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
- Term and serial bonds
Bonds that mature-are due for payment-at a single specified future date are term bonds. In contrast, bonds that mature in installments are serial bonds.
- Research & development costs
Research and development costs are expenditures that may lead to patents, copyrights, new processes, and new products.
- Human element
The human element is an important factor in every system of internal control. A good system can become ineffective as a result of employee fatigue, carelessness, or indifference.
- Gross profit
Gross profit refers to the excess of net sales over the cost of goods sold. Companies deduct from sales revenue the cost of goods sold in order to determine gross profit.
- Lower-of-cost-or market (LCM) basis
Lower-of-cost-or market (LCM) basis is a basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.
- FICA Taxes
In 1937 Congress enacted the Federal Insurance Contribution Act (FICA). FICA taxes are designed to provide workers with supplemental retirement, employment disability...
- Closing entries
Closing entries referred as entries that made at the end of an accounting period to transfer the balances of temporary accounts to a permanent owner’s equity account...