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Identify Components of Cash Flow Statements

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T1. Identify the components needed in cash flow statements.

A cash flow statement will consist of components of organizational expenditures resulting in discovering an organizations outgoing and incoming cash activity. The statement enables an organization to maintain a record of viable, tangible and liquid assets. The components include the following key elements such as;

? Operating (functional activities)-

o Net Income

o Depreciation (sources of non-cash revenue and expense items) Any identifiable depreciation expenses must be added to net income.

o Losses (losses must be added in accordance with the flow of the aforementioned income flow.

o Gains (subtract any recordable gains-cash proceeds that were a direct relation to the proceeds from any type of sales transaction. For example, most non-profit organizations may record monetary gains as a result of proceeds from fundraising activities or charitable cash donations.

Once this segment has been accurately accounted for in terms of ensuring that all the income from an organization's day-to-day operations are inclusive in the report, the income statement must be carefully evaluated for any minor or major changes. This is where the financial accountant assesses the organizations current assets and liabilities from the income statement. The goal is to determine how the organization did within a given period i.e. quarterly, biannually, or annually. This section records the ups and downs of a business based on the organizations income flow and outflow. Depending on what your current assessment of income and expenditures will determine whether to add or subtract monetary gains and losses accordingly. The income from operating expenses will inform business owners as to how much money was generated within a specific period of time.

? Investing (Outflows of expenditures and applicable returns on short-term and long-term investments)-

o This section of the cash flow analysis represents a comprehensive evaluation as to the fluctuation of non-current assets. The overview is to determine the outcome of the investment, such as; did the investment bring forth additional income? If so, how much? Or how much income went out as a result of the investment? Non-current investments represent any type of long-term investments stemming from buying and selling transactions that represents a profit and loss margin from the specified transaction. Non-current assets will either increase or deplete revenue.

? Financing activities (revolving door assets/liabilities)-

o Evaluation of changes in long-term liabilities such as long- term debt, for example, students who borrow government funds to attend educational institutions borrow money against their future in which case money comes in, however, when the student is in the repayment stages of the loan, money goes out. During this stage of cash flow, an accountant will assess the changes of any type of financial increases or decreases incurred through this particular business transaction. Aside from changes within long-term debt, an accountant will also need to evaluate the changes within the Stockholders Equity Account for both entities mentioned the decision to add or subtract will depend on the organizations current financial findings, for example was there a record of cash dividends for the current quarter? Is there evidence of stocks being bought or sold within the current quarter?

? Implementation of any non-cash changes

o In the event that money changes occurred within investing and financing, the change must be accurately disclosed when analyzing cash flow.
Applying the appropriate sum and difference with the cash flow statement will determine the change-in cash in which case these changes can be identified from the beginning of the problem
Each cash flow component is equipped with various subdivisions that will require an individual to appropriately evaluate expenses by adding or subtracting the necessary variables associated with the analysis. This method of expense calculation is fundamental in operating an organization for the reason that a cash-flow analysis displays how much revenue is accessible for the continuous efforts of forward progression.

2. Explain the benefits of cash-flow analysis and any problems that could arise if it is not conducted.

The benefits of cash-flow analysis include providing business owners a picturesque account as to where the organizations money is going. This method of analysis enables an organization to conduct a thorough investigation as to internal and external revenue and expenditures. Unfortunately, some business owners hire independent contractors to figure up the organizations profit and loss margins within the cash flow analysis, when in fact a business owner should be the sole benefactor within his/her own corporation for the sole purpose of identifying necessary and unnecessary expenditures. Conducting a cash flow analysis will enable an organization to run a successful business and will enable the organization effectively manage large amounts of money. Aside from appropriate money management skills that will be applied to an organization utilizing a cash-flow analysis, it will also be beneficial for individuals obtaining employment with a financial institution.

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Solution Preview

1. Identify the components needed in cash flow statements.

A cash flow statement will consist of components of organizational expenditures resulting in discovering an organizations outgoing and incoming cash activity. The statement enables an organization to maintain a record of viable, tangible and liquid assets. The components include the following key elements such as;

? Operating (functional activities)-

o Net Income

o Depreciation (sources of non-cash revenue and expense items) Any identifiable depreciation expenses must be added to net income.

o Losses (losses must be added in accordance with the flow of the aforementioned income flow.

o Gains (subtract any recordable gains-cash proceeds that were a direct relation to the proceeds from any type of sales transaction. For example, most non-profit organizations may record monetary gains as a result of proceeds from fundraising activities or charitable cash donations.

Once this segment has been accurately accounted for in terms of ensuring that all the income from an organization's day-to-day operations are inclusive in the report, the income statement must be carefully evaluated for any minor or major changes. This is where the financial accountant assesses the organizations current assets and liabilities from the income statement. The goal is to determine how the organization did within a given period i.e. quarterly, biannually, or annually. This section records the ups and downs of a business based on the organizations income flow and outflow. Depending on what your current assessment of income and ...

Solution Summary

1. Identify the components needed in cash flow statements.

A cash flow statement will consist of components of organizational expenditures resulting in discovering an organizations outgoing and incoming cash activity. The statement enables an organization to maintain a record of viable, tangible and liquid assets. The components include the following key elements such as;

? Operating (functional activities)-

o Net Income

o Depreciation (sources of non-cash revenue and expense items) Any identifiable depreciation expenses must be added to net income.

o Losses (losses must be added in accordance with the flow of the aforementioned income flow.

o Gains (subtract any recordable gains-cash proceeds that were a direct relation to the proceeds from any type of sales transaction. For example, most non-profit organizations may record monetary gains as a result of proceeds from fundraising activities or charitable cash donations.

Once this segment has been accurately accounted for in terms of ensuring that all the income from an organization's day-to-day operations are inclusive in the report, the income statement must be carefully evaluated for any minor or major changes. This is where the financial accountant assesses the organizations current assets and liabilities from the income statement. The goal is to determine how the organization did within a given period i.e. quarterly, biannually, or annually. This section records the ups and downs of a business based on the organizations income flow and outflow. Depending on what your current assessment of income and expenditures will determine whether to add or subtract monetary gains and losses accordingly. The income from operating expenses will inform business owners as to how much money was generated within a specific period of time.

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Identify each of the transactions as:
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(N) not reported on the statement of cash flows

Indicate whether each item is an:
(+) increase
(-) decrease

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b. Payment of cash dividend
c. Sale of long term investment
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f. Issuance of long term note payable to borrow cash
g.Depreciation of equipment
h. Purchase of treasury stock
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j. Increase in accounts payable
k. Acquisition of equipment by issuance of note payable
l. Payment of long term debt
m. Acquisition of building by cash payment
n. Accrual of salary expense
o. Purchase of long term investment
p. Decrease in merchandise inventory
q. Increase in prepaid expenses
r. Cash sale of land
s. Decrease in accrued liabilities

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