The document defines key accounting terms related to financial statements: - A statement of cash flows reports the impact of operating, investing, and financing activities on a firm's cash flows over an accounting period. It summarizes changes in a company's cash position. - The statement of retained earnings reconciles the beginning and ending balances in the retained earnings account and shows changes from net income and dividends. - Key terms include securities, debt securities, equity securities, amortization, and accrual-based accounts.

1. Statement of Cash Flows:

2. A statement reporting the impact of a firm’s
operating, investing and financing activities
on cash flows over an accounting period.
It summarizes the changes in a company’s
cash position.

3. The objective of the statement of cash flows is
to provide the user of the financial statements
with information as to how the reporting entity
has generated cash during the reporting period
and how the entity has spent that cash during
the reporting period.
It is important to know your cash flow so that
you may adequately plan your expenditures.
Should there be a cut back on payments because
of a cash problem? Where are you getting most
of your cash? What products or projects are cash
drains or cash cows? Is there enough money to
pay bills and buy needed machinery?

4. Purposes of the statement.
a. To provide information about the cash receipts and cash
payments of an entity during a period. Important information for
financial statement users.
b. To summarize the operating, investing, and financing activities
of the business.
Uses of the statement.
a. Assessing the entity’s ability to generate positive future cash
flows.
b. Assessing the entity’s ability to pay dividends and meet
obligations.
c. Reconciling the difference between net income and net cash
flow from operating activities.
d. Assessing the cash and noncash investing and financing
transactions during the period

5. The statement of cash flow is segregated into the following three parts;
Operating activities are the day-to-day revenue-producing activities. They are
connected to the manufacture and sale of goods or the rendering of services. These
include
net income,
depreciation and
changes in current assets and current liabilities other than cash and short term
debt.
Investing activities are the acquisition and disposal of long-term assets that are not
considered to be cash equivalents. These can comprise:
Acquisition of property, plant and equipment (PPE).
Disposals of PPE.
Investing in long term investments.
Acquisitions and disposals of subsidiaries/joint ventures/associates.
Financing activities are those activities which change the capital and borrowing
structure of the reporting entity. Examples of such financing activities are:
Loans taken out in the year.
Proceeds from share issues.
Buy back of equity shares.
Redemption of preference shares/debentures.

6. Cash inflow
Revenue from sale of goods and services
Interest (from debt instruments of other
entities)
Dividends (from equities of other entities)
Cash outflow
Payments to suppliers
Payments to employees
Payments to Government
Payments to Lenders
Payments for other expenses

7. Cash inflow
Sale of Property, Plant, and Equipment
Sale of Debt or Equity Securities (other
entities)
Collection of principal on loans to other
entities
Cash outflow
Purchase Property, Plant, and Equipment
Purchase Debt or Equity Securities (other
entities)
Lending to other entities

8. Cash inflow
Sale of Equity Securities
Issuance of Debt Securities
Cash outflow
Dividends to shareholders
Redemption of long-term debt
Redemption of capital stock

9. Direct Method: uses cash receipts from
operations and cash disbursements to create the
income statement on a cash basis
Indirect Method: starts with net income and
adjusts it for change in current asset and current
liability accounts, generally easier and more
commonly used method
We will use the indirect method

10. Information for the preparation of the Statement
of Cash Flows is derived from three sources:
Comparative Balance Sheets
Current income statements
Selected transaction data
Three steps:
Determine Change in Cash
Determine net cash flow from operating
activities
Determine cash flow from investing and
financing activities

11. Net
incom
e
+
Depreciation in
expense
Increase in deferred
taxes
Decrease in
accounts
receivables
Decrease in
inventories
Decrease in prepaid
expenses
Increase in payables
Loss in disposal
-
Decrease in deferred
taxes
Increase in account
receivables
Increase in
inventories
Increase in prepaid
expenses
Decrease in payables
Gain in disposal
=
Net cash
flow
from
Operatin
g
Activitie
s

15. The retained earnings statement reconciles the
beginning and ending balances in the retained
earnings account. This statement can be presented
as a separate statement or in a combined statement
of income and retained earnings.
A company's overall net income will cause retained
earnings to increase and a net loss will result in a
decrease. Retained earnings is also reduced by
shareholder dividends.
The statement of retained earnings provides a
succinct reporting of these changes in retained
earnings from one period to the next. In essence, the
statement is nothing more than a reconciliation or
“bird’s-eye view” of the bridge between the retained
earnings amounts appearing on two successive
balance sheets.

