Cash Flow Statement (Word Scrambles with Coaching)

The cash flows from operating activities section of the statement of cash flows focuses on the cash inflows and outflows from a company’s main business activities of buying and selling goods, providing services, etc.

Example: Most companies use the indirect method which begins with a company’s net income and then adjusts it from the accrual method to cash amounts.

The cash flows from investing activities section reports the cash flows associated with the purchase and sale of long-term assets such as property, plant and equipment, and long-term investments.

Example: The amount spent to acquire property, plant, and equipment is reported as a negative amount in the investing section. The amount received from the sale of property, plant and equipment is reported as a positive amount in the investing activities section.

The cash flows from financing activities section reports cash flows associated with obtaining or distributing equity, long-term debt, and short-term loans.

Example: Cash proceeds from issuing shares of common stock is reported as a positive amount in the financing section. The cash used to repay bank loans is reported as a negative amount in the financing activities section.

In the cash flows from operating activities section under the indirect method, an increase in current assets other than cash, such as accounts receivable or inventory, is shown as a negative adjustment to net income. This negative adjustment represents cash that was not received or cash that was spent.

Example: If accounts receivable increased during the period, it means some revenues were included in net income, but the cash was not received. Therefore, net income must be reduced by the increase to arrive at cash flows from operating activities.

Under the indirect method, a decrease in current liabilities is shown as a negative adjustment to net income in the operating activities section. This is because a decrease in a liability such as accounts payable means more cash was paid out than the expenses reported on the income statement.

Example: If accounts payable decreased during the period, it means the company paid more cash to suppliers than the amount of the cost of goods sold reported on the income statement. Therefore, net income must be reduced by the decrease in accounts payable to arrive at the cash from operating activities.

Cash inflows from the sale of long-term assets like property, plant and equipment are reported as “proceeds” in the investing activities section of the cash flow statement.

Example: If a company sells a piece of machinery for $10,000, the $10,000 of cash received is reported as proceeds from the sale of equipment in the investing section.

Cash dividends paid to shareholders are reported as a cash outflow in the financing activities section.

Example: If a company paid $50,000 in cash dividends to its common stockholders, the $50,000 would be reported as a deduction in the financing section of the cash flow statement.

Cash outflows to acquire long-term assets are typically called “capital expenditures” and are reported as a negative amount in the investing activities section. (A negative amount indicates a use or outflow of cash.)

Example: If a company spends $100,000 cash to purchase new manufacturing equipment, the $100,000 would be reported as a capital expenditure and shown as a negative amount in the investing section.

When a company buys back its own shares (treasury stock), the cash paid to reacquire the shares is reported as a negative amount in the financing activities section.

Example: If a company spent $25,000 to repurchase shares of its own common stock, the $25,000 would be shown as a negative amount in the financing section. (A negative amount indicates a use or an outflow of cash.)

Payments made to retire or pay off long-term debt are reported as a cash outflow in the financing activities section.

Example: If a company makes a $200,000 principal payment to pay off a long-term loan, the $200,000 cash outflow would be reported as a negative amount in the financing section of the cash flow statement.