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, ³Managing 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 .

and dividends received) .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.

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 .

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

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 Indirect Method ‡ Net Income ‡ + Depreciation exp (noncash exp) ‡ + Losses from sale of assets ± (full amount of sale already included in investing section) ‡ .

Cash paid for operating expenses .Cash paid for inventory .Cash paid for income taxes .Operating Activities Direct Method ‡ ‡ ‡ ‡ ‡ ‡ ‡ + Cash Received from Customers .Cash paid for interest + Cash received from dividends and interest = Net cash from operating activities .

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

Cash Received from Customers (other variations) ‡ ‡ ‡ ‡ ‡ ‡ ‡ Sales + Beg Net A/R .Bad debt exp adj .ending allowance ‡ .End A/R . .Beg unearned rev + End undearned rev = Cash from Customers ‡ ‡ ‡ ‡ Sales + Beg A/R .End Net A/R .Beg unearned rev ‡ + End unearned rev ‡ = Cash from Customers .writeoffs ± = beg allowance + bad debt exp.

Beginning Inventory = Purchases + Beg A/P .Cash Paid For Inventory ‡ ‡ ‡ ‡ ‡ ‡ ‡ Cost of Goods Sold + End Inventory .End A/P = Cash paid for inventory .

End accrued exp = Cash paid for operating expenses ‡ ‡ ‡ ‡ ‡ .Cash Paid for Operating Expenses ‡ Operating Expenses (do not include interest exp.Beg prepaids + End prepaids + Beg accrued exp . nor gains & losses from sale of investments) .. depreciation exp..

End tax payable = Cash paid for income Taxes .Cash Paid for Income Taxes ‡ ‡ ‡ ‡ Income Tax Exp + Beg tax payable .

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 .

‡ Look at change in investment and fixed asset accounts but may need more specific information .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.

000 ‡ Can your just say net cash out for equipment was $100.Example Equipment ‡ Balance Sheet Amount Change: Beg $300.000? ‡ Why? .000. Ending $400.

000) ‡ Bought equipment $200.000 .000 (original cost $100.000 with $80.000 down and the rest on a long term note payable ‡ Accumulated depreciation increased by $50.Example Equipment Continued ‡ Sold Equipment for $65.000 cash that had book value of $40.

000 ‡ Noncash investing & financing Activities ± Issued long-term note payable for some equipment $120.000 increase in accum deprec from B/S + $60.Example Equipment Results on Cash Flow Statement ‡ Cash from sale of equipment $65.000 subtracted from NI on indirect method (make sure amt is not included in direct method either) ‡ Depreciation exp $110.000 .000 ($50.000 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 ‡ Gain on sale $25.

Depr Year end Adj J/E for equip depr.000 .000 100.000 120.000 Equip Gain Sale of equipment ‡ Depr Exp 110.000 80.000 25.00 Accum.Equipment Example Think about journal entries ‡ Cash Accum Depr 65.000 60. ‡ Equipment 200.000 Cash L-T Note Payable Equip Purchase 110.

interest is in operating activities) ± Payment of dividends ‡ Look at change in stock.Financing Activities ‡ Cash received from: ± sale of stock ± issuance of debt ‡ Cash paid for ± Payment of debt (principle only. 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) .

) ‡ 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) .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.

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