cash flows
The income statement indicates the results of the operating activities of Nybrostrand Company for the year ended December 31, 2012. It shows total revenues as well as the cost of goods sold thereby giving the value of gross profit. The income statement also includes all the operating expenses incurred by the company during the year. The income statement gives no consideration to whether the expenses are cash or non-cash expenses. As shown above, the company’s expenses included depreciation, property taxes, marketing, insurance, utilities and rent expenses. The income statement shows whether the operations of the company are profitable or not without putting any consideration to the amount of cash received or used in the operations.
The cash flow statement indicates the items affecting the company’s cash and cash equivalents of the company. Unlike the income statement, it excludes expenses that do not involve movement of money into and out of the company (Fasb.org, 2015). The cash flow statement also categories the items into three groups; operating, investing and financing activities. The income statement only focuses on the operating activities and only recognizes revenues and expenses on other activities (Abc-amega.com, 2015). The statement of cash flows is not concerned about the profitability of the activities, but the cash flows resulting from the activities. For instance, the company sells a fixed asset for $400,000, the cash flow statement will only consider the amount received ($400,000). However, in the preparation of the income statement, the accountant will determine the carrying amount of the fixed asset to determine if it was sold at a profit or not. Only the loss or profit is included in the income statement.
Unlike the income statement that gives the net income during the year, the statement of cash flows shows the amount of money at the end of the financial year (Icaew.com, 2015). The statement lists the various sources and uses of cash under each of three categories of activities during the year. It also shows the net increase or decrease in cash and cash equivalents during the year. The increase or decrease of cash and cash equivalents is added to the opening cash balance to get the cash and cash equivalents balance at the end of the year. Cash flow statements are therefore, critical in the assessment of the liquidity of an entity (Journal of Accountancy, 2015).

Explanation of workings for the statement of cash flows

In the year ended December 31, 2012, Nybrostrand made a net income of $118,650. The preparation of the statement of cash flows starts with the net income. The net income is then adjusted for non-cash expenses as well as changes in operating assets and liabilities. In this case, depreciation expense ($24,350) is added back to the net profit to determine the cash flows from operating activities. Nybrostrand does not pay any money for depreciation. It is rather a provision the company makes periodically. The provision is accumulated throughout the useful life of the fixed asset. The aim of depreciation provision is to set aside an adequate amount that will be used to replace the depreciable asset at the end of its economic life. The expense just reduces the amount of profits available for distribution to shareholders but has not effect on cash and cash equivalents.
The increase in inventories is deducted from the net income to find the amount of cash flows from operations. Inventories can only increase when the company purchases more inventory. The purchase of inventory involves movement of money out of the company hence the increase of stock reduces cash flows from operating activities.
The increase in the value of land from the previous period implies that Nybrostrand Company purchased additional land in the year 2012. Purchase of land is a negative cash flow hence it is shown a deduction. The Land is a long-term asset hence the purchase of land is an investing activity.
Long-term debt, stocks, and dividends fall under financing activities. In the year 2012, Nybrostrand Company’s long-term debt increased by $360,000. The increase in debt could only occur if it issued long-term debt securities such as bonds. The issue of bonds is a positive cash flow as the company receives cash for the securities sold. A secondary stock offering is a positive cash flow since the company receives cash from the shareholders purchasing the company’s shares. Dividend is a financing activity as it relates to shareholders who are sources of long-term finance. The payment is a negative cash flow since it involves an outward movement of money.

References

Fasb.org,. (2015). Summary of Statement No. 95. Retrieved 15 April 2015, from http://www.fasb.org/summary/stsum95.shtml
Icaew.com,. (2015). IAS 7: Statement of cash flows | Accounting standards | Library | ICAEW. Retrieved 15 April 2015, from http://www.icaew.com/en/library/subject-gateways/accounting-standards/ifrs/ias-07
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