Memorandum

To:Karen Thompson

From:Catie Maas

Date:February 22, 2015

Subject: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 long-term 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

Memorandum

To:

Karen Thompson

From:

Catie Maas

Date:

February 22

, 2015

Subject:

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 tec

hnical 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/in

flow.

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.

Memorandum

To: Karen Thompson

From: Catie Maas

Date: February 22, 2015

Subject: 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.