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STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS
• 4th REQUIRED GAAP Statement.• Covers a period of time (like an income statement).• Focuses on: Inflows of CASH
Outflows of CASH
text p. 586
201Lec12.PPT
Questions the Statement of Cash Flow Answers
Format of the Statement of Cash Flows Four parts (called activities):
•Operating - Cash from sales less cash spent on expenses - 2 options: direct or indirect
•Investing - Cash in and out from buying and selling of balance sheet items
•Financing - Cash in from borrowing or stock issue less cash out from paying back debt, buying treasury stock or paying dividends
•Non-cash investing and financing activities(must be “significant” in $$$)
FORMATFORMAT - 3 main parts plus schedule - 3 main parts plus schedule
Net Income Per income stmt (Accrual basis) xxx + or - Adjustments (Convert to cash basis) xxxNet Cash from Operations xxx
Called INDIRECT METHOD
text p. 5891 - Cash from OPERATING activities:
Cash receipts from customers xxxless Cash payments: suppliers xxx
operating expenses xxx taxes xxx -
xxxNet Cash from Operations
xxxCalled DIRECT METHOD
A l t e r n a t i v e l y text p. 612
SAME
AMOUNT
2 - Cash from INVESTING activities:
Buy or sell PP&E. xxx
Buy or sell OTHER company’s stock. xxx
Lend Money, Receive repayments. xxx xxx
3 - Cash from FINANCING activities:
Borrow money, pay back debt. xxx
Buy or sell your OWN stock. xxx
Pay dividends. xxx xxx
NET INCREASE (DECREASE) IN CASH XXX
Cash at Beginning of Year (On balance sheet) XXX
Cash at End of Year (On balance sheet) XXX
4 - Supporting ScheduleSIGNIFICANT NON-CASH Transactions should be disclosed
in a separate schedule.
For example: Trade stock for a building or
Sign note payable for building.
EXAMPLES: Operating activities adjustments.1 - Accrual to Cash conversion:
Assume: Sales for year = $100,000. Beginning A/R = $10,000. Ending A/R = 0.
Cash Collected?Cash Collected if Ending A/R = $15,000 instead of $0?Operating Activities:Net income XXXX
- Increase in A/R ( 5,000)Cash from Operations XXXX
If DIRECT method: Operating Activities:Receipts from customers:
95,000
Operating activities Indirect Method RULES:• Increases in all current assets (except cash) require
negative adjustments to arrive at cash flow.• Decreases in all current assets (except cash) require
positive adjustments to arrive at cash flow.• Increases in all current liabilities require positive
adjustments to arrive at cash flow.• Decreases in all current liabilities require negative
adjustments to arrive at cash flow.
EXAMPLES: Operating activities adjustments.2 - Noncash revenues or expenses:
Assume the following: Cash Revenues 100,000Cash Expenses 90,000Depreciation Exp 50,000
NI (40,000)What is Cash Flow?Statement of cash flows:
Net income (40,000)+ Depreciation 50,000Cash from Operations 10,000
If DIRECT method: Omit any mention of non-cash expenses! Cash Revenues
100,000Cash Expenses 90,000 Net cash flow 10,000
Additional Indirect Method RULES:• To arrive at operating activities cash flows: Addback
non-cash expenses such as:
Depreciation
Amortization
Loss on sale of assets (Also subtract gains.)
EXAMPLES: Investing & Financing activities3 - Examine all Non-current assets and liabilities beginning and
ending balances. Assume selected balances are:Beginning Ending
Long term assets: Land 100,000 115,000Long term liabilities: N/P 200,000 175,000Equity: Common Stock 500,000 600,000
• How did they change? Cash paid or received ?• If no cash involved, significant exchange?• Investing or financing?Note no difference if DIRECT method. Affects only operating
activities format.
Investing and financing RULES:• Locate investing and financing activity items by
reviewing changes in long-term assets, liabilities and equity over the year.
