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Financial Accounting in an Economic Context, 9th Edition by Jamie Pratt

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CHAPTER 14

The Statement of Cash Flows

Key Points

The following key points are emphasized in this chapter:

  • The structure and format of the statement of cash flows.
  • Cash flows from operating, investing, and financing activities.
  • How the statement of cash flows complements the other financial statements and how it can be used by those interested in the financial condition of a company.
  • Important investing and financing transactions that do not appear on the statement of cash flows and how they are reported.
  • Economic consequences associated with the statement of cash flows.
  • Preparing a statement of cash flows from the information contained in two balance sheets, an income statement, and a statement of shareholders’ equity.

MicroStrategy was a red-hot software company in the business-to-business Internet sector. Unlike many other Internet companies, MicroStrategy reported profits early and often. Then, the bottom fell out when news was released that MicroStrategy had been “cooking the books” by overstating revenues and profits. The stock price plunged and Zack's Research Report noted that, at the time, nine out of ten analysts had recently published “buy” or “strong buy” recommendations. Interestingly, well in advance of the stock price collapse, the company's cash flow from operations told a sobering story—negative $2.5 million instead of a profit of $9 million. Should the analysts have been looking at net cash from operations instead of net income? This chapter, which covers the ...

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