Statement of Cash Flows

📘 Statement of Cash Flows – CMA Part 1 Summary (IMA LOS)

✅ Objective:

Understand how to prepare, analyze, and interpret the statement of cash flows using either:

• Direct method or
• Indirect method (more common in practice and on the CMA exam).

📂 3 Main Sections of the Statement of Cash Flows:

🧮 Indirect Method (Most Tested on CMA)

Start with Net Income, then adjust for:

1. Non-cash items (e.g., depreciation, amortization)
2. Gains/losses on sale of assets
3. Changes in working capital (current assets & liabilities)

Formula Sample:

Net Income
+ Depreciation/Amortization
+ Losses / - Gains on sale of assets
+ Decrease in Current Assets / - Increase
+ Increase in Current Liabilities / - Decrease
= Net Cash Flow from Operating Activities

🧾 Key Concepts & Exam Tips:

1. Non-cash transactions (like issuing stock for assets) are disclosed in footnotes, not in cash flows.
2. Depreciation is added back because it reduces net income but doesn't use cash.
3. Buying equipment is an investing outflow, while borrowing money is a financing inflow.
4. Paying dividends is a financing outflow, but receiving dividends is an operating inflow (under US GAAP).
5. The indirect method is heavily favored on the exam, especially in computational questions.
6. You must know how to calculate cash flows and also how to interpret them for analysis.

🧠 Practice Question Example:

A company has net income of $100,000. Depreciation expense is $10,000. Accounts receivable increased by $5,000, and accounts payable increased by $8,000. What is the cash flow from operating activities using the indirect method?

Solution:

Net Income = $100,000
+ Depreciation = $10,000
- Increase in A/R = ($5,000)
+ Increase in A/P = $8,000
= Net cash flow from operations = $113,000