Preparing a Statement of Flows

1

• Chapter 10
• Preparing a Statement of Flows

2
Purpose of the Statement of Cash
Flows

• To show how the business acquired its cash during
  the current year
• To show how the business spent its cash during
  the current year
• This information is crucial for decision makers
  to predict future cash flows of the business.
• Cash includes cash and cash equivalents for
  purpose of the statement.
• Cash Equivalents are
• Short-term, highly liquid investments.
• Easily convertible into known amounts of cash.

3
Categories of Cash Flows

• Categories are based on activities related to
  cash flows
• Operating the business.
• Investing in productive assets.
• Financing the business.
• These are the sections of the Statement of Cash
  Flows.

4
Operating Activities

• Cash inflows and outflows that are directly
  related to income from normal operations.
• Technically, FASB defines operating activities as
  those that are not investing or financing
  activities.
• There are two ways to compute net cash flow from
  operating activities
• Direct method
• Indirect method
• Net cash flow is the same for both methods.

5
Cash Flows from Operating
Activities

• Cash inflows and outflows that are directly
  related to income from normal operations.
• Inflows include
• Receipts from customers.
• Interest on receivables.
• Dividends received.
• Outflows include
• Payments to vendors.
• Interest paid on liabilities.
• Income taxes paid.
• Salary and wages payments to employees.

6
Cash Flows from Investing Activities

• Cash inflows and outflows that are related to the
  purchase and sale of productive assets.
• Inflows include proceeds from
• Sales of property, plant, and equipment.
• Sales of investments in securities.
• Collection of principal on loans made to others.
• Outflows include payments for
• The purchase of property, plant and equipment.
• The purchase of long-term investments.
• Loans to others.

7
Cash Flows from Financing Activities

• Cash inflows and outflows that are related to how
  cash was obtained to finance the enterprise.
• Inflows include
• Proceeds from sale of stock.
• Proceeds from sale of bonds and from borrowings.
• Outflows include
• Payments to purchase treasury stock.
• Principal payments to retire bonds and loans.
• Dividends paid to owners.

8
Significant Noncash Activities

• Investing and financing activities that do not
  involve cash, e.g.,
• Retirement of bonds by issuing stock.
• Settlement of debt by transferring assets.
• Noncash activities must be disclosed separately
  in the financial statements.

9
Preparing the Statement of Cash
Flows

• The face of the statement includes
• Net Cash Flows from Operating Activities
• Net Cash Flows from Investing Activities
• Net Cash Flows from Financing Activities
• Net Cash Flows for the period
• Beginning Cash Balance
• End of period Cash Balance

10
Cash Flows from operating activities

• Accounting records are kept on the accrual basis
  (GAAP).
• Cash data must be developed before the SCF can be
  prepared (especially for operating activities).
• The examples that follow demonstrate the direct
  method for converting accrual data to cash data.
• Information used
• The income statement for the current period.
• Comparative beginning of period and end of
  period balance sheets.
• Additional transaction details not found in the
  financial statements.

11
Cash collected from customers

• Accrual revenues plus or minus change in accounts
  receivable cash collected from customers
• The A/R balance was 45,000 on 1/1/05 and 52,000
  on 12/31/05. If accrual sales revenue for 2005
  was 600,000, what was cash basis revenue?
• Do you know what would make AR increase by 7,000
  during the year? It must have been sales for
  which the customers have not yet paid.
• Because there were 7,000 more sales than cash
  collected, the cash must be 593,000 600,000
  minus 7,000
• Use of T accounts

12
Cash Paid for Expenses

• Accrual expenses plus or minus change in the
  payable
• Salary Expense for 2005 was 500,000.
• Salary Payable was 35,000 on 12/31/04 and
  10,000 on 12/31/05.
• How much cash was paid to employees in 2005?
• Start with the salary expense amount from the
  income statement 500,000
• Then, adjust that for the change in Salaries
  Payable. Because Salaries Payable decreased by
  25,000, we must have paid that amount in cash to
  our employees. That gives a total cash paid to
  employees of 525,000.
• Use of Taccount

13
Cash paid for purchase of inventory

• Requires analysis of two accounts inventory and
  accounts payable.
• Can be computed as

Cost of Goods Sold
or - changes in inventory and or - changes in
accounts payable
Cash payments to vendors
14
Cash paid for purchase of inventory

• Suppose CGS was 20,000 BI was 12,000 and EI
  was 10,000 AP had a beginning balance of
  13,000 and an ending balance of 13,600. What
  was cash paid to vendors?
• Inventory account
• 12,000 Purchases 20,000 10,000
• Purchases 18,000
• A/P account
• 13,000 18,000 Cash Paid 13,600
• Cash paid for inventory 17,400

15
Cash Flows from Operating Activities using the
Direct Method

• All current assets and current liabilities need
  to be examined in conjunction with revenue and
  expense accounts.
• Accounts Receivable Sales revenue
• Prepaid assets Insurance expense, rent
  expense
• Inventory Cost of goods sold
• Accounts Payable Cost of goods sold
• Other Payables Other expenses
• Net the cash inflows and outflows to calculate
  cash flows from operating activities

16
Identifying Cash Paid For Insurance

Prepaid insurance
BB 125
Insurance expense
Cash paid for insurance
50
0
EB 75
17
Cash Flows from Investing and Financing Activities

• Regardless of which method (direct or indirect)
  is used for cash flows from operating activities,
  the cash flows from investing and financing
  activities are determined the same way
• Use the balance sheet and additional information
  to determine
• Cash inflows and outflows for investing
  activities
• Cash inflows and outflows for financing
  activities
• Examples