Answered Essay: What are the special problems that are associated with preparing the statement of cash flows? What items are

What are the special problems that are associated with preparing the statement of cash flows? What items are included in the operating section? What items should be included in the investing and financing sections? What kind of results – positive or negative cash flows would you expect from each section? Why?

Expert Answer

 

The special problems that are associated with preparing the statement of cash flows are a) adjustment to net income (depreciation, amortization, extraordinary items), b) account receivables (net), c) changes in other working capital and d) significant non-cash transactions.

Items included in operating section: Inflows: From sales of goods and services, From interest and dividend income Outflows: To vendors for inventory purchases and other business expenses, To employees for services, To interest expense on borrowings, To government for taxes

Items included in investing section: Inflows: From sales of tangible or intangible assets, From sales of other investments or investment in other entities Outflows: To vendors for purchase of tangible or intangible assets, To other investments or investment in other entities

Items included in financing section: Inflows: From sales of equity capital, From issuance of debt securitiesOutflows: To shareholders as dividends, To redeem debt securities or equity capital

Operating section: Expected positive cash flows which indicates that the Company is generating additional cash which can be reinvested to further maximize profit

Investing section: Expected negative cash flows which indicates that the Company buys more assets, what it sells

Financing section: Expected positive cash flows which indicates that the Company is raising additional money from investors and creditors to fund its growth

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