- If change used or generated cash, then put on statement of cash flows.
- If cash not involved, do nothing unless it’s a significant exchange. Then put on supporting schedule.
EXAMPLE:B A L A N C E S H E E T
END BEGIN Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)
Total Assets 66,500 36,500
A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
EXAMPLE: I N C O M E S T A T E M E N T
Sales 100,000- CGS -60,000Gross Profit 40,000 - Depreciation Expense -6,500 - Other Expenses -20,000 Net Income from operations 13,500- Loss on sale of PP&E -1,000 Net Income 12,500
Other data:
• Land was bought by signing a note
• Old building which cost $25,000, accumulated of $15,000, was sold for $9,000 cash
• New building was bought for $35,000 cash• Stock was issued for $10,000 cash• Cash dividends paid were $3,000
EXAMPLE:Sales 100,000- CGS -60,000Gross Profit 40,000 - Depreciation Expense -6,500 - Other Expenses -20,000 Net Income from operations 13,500- Loss on sale of PP&E -1,000 Net Income 12,500CASH FROM OPERATING ACTIVITIES:
NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000
EXAMPLE: END BEGIN
Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)
Total Assets 66,500 36,500
A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000
+ Decrease in A/R 1,000
- Increase in Inventory ( 1,500) - Increase in Prepaid Insurance ( 1,500)
EXAMPLE: END BEGIN
Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)
Total Assets 66,500 36,500
A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000+ Decrease in A/R 1,000- Increase in Inventory ( 1,500)- Increase in Prepaid Insurance ( 1,500) + Increase in A/P 4,000
- Decrease in Unearned Revenue ( 3,500)Net Cash From Operations
18,500
EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN
Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
LAND:LAND: Increased $10,000. If bought with Cash, then Investing Activity
Other data - land was bought by signing a note.
Other than cash > Significant non-cash for schedule.
All
Non -
current
accounts
Buy new building
for $35,000
cash Sell old building for $9,000 cash
EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN
Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
BuildingBuilding: Increased $10,000. Accum DeprAccum Depr:: Decreased $8,500.
Depreciation Expense
28000
19500
Building Accum Depr50000
60000
150002500035000 6500
EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN
Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
N/P:N/P: Increased $10,000. Relates to land purchase discussed earlier.
Common Stock:Common Stock: Increased $500. Paid In Capital:Paid In Capital: Increased $9,500.
Other data – Stock was issued for $10,000 cash so 500 shares must
have been issued for $20 per share.
Financing Activities: $10,000 inflow.
EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN
Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
3,000 of cash dividends were paid.
Retained EarningsRetained Earnings: Increased $9,500.
EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN
Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500
Retained Earnings11500
21000
12500 = Net Income3000
CASH FROM OPERATING ACTIVITIES:NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000+ Decrease in A/R 1,000- Increase in Inventory ( 1,500)- Increase in Prepaid Insurance ( 1,500)+ Increase in A/P 4,000- Decrease in Unearned Revenue ( 3,500)
Net Cash From Operations 18,500CASH FROM INVESTNG ACTIVITIES:
Proceeds from building sale 9,000Purchase of building (35,000)
Net Cash From Investing (26,000)
CASH FROM FINANCING ACTIVITIES:Proceeds from stock issuance 10,000Payment of Dividends ( 3,000)
Net Cash From Financing 7,000 NET DECREASE IN CASH ( 500) Cash at beginning of year 1,500 Cash at end of year 1,000
SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:
Land was obtained by signing a $10,000 note payable.
Cash Provided By Operations – Capital Expenditures– Dividends Paid
Free Cash Flow
Free Cash Flow
• Considered excess cash available after spending to maintain operational efficiency and shareholders satisfied.
Text p 604
Current Cash Debt Coverage Ratio =
Cash provided by operationsAverage current liabilities
• Probably better than current ratio in assessing ability to meet current liability payments.
Text p 607