The objective of financial reporting is to provide investors and creditors with useful
information, primarily in the form of financial statements. The balance sheet and the income
statement – that have been the focus of your study in earlier chapters – do not provide all the
information needed by these decision makers. In this chapter, you will learn how the statement of
cash flows fills the information gap left by the other financial statements.
The statement lists all cash inflows and cash outflows during each reporting period, and
classifies them as cash flows from (a) operating, (b) investing, or (c) financing activities. Investing
and financing activities that do not directly affect cash also are reported.
After studying this chapter, you should be able to:
LO20-1 Explain the usefulness of the statement of cash flows.
LO20-2 Define cash equivalents.
LO20-3 Determine cash flows from operating activities by the direct method.
LO20-4 Determine cash flows from operating activities by the indirect method.
LO20-5 Identify transactions that are classified as investing activities.
LO20-6 Identify transactions that are classified as financing activities.
LO20-7 Identify transactions that represent noncash investing and financing activities.
LO20-8 Prepare a statement of cash flows with the aid of a spreadsheet or T-accounts.
LO20-9 Discuss the primary differences between U.S. GAAP and IFRS with respect to the
statement of cash flows.
I. Investors and creditors analyze the prospects of receiving a cash return from their dealings with
A. Cash flows to investors and creditors depend on the corporation generating cash flows to
II. The statement of cash flows fills an information gap left by the balance sheet and the income
A. It presents information about cash flows that the other statements either (a) do not
provide or (b) provide only indirectly.
B. Cash continuously flows into and out of an active business.