Cash Flow Statement

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 growth’s 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.)
 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
 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)
 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
 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
 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
 Operating Activities
Indirect 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
 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
 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
 Cash Received from Customers
(other variations)
• Sales • Sales
• + Beg Net A/R • + Beg A/R
• - End Net A/R • - End A/R
• - writeoffs
• - Bad debt exp adj – = beg allowance + bad debt exp. -
• - Beg unearned rev ending allowance

• - Beg unearned rev

• + End undearned rev
• + End unearned rev
• = Cash from
• = Cash from Customers
Customers
 Cash Paid For Inventory
• Cost of Goods Sold
• + End Inventory
• - Beginning Inventory
• = Purchases
• + Beg A/P
• - End A/P
• = Cash paid for inventory
 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
 Cash Paid for Income Taxes
• Income Tax Exp
• + Beg tax payable
• - End tax payable
• = Cash paid for income Taxes
 Cash Paid for Interest
• Interest Exp
• + Beg interest payable
• - End interest payable
• = Cash paid for interest
 Cash Received from dividends
and interest
• Dividend and Interest Income
• + Beg interest receivable
• - End interest receivable
• = Cash Received from dividends and
interest
 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
 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?
 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
 Example Equipment
Results 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
 Equipment Example
Think about journal entries
• Cash 65,000
Accum Depr 60,000
Equip 100,000
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
 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)
 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)