STATEMENT OF CASH FLOWS

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STATEMENT OF CASH FLOWS
201Lec12.PPT

• 4th REQUIRED GAAP Statement.
• Covers a period of time (like an income
  statement).
• Focuses on Inflows of CASH Outflows of CASH

text p. 586
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Questions the Statement of Cash Flow Answers
Where did the cash come from?
What was the cash used for?
And least importantly, What was the change in
the cash balance?
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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 )

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FORMAT - 3 main parts plus schedule
text p. 589
1 - Cash from OPERATING activities

• Net Income Per income stmt (Accrual basis) xxx
• or - Adjustments (Convert to cash
  basis) xxx
• Net Cash from Operations xxx
• Called INDIRECT METHOD

A l t e r n a t i v e l y
text p. 612

• Cash receipts from customers xxx
• less Cash payments suppliers xxx
• operating expenses xxx
• taxes xxx - xxx
• Net Cash from Operations xxx
• Called DIRECT METHOD

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• 2 - Cash from INVESTING activities
• Buy or sell PPE. xxx
• Buy or sell OTHER companys 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

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• 4 - Supporting Schedule
• SIGNIFICANT NON-CASH Transactions should be
  disclosed in a separate schedule.
• For example Trade stock for a building or
• Sign note payable for building.

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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
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• 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.

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EXAMPLES Operating activities adjustments.

• 2 - Noncash revenues or expenses
• Assume the following Cash Revenues 100,000
• Cash Expenses 90,000
• Depreciation Exp 50,000
• NI (40,000)
• What is Cash Flow?
• Statement of cash flows
• Net income (40,000)
• Depreciation 50,000
• Cash from Operations 10,000

If DIRECT method Omit any mention of non-cash
expenses! Cash Revenues 100,000 Cash
Expenses 90,000 Net cash flow 10,000
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• 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.)

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EXAMPLES Investing Financing activities

• 3 - Examine all Non-current assets and
  liabilities beginning and ending balances. Assume
  selected balances are
• Beginning Ending
• Long term assets Land 100,000 115,000
• Long term liabilities N/P 200,000 175,000
• Equity 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.

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• 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 its a
  significant exchange. Then put on supporting
  schedule.

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EXAMPLE

• B A L A N C E S H
  E E T
• END BEGIN
• Cash 1,000 1,500
• A/R 4,000 5,000
• Inventory 9,500 8,000
• Prepaid Insurance 1,500 0
• Land 10,000 0
• Building 60,000 50,000
• Accum Depr (19,500)
  (28,000)
• Total Assets 66,500 36,500
• A/P 6,000 2,000
• Unearned Revenue 3,500 7,000
• Note Payable 10,000 0
• Common Stock ( 1 Par) 1,500 1,000
• Paid In Capital Excess Par 24,500 15,000
• Retained Earnings 21,000 11,500
• Total Liabs Equity 66,500 36,500

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EXAMPLE

• I N C O M E S T
  A T E M E N T
• Sales 100,000
• - CGS -60,000
• Gross Profit 40,000
• - Depreciation Expense -6,500
• - Other Expenses -20,000
• Net Income from operations
  13,500
• - Loss on sale of PPE -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

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EXAMPLE

• Sales 100,000
• - CGS -60,000
• Gross Profit 40,000
• - Depreciation Expense -6,500
• - Other Expenses -20,000
• Net Income from operations
  13,500
• - Loss on sale of PPE -1,000
• Net Income 12,500

• CASH FROM OPERATING ACTIVITIES
• NET INCOME 12,500
• Depreciation Expense 6,500
• Loss on Sale of PPE 1,000

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EXAMPLE

• END BEGIN
• Cash 1,000 1,500
• A/R 4,000 5,000
• Inventory 9,500 8,000
• Prepaid Insurance 1,500 0
• Land 10,000 0
• Building 60,000 50,000
• Accum Depr (19,500)
  (28,000)
• Total Assets 66,500 36,500
• A/P 6,000 2,000
• Unearned Revenue 3,500 7,000
• Note Payable 10,000 0
• Common Stock ( 1 Par) 1,500 1,000
• Paid In Capital Excess Par 24,500 15,000
• Retained 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 PPE 1,000