16. A statement reporting how much of the
firm’s earnings were retained in the business
rather than paid out in dividends.
It is the sum of the annual retained earnings
for reach year of the firm’s history.

19. Prepare the Heading for the Statement of
Retained Earnings
A Statement of Retained Earnings should
have a three-line header. The first line is the
name of the company. The second line is
simply, "Statement of Retained Earnings." The
third line is "For the Year Ended XXXXX." For
the word "year," any accounting time period
can be entered.

20. State the Balance of Retained Earnings
from the Prior Year
The first item on the Statement of Retained
Earnings should be the balance of retained
earnings from the prior year. This comes
from the prior year's balance sheet. Let's say
that the balance of retained earnings for our
hypothetical firm is $20,000. The first line
for the Statement of Retained Earnings would
look like this:
Retained Earnings, December 31,
2013 $20,000

21. Add Net Income from the Income Statement
The Statement of Retained Earnings should be the
second financial statement prepared. The Income
Statement is the first financial statement prepared.
Let's say that net income from the hypothetical
company is $10,000. That is the first item added into
the Statement of Retained Earnings. Our retained
earnings statement is now going to look like this:
Retained Earnings: December 31,2013 $20,000
Plus: Net Income 2014 +10,000
Total $30,000
If the company has a net loss on the Income
Statement, then the net loss is subtracted from the
existing retained earnings.

22. Subtract Dividends that your Company Pays out to
Investors
Does your company pay dividends? If it does, you
subtract the amount of dividends your company pays
out of net income. If it does not, then you subtract
$0. Let's say your company's dividend policy is to pay
50 percent of its net income out to its investors. In
this example, $5,000 would be paid out as dividends
and subtracted from the current total.
Retained Earnings, December 31, 2013 $20,000
Plus: Net Income 2014 +10,000
Total $30,000
Minus: Dividends (5,000)

23. Prepare the Final Total for Retained Earnings for
2014
Subtract out the dividends, if you pay dividends, and
total the Statement of Retained Earnings. This is the
amount of retained earnings that you post to the
retained earnings account on your new 2013 balance
sheet.
Retained Earnings, December 31, 2013 $20,000
Plus: Net Income 2014 10,000
Total: 30,000
Minus: Dividends Paid (5,000)
Retained Earnings, December 31, 2014 $25,000
This completes the Statement of Retained Earnings.

29. A security is a tradable asset of any
kind. Securities are broadly categorized into:
debt securities (such
as banknotes, bonds and debentures),
equity securities, e.g., common stocks; and,
derivative contracts, such
as forwards, futures, options and swaps

30. Any debt instrument that can be bought or sold
between two parties and has basic terms defined,
such as notional amount (amount borrowed), interest
rate and maturity/renewal date. Debt securities
include government bonds, corporate bonds,
municipal bonds, preferred stock, collateralized
securities (such as CDOs, CMOs, GNMAs) and zero-
coupon securities.
The interest rate on a debt security is largely
determined by the perceived repayment ability of
the borrower; higher risks of payment default almost
always lead to higher interest rates to borrow
capital.
Also known as "fixed-income securities."

31. An instrument that signifies
an ownership position (called equity) in a corporation, and
represents a claim on its proportional share in
the corporation's assets and profits. Ownership in the
company is determined by
the number of shares a person owns divided by
the total number of shares outstanding. For example, if a
company has 1000 shares of stock outstanding and a person
owns 50 of them, then he/she owns 5% of the company.
Most stock also provides voting rights, which
give shareholders a proportional vote in
certain corporate decisions. Only a certain type of
company called a corporation has stock;
other types of companies such as sole
proprietorships and limited partnerships do
not issue stock. also called equity or stock or corporate
stock.

32. The paying off of debt in regular installments
over a period of time.
The deduction of capital expenses over a
specific period of time (usually over the
asset's life). More specifically, this method
measures the consumption of the value of
intangible assets, such as a patent or a
copyright.
While amortization and depreciation are
often used interchangeably, technically this
is an incorrect practice because amortization
refers to intangible assets and depreciation
refers to tangible assets.

33. Accounts on a balance sheet that represent
liabilities and non-cash-based assets used in
accrual-based accounting. These accounts
include, among many others, accounts
payable, accounts receivable, goodwill,
future tax liability and future interest
expense.