Lesson: 61

Topic: Statement of Cash Flows

Objective:

Once we have taken up last day's problem, we will then explore the Statement of Cash Flows. This is a statement that allows us to examine changes to our cash account. Thus, we compare all inflows of cash with all outflows of cash, in order to see whether we have experienced a net increase, or a net decrease, in cash for the accounting period. Although this statement may look similar to an Income Statement, make no mistake, it in no way depicts net income. This statement does not consider when cash was earned, nor does it differentiate between cash spent on assets or expenses.

Expectations Addressed:

The "Internal Control, Financial Analysis, and Decision Making" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Internal Control Procedures:
  • describe the basic elements of an internal control system (e.g., separation of duties, prenumbered documents, rotation of staff);
  • apply appropriate control measures used in accounting for assets (e.g., petty cash procedures, bank reconciliation procedures);
  • describe the role of budgeted financial statements in planning, controlling, and evaluating business results (e.g., difference between budgeted and actual income statements);
  • describe the role and work of an auditor.
• Financial Analysis:
  • explain the importance of current assets and current liabilities when interpreting a balance sheet;
  • analyse a company’s liquidity and solvency by using simple financial ratios (e.g., current ratio, debt ratio) and other financial analysis tools (e.g., comparative statements, trend analysis, common size statements);
  • analyse a company’s profitability by using simple financial ratios (e.g., gross profit percentage, return on equity) and other financial analysis tools (e.g., comparative statements, trend analysis, common size statements).
• Decision Making:
  • describe how accounting information is used by company personnel (e.g., department managers, owners) in making decisions;
  • explain the role of financial analysis in decision making from the standpoint of potential investors (e.g., mutual fund managers, institutional investors, individual investors);
  • describe how accounting information is used by individuals or organizations outside the company (e.g., governments, Ontario Securities Commission, police, forensic accountants) in making decisions.