The Financial Accounting Standard 95 (FAS 95), Statement of Cash requires all audited financial statements to include a statement of cash flows in the audited reports. Under FAS 95 rules firms may elect to prepare the required statement of cash flows using either the direct or the indirect method defined in the rule. This example shows information from the financial statements issued by the The Life Saver, LLC. The income statement shows net income for 2009 of $160,000. After a review of the balance sheet accounts and after adjusting net income for operating activity pluses and minuses net cash provided by operating activities totaled $75,000.
Cash at January 1, 2009 = $11,000 and cash at December 31, 2009 = $87,000.
Further review of the balance sheet shows the following increases and decreases relating to investing and financing activities:
- Equipment has increased by $60,000
- Vehicles has decreased by $25,000
- Common Stock has increased by $36,500
The company purchased a security system for his warehouse, disposed of a company truck and issued additional shares of common stock. The security system was paid for with cash. These events are reflected on a statement of cash flows using the indirect method as follows:
The Life Saver Company, LLC
Statement of Cash Flows
For the Year Ended December 31, 2009
|Cash flows from operating activities:|
|Other operating activities not detailed in this example||(85,000)|
|Net cash provided by operating activities||75,000|
|Cash flows from investing activities:|
|Sale of vehicle||25,000|
|Purchase of equipment||(60,000)|
|Net cash used by investing activities||(35,000)|
|Cash flows from financing activities:|
|Issued common stock||36,500|
|Net cash provided by financing activities||36,500|
|Net increase in cash = 75,000 - 35,000 + 36,500||76,500|
|Cash, January 1, 2009||11,000|
|Cash, December 31, 2009||87,500|
The Life Saver, LLC has an overall increase in cash for the year of $76,500. The information provided in the statement of cash flows helps investors, creditors, and other stakeholders to assess the effects of an enterprise’s financial position of both its cash and non-cash investing and financing transactions during the period.