THE STATEMENT OF CASH FLOWS
Changes from Twelfth Edition
Updated from the Twelfth Edition. Great Valu Variety Stores has been dropped.
This is a topic that has always been difficult for students. The indirect method of developing the amount of cash flow from operating activities is particularly difficult. The hearings prior to FASB 95 indicated that the investment analyst community would press companies to continue using the indirect (reconciliation) method; the primary supporters of the direct method were bankers. Thus, it appears that students will not be well served in this subject area unless they gain an understanding of the indirect method.
Since students were introduced to the difference between cash flows and accrual accounting’s revenues and expenses way back in Chapter 3, this should be reinforcement at this point, but it usually seems to be a new revelation to at least a subset of the class. For those who never succeed in fully understanding the rationale for the adjustments, Illustration 11-4 now gives them a rote approach to which they can revert.
Medieval Adventures Company is an armchair case intended to dramatize the difference between operating cash flow and income.
Amerbran Company (A) illustrates preparation of the cash flow statement from the other two statements and supplemental information.
2010 sales $8,337,000
Less: Change in accounts receivable (130,000)
Cash generated from sales during 2003 $8,207,000
a. Use of $2 million cash to purchase equipment is an investment use of cash.
b. Cash proceeds from the issuance of common stock is a financing source of cash. The use of cash to retire mortgage bonds is a financing use of cash.
c. No cash effect.
d. No cash effect.
e. Cash proceeds from the sale of machinery is an investment source of cash.
The above responses assume the direct method is used to present its cash flow of statement.