Cash Flow Statement

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Cash Flow Statement
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Why Cash Flow Statement?

• Shareholder value is now widely accepted as an
  appropriate standard for performance in US
  business. The stock market sends a clear message
  that earning per share is not the most important
  measure. Now is growth for growths sake. What
  matters is long-term cash generation. (Werner
  LeBer, Managing for Shareholder Value--From Top
  to Bottom, Harvard Busines Review, Nov.-Dec.
  1989 pp. 52-65.)

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Basic Form of Cash Flow Statement

• Cash Flow From Operating Activities
• Direct method or indirect method (direct requires
  also a reconciliation of net income to cash flow
  from operating activities)
• Cash Flow from investing activities
• Cash Flow from financing activities
• Total (positive or negative) cash flow is added
  to beginning cash balance and should result in
  ending cash balance

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Flow from Operating Activities

• Includes
• Current assets
• except Marketable securities and s-term notes
  receivable which are investing
• Current Liabilities
• except s-t notes payable which are financing
• Revenue and Expenses (includes interest expense
  and revenue, and dividends received)

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Flow from Investing Activities

• Includes
• Short-term and long-term investments
• Short-term and long term notes receivable
• Property, Plant and Equipment (depreciation
  affects operating activities)
• Intangible Assets

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Flow from Financing Activities

• Includes
• Short-term and long-term loans
• Capital Stock and Paid in Capital in excess of
  par
• Retained earnings (net income aspect is
  operating)
• Dividends Paid

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General Theory

• Take revenue or expense account (includes cash
  and accrual)
• adjust out accrual amounts
• Result is net cash in or out.
• Too expensive to classify all cash transactions
  into operating, financing, investing activities.
  Cheaper to use accrual systems and adjust out
  accrual information

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Operating ActivitiesIndirect Method

• Net Income
• Depreciation exp (noncash exp)
• Losses from sale of assets
• (full amount of sale already included in
  investing section)
• - Gains from sale of assets
• (full amount of sale already included in
  investing section)
• - increases in current assets
• decreases in current assets
• increases in current liabilities
• - decreases in current liabilities
• Net cash from operating activities

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Operating Activities Direct Method

• Cash Received from Customers
• - Cash paid for inventory
• - Cash paid for operating expenses
• - Cash paid for income taxes
• - Cash paid for interest
• Cash received from dividends and interest
• Net cash from operating activities

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Cash Received from Customers

• Sales
• - Increase in A/R (receive less cash) OR
  Decreases in A/R (receive
  more cash)
• - writeoffs (beg allowance bad debt exp. -
  ending allowance)
• Increase in unearned revenue (receive more
  cash) OR
  - Decrease in unearned revenue (receive
  less cash)
• Cash Received from Customers

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Cash Received from Customers(other variations)

• Sales
• Beg Net A/R
• - End Net A/R
• - Bad debt exp adj
• - Beg unearned rev
• End undearned rev
• Cash from Customers

• Sales
• Beg A/R
• - End A/R
• - writeoffs
• beg allowance bad debt exp. - ending
  allowance
• - Beg unearned rev
• End unearned rev
• Cash from Customers

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Cash Paid For Inventory

• Cost of Goods Sold
• End Inventory
• - Beginning Inventory
• Purchases
• Beg A/P
• - End A/P
• Cash paid for inventory

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Cash Paid for Operating Expenses

• Operating Expenses (do not include interest exp.,
  depreciation exp., nor gains losses from sale
  of investments)
• - Beg prepaids
• End prepaids
• Beg accrued exp
• - End accrued exp
• Cash paid for operating expenses

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Cash Paid for Income Taxes

• Income Tax Exp
• Beg tax payable
• - End tax payable
• Cash paid for income Taxes

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Cash Paid for Interest

• Interest Exp
• Beg interest payable
• - End interest payable
• Cash paid for interest

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Cash Received from dividends and interest

• Dividend and Interest Income
• Beg interest receivable
• - End interest receivable
• Cash Received from dividends and interest

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Cash Flow from Investing Activities

• Cash received (sale) or paid (purchase) for
• short term investments
• long-term investments
• property plant and equipment
• Whole cash amount received or paid.
• Look at change in investment and fixed asset
  accounts but may need more specific information

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Example Equipment

• Balance Sheet Amount Change Beg 300,000, Ending
  400,000
• Can your just say net cash out for equipment was
  100,000?
• Why?

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Example Equipment Continued

• Sold Equipment for 65,000 cash that had book
  value of 40,000 (original cost 100,000)
• Bought equipment 200,000 with 80,000 down and
  the rest on a long term note payable
• Accumulated depreciation increased by 50,000

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Example EquipmentResults on Cash Flow Statement

• Cash from sale of equipment 65,000
• Gain on sale 25,000 subtracted from NI on
  indirect method (make sure amt is not included in
  direct method either)
• Depreciation exp 110,000 (50,000 increase in
  accum deprec from B/S 60,000 acum depr reduced
  when sold equip added back in indirect method
  (make sure amt is not included in direct method
  operating expenses
• Cash paid for purchase of equipment 80,000
• Noncash investing financing Activities
• Issued long-term note payable for some equipment
  120,000

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Equipment ExampleThink about journal entries

• Cash 65,000Accum Depr 60,000 Equip 100,0
  00 Gain 25,000 Sale of equipment
• Depr Exp 110,00 Accum. Depr 110,000 Year
  end Adj J/E for equip depr.
• Equipment 200,000 Cash 80,000 L-T Note
  Payable 120,000 Equip Purchase

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Financing Activities

• Cash received from
• sale of stock
• issuance of debt
• Cash paid for
• Payment of debt (principle only, interest is in
  operating activities)
• Payment of dividends
• Look at change in stock, debt and retained
  earnings (May need more details) (for R/E only
  dividends portion applies to financing activities
  while net income portion should tie into indirect
  method in operating activities)

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Ways to Check Your Work

• Indirect and Direct methods must equal each other
• Net cash flow added to beginning cash balance
  must equal ending cash balance (Marketable
  securities are most often included as part of
  these cash balances.)
• In template must account for every change in B/S
  accounts and every item on income statement (some
  noncash items are adjusted out or not included in
  cash flow calculations)