Companies prepare the statement of cash flows differently from the three other basic financial statements. First, it is prepared from an adjusted trial balance. It requires detailed information concerning the changes in account balances that occurred between two points in time. An adjusted trial balance will not provide the necessary data. Second, the statement of cash flows deals with cash receipts and payments. As a result, the company must adjust the effects of the use of accrual accounting to determine cash flows.
The information to prepare this statement usually comes from three sources:
Comparative balance sheets: Information in the comparative balance sheets indicates the amount of the changes in assets, liabilities, and stockholders’ equities from the beginning to the end of the period.
Current income statement: Information in this statement helps determine the amount of cash provided or used by operations during the period.
Additional information: Such information includes transaction data that are needed to determine how cash was provided or used during the period.
More from this Section
- Unearned income
Income received though a part of it is not applicable to the current year but will be earned during the following year is called
- Annual rate of return technique
Annual rate of return technique determines the profitability of a capital expenditure by dividing expected annual net income by the average investment.
- Direct labor budget
The direct labor budget contains the quantity (hours) and cost to direct necessary to meet production requirements. The total direct labor cost is derived from the following formula.
- Direct labor
The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is called direct labor.
Manufacturing consists of activities and process that convert raw materials into finished goods. Contrast this type of operation with merchandising...
- Just-in-time (JIT) inventory
Just-in-time (JIT) inventory is a inventory system in which goods are manufactured or purchased just in time for use.
- Leveraging/ Trading on Equity
Leveraging or trading on the equity at a gain means that the company has borrowed money at a lower rate of interest than it is able to earn by using the borrowed money.