BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Cash Flow Statement

This statement is a categorized list of all transactions of the period that affected the Cash

account.

The three categories are . . .

Operating activities, Investing activities, and Financing activities.

Classifications of the Cash Flow Statement

Cash Equivalents CashCurrency

Short-term, highly liquid investments.

Readily convertible into cash.

Statement of Cash Flows

• To assess the firm’s ability to generate cash and cash equivalents and

• To assess the firm’s cash requirements

• Statement of Cash Flows shows:• Where the cash came from• What the cash was used for• The change in the cash balance

Statement of Cash FlowsCash activities are divided into three main

categories:

1. Operating Activities• Main revenue-producing activities

2. Investing Activities• Changes in long-term assets and investments

3. Financing Activities• Changes in equity and non-operating liabilities

Cash Flows from Operating Activities

The Direct Method of presenting the Operating Activities section of the cash flow statement reports components of cash flows from operating activities as gross receipts and gross payments.

The Indirect Method of presenting the Operating Activities section of the cash flow statement adjusts net income to compute cash flows from operating activities.

Cash Flows from Operating Activities – Direct Method

+

_

Outflows to: Purchase goods (for resale)

and services Salaries and wages Income taxes Interest on liabilities

Inflows from: Sales to customers Interest and dividends

received Cash Flows from

Operating Activities

Sales revenue + Decrease in accounts receivable- Increase in accounts receivable= Cash collected from customers

Cost of goods sold+ Increase in inventory- Decrease in inventory- Increase in accounts payable+ Decrease in accounts payable= Cash payments to suppliers

Cash Flows from Operating Activities—Direct Method

Net IncomeCash Flows from

Operating Activities - Indirect

Method

+/- Changes in current assets and current

liabilities.

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

The indirect method adjusts net income by eliminating non-cash items.

Cash Flows from Operating Activities- Indirect Method

Cash Flows from Operating Activities

Net Income +/- Adjustments

Depreciation Expense

Gains and Losses on the Sale of Long-Term Assets

Changes in the Current Asset andCurrent Liability Accounts

A

C

B

Make adjustments for changes in current assets and current liabilities using the decision table above.

Reporting Cash Flows from Operating Activities—Indirect Method

Sep 30, June 30,In Thousands of dollars 2006 2006 ChangeASSETSCurrent assets:

Accounts receivable 27,687$ 21,682$ 6,005 Inventories 71,870 70,131 1,739 Prepaid expenses 4,490 3,318 1,172

Total current assets 104,047 95,131 Property, plant and equipment (net) 84,863 85,001 (138) Long-term investments 8,131 8,219 (88) Goodwill 36,171 36,171 - Total assets 233,212$ 224,522$ LIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:

Bank indebtedness 44,080$ 41,982$ 2,098 Accounts payable 18,423 12,210 6,213 Accrued liabilities 7,134 6,569 565 Dividends payable 917 778 139 Income taxes payable - 470 (470)Current portion of long-term debt 5,897 5,892 5

Total current liabilities 76,451 67,901 Long-term debt 51,430 52,998 (1,568)Future income taxes 12,514 12,445 69

Total liabilities 140,395 133,344 Stockholders' Equity:

Share capital 7,375 7,375 0Retained earnings 85,442 83,803 1,639

Total shareholders' equity 92,817 91,178 Total liabilities & shareholders' equity 233,212$ 224,522$

ANDREW PELLER LIMITEDCONSOLIDATED BALANCE SHEET - unaudited

(in thousands of dollars)Quarter ended Sept. 30, 2006

Net sales 59,413$ Cost of goods sold 34,369 Gross margin 25,044 Operating expenses:Selling, general and administrative 17,880 Amortization of plant and equipment 1,908 Total operating expenses 19,788 Operating income 5,256 Interest expense 1,383 Income before income taxes 3,873 Provision for income taxes 1,317 Net income 2,556$

ANDREW PELLER LIMITEDConsolidated Statement of Earnings - Unaudited

(in thousands of dollars)Quarter ended Sept. 30, 2006

Net sales 59,413$ Cost of goods sold 34,369 Gross margin 25,044 Operating expenses:Selling, general and administrative 17,880 Amortization of plant and equipment 1,908 Total operating expenses 19,788 Operating income 5,256 Interest expense 1,383 Income before income taxes 3,873 Provision for income taxes 1,317 Net income 2,556$

ANDREW PELLER LIMITEDConsolidated Statement of Earnings - Unaudited

The Statement of Cash Flows will begin with

Net income from the Statement of

Earnings.

Operating Activities - Indirect Method

The Net income

number will be adjusted for non-cash

items.

