The Statement of Cash Flows: Operating Activities Example (with video)

The Statement of Cash Flows

There are four financial statements that are used by investors for decision making: income statements, statement of retained earnings, balance sheet and statement of cash flows. The latter of these can be used by management in decision making for the business. The statement of cash flows shows where a businesses cash is going (cash outflows/use of cash) and what activities are creating cash inflows (source of cash) for the business.

The statement of cash flows is unmistakably the most difficult of the financial statements to prepare. With three sections, operating activities, investing activities, and financing activities, students often find this statement a bit challenging to master. Students first have to assimilate to the idea of accrual accounting where revenues are recorded when earned and expenses are recorded when incurred. When students finally have this topic concurred they are asked to complete the statement of cash flows that only represents cash inflows and outflows. Therefore, instead of taking balances from the ledger accounts (t-accounts) and placing them on a financial statement (i.e. balance sheet, income statement) we have to look at the changes in the account balances (i.e. change from beginning of the period to the ending of the period).

What is Capital Budgeting: Introduction - Managerial Accounting

What is Capital Budgeting?

Capital budgeting is the process of budgeting for the acquisition of "capital assets." In accounting, capital assets are assets that are depreciable (i.e. have a useful life beyond one accounting period). Four capital budgeting models that can be used to determine whether or not a capital investment is a viable investment: payback period, accounting rate of return, net present value and internal reate of return.

When a business is deciding on an investment, the business must consider and incorporate the concept of time-value-of-money (TVM). Time-value-of-money is simply the concept that money earns money over time.

The payback period and the accounting rate of return are used when making short-term investment decisions. These two models do not incorporate the time-value-of-money as these are short-term decisions and the time-value-of-money would not be relevant.

The money that will be used to purchase an investment can be earning money (i.e. interest). Therefore, businesses, when considering long-term investment decisions, must incorporate the time-value-of-money concept in long-term business decision making.

The net present value and internal rate of return models incorporate the time-value-of-money concepts.

When a business is considering a capital investment, the business must take into consideration any cash inflows and cash outflows.

Recording Business Transactions: Rules of Debits and Credits; T-Accounts

Recording Business Transactions: Rules of Debits and Credits; T-Account

There are very few things in accounting that I encourage my students to memorize. However, the rules of debits and credits is one that ultimately comes down to memorization. When learning the rules of debits and credits let's think about the accounting equation: Assets = Liabilities + Owners' Equity. Imagine each category of accounts as a t-account. All assets are increased with debits and decreased with credits. One asset that students sometimes has issues with is Cash. They recall that when they make a deposit into their bank account that the deposit slip states their account was credited for the amount of the deposit. What we have to understand is that the bank is keeping their books, not our books. Therefore, when you give them money, they owe that money back to you; this creates a liabilities for the bank. The account the bank is crediting is an account payable with your name on it.