Statement of Cash Flows - Lesson 2

In this video, 25.01 – Statement of Cash Flows – Lesson 2, Roger Philipp, CPA, CGMA, has a discussion on the statement of cash flows, mainly that all cash inflows and outflows are categorized as operating, investing, or financing activities.

Roger goes into detail on the definitions of operating, investing, and financing activities, providing examples for all. He tells us to remember that interest paid and interest received are both considered operating activities under US GAAP, though IFRS is different. And that dividends received are an operating cash inflow, but dividends paid are a financing cash outflow, because they are considered distributions to owners.

Roger does some journal entries on the whiteboard to help show both sources and uses of cash on the statement of cash flows. Then Roger explains how journal entries help to reconcile between accrual accounting and cash flow, going into different scenarios and angles: maybe there was interest expense, but it wasn’t all cash, because some of it was amortization of bond discount; maybe there was depreciation expense, but it was all accumulated amortization, and no cash.

Find out what Roger’s conclusions are, and don’t miss another handy mnemonic that is LIP for investing activities – Loans, Investments, Property.

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Video Transcript Sneak Peek:

Now as I said, we have operating activities. What are operating activities? "In-flows and out-flows related to production of income from continuing operations". So it says, "All transactions that are not investing or financing". Are what? Operating, so everything kind of falls into this category if it's not investing or financing which are very carefully defined.

So for example, collections on sales from customers. As you make a sale, we'll do lots of journal entries, I'm going to debit cash, credit sales. That would be collection from sales. Let's say I collect an account receivable. I might have an account receivable here I'm setting it up. Then later I collect it, debit cash, and credit AR. Collections on sales from customers, payments for cost of goods sold and SG&A.

Interest received and paid, circle that. Interest received, interest paid. Interest received, interest paid is what? Operating under GAAP. It's going to be different under IFRS so that's important, but for now let's just study GAAP.

Dividends received are also operating because most companies buy stocks, bonds and so on as a normal part of operations with their extra cash. They are just putting the cash somewhere to make money. Acquisition or disposal of trading securities. Payments for taxes. Taxes, normal part of business, operating activity. Payments for taxes, all other receipts and disbursements that do not stem from investing or financing are also operating.
So as we go through we are going to be doing a lot of journal entries and basically, if you debit cash that's a cash in-flow, a source. If you debit, let's say you have some kind of expense and we credited cash, that would be an out-flow, cash going out.

A statement of cash flows, you know, normally we're doing accrual accounting. Here, let's take accrual and go back to cash. We're going to be doing some reconciling between accrual and cash because we've got to figure out, how much of this transaction was actually cash? Maybe there was interest expense, but it wasn't all cash because some of it was amortization of bond discount or premium, hhmmm. We have depreciation expense but it wasn't cash because it was accumulated amortization. So that's where we have to kind of go through and see what the journal entries were to figure them out.

Now, FASB very carefully defines investing activities and financing activities. Investing activities you can think of this, don't give me any lip. So when I talk about lip, what does that mean? That is going to be things like loans, investments and investments like property, plant and equipment, investing in yourself.