(in thousands of dollars)Quarter ended Sept. 30, 2006

Net sales 59,413$ Cost of goods sold 34,369 Gross margin 25,044 Operating expenses:Selling, general and administrative 17,880 Amortization of plant and equipment 1,908 Total operating expenses 19,788 Operating income 5,256 Interest expense 1,383 Income before income taxes 3,873 Provision for income taxes 1,317 Net income 2,556$

ANDREW PELLER LIMITEDConsolidated Statement of Earnings - Unaudited

In the case of Andrew Peller, those adjustments included amortization expense ($1,908)

This is the most common non-cash item and one you will ALWAYS need to adjust

Operating Activities - Indirect Method

(All amounts in 000s)Cash flows from operating activities: Net income $2,556

Net cash provided by (used in) operating activities

Consolidate Statement of Cash Flows - UnauditedANDREW PELLER LIMITED

For the Quarter Ended September 27, 2003

With the indirect method, always start with the net income or net

loss for the period.

Next, adjust for the non-cash items included in net income.

Reporting Cash Flows from Operating Activities—Indirect Method

(All amounts in 000s)Cash flows from operating activities: Net earnings 2,556$ Items not affecting cash: Amortization of plant and equipment 1,908 Future income taxes 69 Changes in non-cash operating working capital items: Increase in accounts receivable (6,005)

Increase in inventory (1,739) Increase in prepaid expenses (1,172) Increase in accounts payable 6,213 Increase in accrued liabilities 565 Decrease in income taxes payable (470)

Net cash provided by (used in) operating activities 1,925$

3 Months EndedSeptember 30, 2006

Consolidated Statement of Cash Flows - UnauditedANDREW PELLER LIMITED

As at September 30, 2006

To complete the Cash flows from operating activities section, you must examine a comparative balance sheet to determine the changes in current assets and current liabilities from the beginning of the period to the end of

the period.

Reporting Cash Flows from Operating Activities—Indirect Method

Now, make adjustments for changes in current assets and current liabilities

Reporting Cash Flows from Operating Activities—Indirect Method

Net Income 2,556

Add back amortization 1,908

Change in non-cash working capital:

Increase in accounts receivable (6,005)

Increase in inventory (1,739)

Increase in prepaid expenses (1,172)

Increase in accounts payable 6,213

Increase in accrued liabilities 565

Decrease in income taxes payable (470)

Net cash provided by (used in) operating activities $1,856

Direct Method vs. Indirect Method

The CICA Handbook recommends the direct method, but it is rarely seen in

practice.

Many financial executives have reported that they do not use it because it is more

expensive to implement than the indirect method.

Cash Flows from Investing Activities

+

_

Cash Flows from

Investing Activities

Inflows from: Sale or disposal of property,

plant, and equipment. Sale or maturity of investments

in securities.

Outflows to: Purchase property, plant, and

equipment. Purchase investments in

securities.

Cash Flows from Financing Activities

Cash Flows from

Financing Activities

+

_Outflows to:

Repay principal to creditors (excluding interest)

Repurchase equity securities from owners

Pay dividends to shareholders

Inflows from: Borrowing on notes,

mortgages, bonds, etc. from creditors

Issuing equity securities to shareholders

Relationship to the Balance Sheet and Income Statement

Information needed to prepare a cash flow statement:

Comparative Balance Sheets Income Statement Additional details concerning different types

of transactions and events

Relationship to the Balance Sheet and Income Statement

Cash = Liabilities Shareholders’ Equity Non-

cash Assets

Derives from . . .

Assets = Liabilities Shareholders’ Equity

Additional Cash Flow Disclosures

Required Supplemental Information

1. Reconciliation of net income to cash flow from operations.

2. Cash paid for income taxes and interest.

3. Significant non-cash investing and financing activities.

Adjustment for Gains and Losses

GainsGains must be subtracted from net

income to avoid double counting the gain.

Losses Losses must be added to net income to avoid double counting the loss.

Transactions that cause gains and losses should be classified on the cash flow statement depending on their dominate

characteristics.

For example, if the sale of equipment produced a gain, it would be classified as an investing activity.

Interpreting Cash Flows from Operating Activities

Accounts Receivable Changes

Managers sometimes attempt to boost declining sales by extending credit

terms or by lowering credit standards. The resulting increase in accounts receivable can cause net income to outpace cash flows from operations.

Inventory Changes

Inventory growth can be a sign that planned sales growth did not

materialize. A decline in inventory can be a sign that the company is

anticipating lower sales in the next quarter.

Interpreting Cash Flows from Financing Activities

The long-term growth of a company is normally financed from three sources:

1. internally generated funds, 2. the issuance of shares, and

3. money borrowed on a long-term basis.The statement of cash flows shows how

management has elected to fund its growth. This information is used by analysts who wish to evaluate

the capital structure and growth potential of a business.