Comprehensive Guide to the Statement of Cash Flows (SCF) Analysis

This document provides a comprehensive overview of the Statement of Cash Flows (SCF). It explains the purpose of the SCF, which is to report cash inflows and outflows during an accounting period and the ending cash balance. The document details the three main categories of cash flows: operating, investing, and financing activities, and explains the indirect method of preparing the SCF. It outlines the adjustments made to net income in the operating activities section, including depreciation, gains/losses on asset sales, and changes in current assets and liabilities. The document further explains investing activities (acquisition and disposal of long-lived assets) and financing activities (debt, equity, and dividends). A worked example using the Altar Company illustrates the practical application of the concepts, and it concludes with advice for students to practice using past papers for exam preparation.

Statement of Cash Flows
(SFC)

Statement of Cash Flows (SFC)
The statement of cash flows reports the cash inflows and outflows during the
accounting period and the ending cash balance. It is also called a statement
of changes in financial position and is useful to investors and creditors for
several reasons:
 It helps predict the future cash flows of the entity, which may be used to
pay cash dividends, repay outstanding debt, or finance future growth.
 It indicates the ability of the business to generate and properly manage its
cash and working capital resources.
 It provides insights into the company’s financing and investing decisions.
 It transforms the accrual basis of accounting to the cash basis of
accounting.
 It isolates the liquidity condition of the entity. Businesses that do not
generate sufficient cash flows from operations and do not maintain an
adequate level of liquidity, risk receivership or bankruptcy.

Statement of Cash Flows (SCF)
Cash receipts refers to inflows of cash into the company while cash payme
refers to outflows of cash from the business during the accounting period
This movement of cash is divided into three main categories:
 Cash flows from Operating activities;
 Cash flows from Investing activities; and
 Cash flows from Financing activities.
There are two (2) methods-Direct and Indirect method to extract such infl
and outflows. However, the indirect method is the more commonly used
method and is the one adopted for use in ACCT1002.
Net income is derived from the company’s operating activities and under the
indirect method is the first item reported on the SCF. Bearing in mind that not
all income/expenses are received/paid in cash, some adjustments to net
income must be made to convert the net income figure for the SFC purposes.
The nature of these adjustments/movements will now be explained in details.

Adjustments -Operating Activities
Operating Activities include the cash effects of transactions that create
revenues and expenses. In other words, the Operating Activities Section of the
Statement of Cash Flow includes the cash effects of those transactions
reported on the Income Statement. Operating activities are thus the
determinants of Net Income. For example, let us consider the effects of Credit
Sales – credit sales are reported on the Income Statement in the period in
which the sales occur. The cash effects however occur later (because it
creates a receivable and we collect the cash at a later date). If the creating
of the sales and the collection of cash occur in different accounting periods,
the income statement and the operating activities section of the cash flow
statement will differ.

Adjustments -Operating activities
 + Depreciation / amortization expense
 + Loss on sale of long-term assets
 – Gain on sale of long-term assets
 – Increases in current assets other than cash
 + Decreases in current assets other than cash
 + Increases in current liabilities
 – Decreases in current liabilities
Sometimes if the figures for the movement in the current assets and liabilities are not readily
provided, you will be required to compare the balance sheet for two successive accounting
periods to determine any increase or decrease for these items. Note, an increase in current assets
(example accounts receivable) is an indication that less cash is received and the impact on the
cash flow will be negative thus we minus. On the contrary, if the current asset decreases
(example accounts receivable), this creates a positive impact on the cash flow. This therefore
means cash came into the company and as such we add back these amounts. In the case of
an increase in current liabilities (example accounts payable), this means less cash is paid out and
its impact is a positive effect on the cash flow and it is thus added. On the other side, if there is a
decrease in the current liability (example accounts payable), the impact is a negative effect on
the cash flow as funds are deemed to be paid out and thus is subtracted.
The net effect of adjustments in this category of the SCF activities can either be a positi
net cash provided by operating activities or a negative termed net cash used for operat
activities. (REMEMBER THE NET INCOME OR LOSS MUST BE INCLUDED TO OBTAIN THE ca
by operating activities OR net cash used for operating activities)

Adjustments -Investing activities
Investing Activities are made up of anything that relates to the acquisition and
disposal of investments and long-lived assets. They also include lending
money and collection of loans. Cash flows relating to Investing activities
include transactions involving plant assets, intangible assets and investments.
 + Cash receipts from sales of long-term (plant) assets (investments,
land, building, equipment, and so on)
 – Acquisition of long-term (plant) assets
The net effect of adjustments in this category of the SCF can either be a
positive, termed net cash provided by investing activities or a negative te
net cash used for investing activities.

Adjustments- Financing activities
Financing Activities include obtaining cash from debt issue and repayment of
borrowed amounts. It also includes obtaining cash from stockholders and the return
that is provided to them on their investment.
 + Cash receipts from issuance of stock
 + Cash receipts from sale of treasury stock
 – Purchase of treasury stock
 + Cash receipts from issuance of notes or bonds payable (borrowing)
 – Payment of notes or bonds payable
 – Payment of dividends
The net effect of adjustments in this category of the SCF can either be a positive,
net cash provided by financing activities or a negative termed net cash used for
financing activities.

Worked Example:-Q3 Unit 8 Tutorial
Worksheet– Altar CompanyAltar Company
Statement of Cash Flows
Year ended December 2014
Cash flows from operating activities $ $ $
Net income (loss) 49,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Add: Decrease in Accounts Receivable 4,000
Increase in Accrued Liabilities 1,000
Depreciation 12,000 17,000
Deduct: Increase in Inventory 28,000
Decrease in Accounts Payable 2,000
Gain on sale of plant asset 4,000 (34,000) (17,000)
Net cash provided by operating activities 32,000
Cash flows from investing activities:
Add: Sale of Equipment 14,000
Deduct: Purchase of Equipment (52,000)
Net cash used for investing activities (38,000)
Cash flows from financing activities
Add: Issuance of Common Stock 28,000
Borrowed Note Payable 34,000 62,000
Deduct: Increase in Treasury Stock 3,000
Repaid Long term Note Payable 40,000
Dividend Paid 10,000 (53,000)
Net cash provided by financing activities 9,000
Net increase in cash 3,000
Cash Balance, December 31, 2013 18,000
21,000

The End
This is the final e-tutor presentation and the Statement of Cash Flow is yet
another area covered on all past papers as you will soon come to realize,
when the past papers are circulated. It is therefore imperative that you
carefully note the pointers shared in this presentation and read the unit
reading and text to aid your preparation for the discussion and final exam
questions on this area.
You will be tested on theoretical as well as structured questions on this area
which requires astute preparation to allow you to master same. The practicing
of unit 8 tutorial worksheet as well as the past papers is a most do for all, as
once done you will be exposed to different formats of the structured questions
on SCT.
Be prudent and take the advice given seriously.