Instructions for main post (Around 200 words)
Define and discuss the three major sections of the statement of cash flows with appropriate examples.
In your response, provide at least one example. Include appropriate citations. (Citations only needed for main post)
Instructions for the two classmate responses (around 150 words each)
Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response.)
Classmate post #1:
Ronnie Espigul
The three main section of the cash flow statements are discussed as below-
1) Cash flow from operating activities: It comprises of the cash received from customers and cash used in the normal operating activities of the business. It includes cash receipts from customers from rendering service and sale of goods, fees and commissions in various ongoing business activities, cash payments to suppliers for delivery and production and goods and services, payments to the employees.
2) Cash movement from investing activities are the cash flows which states that the expenditures have been made for assets expected to create or leads to future income and cash flows. This comprises of various example as cash payments to purchase various assets like property, plant and equipment etc., cash received from sale of those assets.
3) Cash movement from financing activities are the cash flows which represent the transaction related to bo
owing, issue of shares, buy back of shares, payment of dividend and transaction related from debt instruments and bo
owing of cash and repayments on bo
owings (AASB, 2017)
References:
AASB, 2017. Statement of cash flows. 1 [Online] Retrieved from: https:
www.aasb.gov.au/admin/file/content105/c9/AASB107_08-15_COMPmar16_01-17.pdf [Accessed 03/06/ 2019].
Schroeder, R. G., Clark, M. W., & Cathey, J. M XXXXXXXXXXFinancial accounting theory and analysis: Text and cases(12th ed.). Hoboken, NJ: Wiley
Classmate post # 2:
Maurice Naylon
“The cash inflows and outflows of a business are of primary importance to investors and creditors,” as this information should “enable investors to (1) predict the amount of cash that is likely to be distributed as dividends or interest in the future and (2) evaluate the potential risk of a given environment” (Schroeder et al, 2017, p. 227). Recognizing this importance, the SEC now mandates that publicly-traded companies publish a statement of cash flows quarterly – in addition to the other three financial statements. Specifically, SFAC No. 1 places significant emphasis on cash flows, stating that “effective financial reporting must enable investors, creditors, and other users to (1) assess the cash-flow prospects and (2) to evaluate the liquidity, solvency, and flow of funds” (Schroeder et al, 2017, p. 227). To accomplish these ends, the statement of cash flows is divided into three major sections: cash flow from operating activities, investing activities, and financing activities.
Cash flows from operating activities include “the cash effect from transactions that enter into the determination of net income exclusive of financing and investing activities” (Schroeder et al, 2017, p. 229). With some exceptions, this category represents change in cash caused by a company’s primary business operations. For an auto mechanic, cash receivedfor conducting an oil change would be accounted for in this statement. Similarly, cash spent for the oil used in that oil change would represent an outflow in the operating activities section. Next, investing activities include “making and collecting loans; acquiring and disposing of debt or equity securities of other companies; and acquiring and disposing of property, plant, and equipment as well as other productive resources” (Schroeder et al, 2017, p. 232). Extending the above example, if the owner of the auto shop used cash to purchase a new lift, that equipment purchase would be an outflow of cash in the investing activities section. Lastly, financing activities “result from obtaining resources from owners, providing owners with a return of and on their investment, bo
owing money and repaying the amount bo
owed, and obtaining and paying for other resources from long-term creditors” (Schroeder et al, 2017, p. 232). If the owner of the above garage wanted to expand by purchasing an adjacent lot – but didn’t have cash on hand for the purchase – securing a loan from a bank for the purchase would qualify as an investing activity. Similarly, if the owner prefe
ed an equity-financing situation, raising money to buy the adjacent lot by selling shares in the business would also qualify as a financing activity.
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017). Financial accounting theory and analysis: Text and cases (12th ed.). Hoboken, NJ: Wiley.