• Decrease in A/R 1,000
• - Increase in Inventory (
  1,500)
• - Increase in Prepaid Insurance (
  1,500)

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EXAMPLE

• CASH FROM OPERATING ACTIVITIES
• NET INCOME 12,500
• Depreciation Expense 6,500
• Loss on Sale of PPE 1,000
• Decrease in A/R 1,000
• - Increase in Inventory ( 1,500)
• - Increase in Prepaid Insurance ( 1,500)

• END BEGIN
• Cash 1,000 1,500
• A/R 4,000 5,000
• Inventory 9,500 8,000
• Prepaid Insurance 1,500 0
• Land 10,000 0
• Building 60,000 50,000
• Accum Depr (19,500)
  (28,000)
• Total Assets 66,500 36,500
• A/P 6,000 2,000
• Unearned Revenue 3,500 7,000
• Note Payable 10,000 0
• Common Stock ( 1 Par) 1,500 1,000
• Paid In Capital Excess Par 24,500 15,000
• Retained Earnings 21,000 11,500
• Total Liabs Equity 66,500 36,500

• Increase in A/P 4,000
• - Decrease in Unearned Revenue (
  3,500)
• Net Cash From Operations 18,500

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EXAMPLE INVESTING FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0 Building 60,000
50,000 Accum Depr ( 19,500)
( 28,000) N/P 10,000 0 Common
Stock ( 1 Par) 1,500 1,000 Paid In
Capital Excess Par 24,500 15,000 Retained
Earnings 21,000 11,500
All Non - current accounts

• LAND Increased 10,000.
• If bought with Cash, then Investing
  Activity
• Other data - land was bought by signing a
  note.
• Other than cash gt Significant non-cash for
  schedule.

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EXAMPLE INVESTING FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0 Building 60,000
50,000 Accum Depr ( 19,500)
( 28,000) N/P 10,000 0 Common
Stock ( 1 Par) 1,500 1,000 Paid In
Capital Excess Par 24,500 15,000 Retained
Earnings 21,000 11,500

• Building Increased 10,000. Accum
  Depr Decreased 8,500.

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EXAMPLE INVESTING FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0 Building 60,000
50,000 Accum Depr ( 19,500)
( 28,000) N/P 10,000 0 Common
Stock ( 1 Par) 1,500 1,000 Paid In
Capital Excess Par 24,500 15,000 Retained
Earnings 21,000 11,500

• N/P Increased 10,000.
• Relates to land purchase discussed earlier.

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EXAMPLE INVESTING FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0 Building 60,000
50,000 Accum Depr ( 19,500)
( 28,000) N/P 10,000 0 Common
Stock ( 1 Par) 1,500 1,000 Paid In
Capital Excess Par 24,500 15,000 Retained
Earnings 21,000 11,500

• Common Stock Increased 500.
• 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.

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EXAMPLE INVESTING FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0 Building 60,000
50,000 Accum Depr ( 19,500)
( 28,000) N/P 10,000 0 Common
Stock ( 1 Par) 1,500 1,000 Paid In
Capital Excess Par 24,500 15,000 Retained
Earnings 21,000 11,500

• Retained Earnings Increased 9,500.

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• CASH FROM OPERATING ACTIVITIES
• NET INCOME 12,500
• Depreciation Expense 6,500
• Loss on Sale of PPE 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

• CASH FROM INVESTNG ACTIVITIES
• Proceeds from building sale 9,000
• Purchase of building (35,000)
• Net Cash From Investing (26,000)
• CASH FROM FINANCING ACTIVITIES
• Proceeds from stock issuance 10,000
• Payment 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

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• SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES
• Land was obtained by signing a 10,000 note
  payable.

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Free Cash Flow
Text p 604

• Cash Provided By Operations
• Capital Expenditures
• Dividends Paid
  
• Free Cash Flow

• Considered excess cash available after spending
  to maintain operational efficiency and
  shareholders satisfied.

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Current Cash Debt Coverage Ratio
Text p 607

• Cash provided by operations
• Average current liabilities
• Probably better than current ratio in assessing
  ability to meet current liability payments.