Which of the following correctly lists the three-step analysis to determine cash provided or used by financing activities on the statement of cash flows?

• A. Calculate net income, adjust for non-cash expenses, and analyze changes in current assets and liabilities.
• B. Identify cash receipts from customers, subtract cash payments to suppliers, and adjust for depreciation.
• C. Classify cash flows as operating, investing, or financing, total each section, and reconcile to the ending cash balance.
• D. Identify changes in financing account balances, determine the cash effect of each change, and explain the net cash provided or used by financing activities.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the purpose of the financing activities section in the statement of cash flows. Financing activities involve transactions that affect long-term liabilities and equity, such as issuing debt, repaying debt, issuing stock, or paying dividends.
2. Step 2: Identify changes in financing account balances. Look at the comparative balance sheets to determine how accounts like long-term debt, common stock, and retained earnings have changed over the period.
3. Step 3: Determine the cash effect of each change. For example, if long-term debt increased, it likely indicates cash inflow from borrowing. If dividends were paid, it represents a cash outflow.
4. Step 4: Explain the net cash provided or used by financing activities. Sum up all cash inflows and outflows related to financing activities to determine the net effect on cash.
5. Step 5: Ensure the financing activities section reconciles with the overall change in cash on the statement of cash flows, alongside operating and investing activities.