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Memorandum

To:
From:
Date:
Subject:

Karen Thompson
Catie Maas
February 22, 2015
Technical Definition and Description

This memo provides a definition and description of accounting statement of cash flows. The
statement of cash flows are used by accountants to assess the cash inflows and outflows from
operating, financing and investing activities during a period. The statement of cash flows is the
most difficult document to understand however, is the most useful document for accountants
because it assess a businesss financial performance.
Audience
The audience for this technical definition and description are classmates and small business
owners who do not have an accounting degree but would like more information on the statement
of cash flows. The majority of the audience will have some college and understanding of
accounting who want to broaden their accounting skills. This audience has little knowledge about
the basics of the statement of cash flows.
Problem/Purpose
The purpose of this technical definition and description is to give the audience a better
understanding of the statement of cash flows. The goal is to provide the audience with a general
understanding and background of the statement of cash flows to be able to assess where cash
inflows and outflows are coming from in a business.
Placement
The placement of this document is the definition and then the description. The description is
broken down into the three activities that go further into detail about what is a cash
outflow/inflow.
Choice of Visuals
The visuals used in this document are to help the readers understand the format of the statement
of cash flows. The visuals will help support the definition and description in providing a general
understanding of the format used and to assess where/what are cash inflows/outflows. Both
figures were pulled from online sources.

Technical Definition: What is a Statement of Cash Flows?


The statement of cash flows is an organized statement with three sections that aid in determining
a businesss financial performance. The three sections are first operating activities, second
investing activities, third financing activities, and last cash at end of period. The statement of
cash flows are used by accountants to show the actual cash flowing in and flowing out during a
period of time. The basic formula for the statement of cash flows is net (inflows minus outflows)
cash provided by operating activities minus the net cash provided by investing activities plus the
net cash provided by financing activities equals the net cash increase/decrease for the period.
Then you take the net cash increase/decrease minus the cash balance from previous period to
equal change in cash from current period.
Operating Activities
Operating activities are activities that increase
or decrease actual cash that determine net
income. These activities can be found on the
income statement which consists of revenues
and expenses. The most common inflow
(cash received) activities are: cash from sales
of goods/services, dividends received from
equity securities, and interest received from
interest earning assets. The most common
outflow (cash used) activities are: payments
for purchase of inventory, payments for
operating activities (rent, salaries, utilities,
etc.), payments to suppliers for purchases
other than inventory, payments to lenders
(loans), and payment for taxes.
Investing Activities
Investing activities are activities found on the
balance sheet under long term assets. They
generally include making and collecting
loans, acquiring and disposing of investments
and productive long-lived assets. The most
common inflow activities are: cash from sale
of property, plant and equipment (PPE), cash
collections from loans to others, cash from
sale of debt/equity securities of other entities,
and cash from the sale of a business segment.

The most common outflow activities are: purchases of PPE, loans to others, and purchase of
debt/equity securities of other entities.

Financing Activities
Financing activities are activities that involve liabilities and stockholders equity (SE) which are
found on the balance sheet. These activities include cash from creditors and repaying the
amounts borrowed, and obtaining capital from owners and providing them with a return on and
return of their investment. The most common inflow activities are: cash from borrowings, and
cash from issuing the businesss own equity securities. The most common outflow activities are:
repayments of debt/ borrowings, repurchase of businesss own equity securities, and repayment
of dividends to our stockholders.
Technical Description: How Does a Statement of Cash Flows Work?
A statement of cash flows works by taking the net of cash from the operating, investing, and
financing activities to equal the change in cash for the period. Once the activities for each section
are determined investors can use the statement of cash flows as an analytical tool to assess how a
business generates and uses its cash.
Determining Net Flows of Cash for Each Activity
The operating activities represents the cash
generated internally from a business while
the investing and financing represent cash
generated externally from a business. First
the cash inflows are determined, second
the cash outflows are determined and
lastly the net flow is determined by taking
the inflows minus the outflows for each
activity. The net flow can be either
positive or negative for each activity.
Determining Change in Cash for the
Period
Once the net flow is determined for the
three activities the change in cash for the
period can be determined. To determine
this change you take the net flow from
operating activities minus the net flow
from investing activities plus the net flow

from financing activities. This will equal the net increase/decrease in cash. Then you take the net
increase/decrease minus the previous periods cash amount to equal the change in cash in the
current period. This change in cash is reflected in the cash account on the balance sheet.
Use the Statement of Cash Flows as an Analytical Tool
Once the net flow from each activity and the change is cash is determined investors can use the
statement as an analytical tool. Investors use the statement to assess the following about a
business: its ability to generate cash in the future, its capacity to meet obligations for cash, its
future external financing needs, its success in managing investing activities and its effectiveness
in implementing financing and investing strategies. The main activity we use to determine the
preceding assessments is the operating activities because this shows how we generate cash
internally. Ideally the net flow from operating activities should be positive and not negative. A
positive net flow means the businesses assets are being used to their fullest and are generating
cash. This results in the business having to borrow less (financing activity) and not having to sell
off long- term assets (investing activity). A negative net flow means the business is not using
their assets to their fullest and are not generating much cash if any at all. This results in the
business having to borrow more at a cost (financing activity) and having to sell off their longterm assets also at a cost (investing activity). The bottom line is investors want to see that the
business can generate cash and use cash sparingly or when appropriate, such as buying new PPE
to generate future cash.

Cited Visuals
Table 1: www.cliffnotes.com
Genesis:
www.highered.mheducation.com/sites/dl/premium/0077338073/student/wiL10874_1607.jpg

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