Preface xvii
This chart clearly shows students that if the cash basis had been used for all three
months, a net loss of $(1,690) would have been reported in November. Students can
see that, if cash basis had been used, the financial statements might misrepresent the
financial performance of Family Health Care, which is actually a successful, rapidly ex-
panding business. This is illustrated by the net income under the accrual basis of ac-
counting of $6,390 for November. In other words, students learn that the accrual basis
of accounting is a better indicator of the financial performance of a business than is
cash flows; this is why the accrual basis of accounting is required by GAAP.
While illustrating and explaining why the accrual basis of accounting is required
by GAAP, the authors also emphasize the importance of the statement of cash flows
and net cash flows from operations. For example, a business cannot survive in the
long-term without positive cash flows from operations.
STATEMENT OF CASH FLOWS
The statement of cash flows is described and illustrated throughout Chapters 1–5. In
addition, end-of-chapter exercises and problems allow instructors the choice of as-
signing homework that requires students to prepare the statement of cash flows.
The importance of communicating the effects of financing, investing, and operat-
ing business activities through the statement of cash flows is described in Chapter 1.
In addition, Chapter 1 includes exercises and problems that require the preparation of
the statement of cash flows from summary data.
Chapter 2 uses only cash transactions to illustrate the recording of transactions
using IFS spreadsheets. As noted earlier, the statement of cash flows can easily be pre-
pared from the IFS summary spreadsheets.
Although Chapter 3 introduces the accrual basis of accounting, the statement of
cash flows can easily be prepared from the IFS summary spreadsheets. An appendix
at the end of Chapter 3 gives instructors the option of covering the reconciliation of
net cash flows from operations with net income under the accrual basis.
Chapters 4 and 5 also provide additional chapter illustrations of the statement of
cash flows. In addition, both chapters provide appendices that illustrate how the state-
ment of cash flows is prepared by analyzing the cash account under a double-entry
accounting system. These chapter appendices allow instructors to continue their cov-
erage and discussion of the statement of cash flows. Both chapters contain appendix
exercises and problems for instructors who want to assign statement of cash flows
homework.
Chapters 6 through 12 contain boxed statement of cash flows items that further
explain how more complex accounting topics impact the statement of cash flows.
Chapter 13 is a traditional statement of cash flows chapter, illustrating the indirect and
direct methods of cash flows from operating activities. However, instructors who cover
Net Cash Flow
from Operations Net Income
September $ 2,600 $2,
October 3,220 3,
November (1,690) 6,FROM PAGE 118