The statement of financial position, income statement, and retained earnings statement d o not always show

the whole picture of the financial condition of a company or institution. In fact, looking at the financial statements of some well-known companies, a thoughtful investor might ask questions like these: How did
Anheuser-Busch lnBev (BEL) finance cash dividends of 2.1 billion in a year? How could Cathay Pacific
Airways (HKG) purchase new assets that cost HK$9.2 billion in a year in which it reported a net loss of over
HK$8.6 billion? How d i d the companies that spent a combined fantastic $3.4 trillion on mergers and acquisitions in a recent year finance those deals? Answers t o these and similar questions can b e found in this
chapter, which presents the statement of cash flows.
The content and organization of this chapter are as follows.

Usefulness
Classifications
Significant non-cash activities
Format
Preparation
Indirect and direct methods

Step 1: Operating activities

Step 2: Investing and financing
activities
Step 3: Net change in cash

Free cash flow

The statement of financial position, income statement, and retained earnings statement provide only limited information about a company's cash flows (cash receipts
and cash payments). For example, comparative statements of financial position
show the increase in property, plant, and equipment during the year. But they do
not show how the additions were financed or paid for.The income statement shows
net income. But it does not indicate the amount of cash generated by operating activities. The retained earnings statement shows cash dividends declared but not the
cash dividends paid during the year. None of these statements presents a detailed
summary of where cash came from and how it was used.

Usefulness of the Statement of Cash Flows

D

0 :

Indicate the usefulness of the

statement of cash flows.

The statement of cash flows reports the cash receipts, cash payments, and
net change in cash resulting from operating, investing, and financing activities during a period. The information in a statement of cash flows should
help investors, creditors, and others assess:

1. The entity's ability to generate future cash flows. By examining relationships

between items in the statement of cash flows, investors can make predictions of
the amounts, timing, and uncertainty of future cash flows better than they can
from accrual basis data.