Statement of Cash Flows

Cash flow versus profit

Cash flow and profit are different economic
phenomena
But linked through the mechanisms of accrual accounting!
Cash flows are factual details of incoming and outgoing
flows of cash, while the balance sheet and income
statement emanate from professional judgement and
are not a direct projection of objective economic data

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Cash Flow Statement
A cash flow statement presents information about
the cash flows associated with the company’s main
operations and those associated with its investing
and financing activities of the period.

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Current Assets
Current Assets are those assets which are converted into cash
within time period of 12 months or accounting year whichever is
earlier.
Examples :
 Cash in hand

 Cash at bank

 Bills Receivable

 Debtors

 Stock

 Short term Investments

 Others (Prepaid Expenses and Outstanding Incomes)

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Current Liabilities
Current Liabilities are those Liabilities which are be paid into
within time period of 12 months or accounting year whichever is
earlier.
Examples :
 Cash in hand

 Cash at bank

 Bills Receivable

 Debtors

 Stock

 Short term Invesments

 Others (Outstanding Expenses and incomes received in advance )

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I. Activities which can either generate cash
or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.

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A. Operating Activities
 All these activities are reported in the I/S (income
statement). However, I/S only provides the accrual-
basis net income (revenue –expense + gains –
losses ) which very often is not the change in cash.
 Therefore, we need to adjust from net income flows
to cash flows in order to report the net cash provided
by (or used in) operating activities.

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A. Operating Activities (contd.)

There are two approaches to reconcile net income to
net cash provided by (or used in) operating activities:
1. Indirect Method
==> Lump-Sum Adjustment
2. Direct Method
==> Individual Account Adjustment

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1. Indirect Method

Adjust net income (the lump sum
amount of all revenues and expenses) for
all differences between income flows
and cash flows.

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2. Direct Method

Adjust each revenue account to cash collection and
adjust each expense account to cash payment.
Subtract total cash payments from total cash
collections to derive net cash flows of the operation
activities.

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Cash flows from operating activities

Cash Inflows:
1. Collections from customers including cash received
from sales (or services) and collections of A/R.
2. Cash receipts of interests or dividends.
3. Collections of other operating receipts (i.e., unearned
revenue, rent revenue).

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Cash Flows from
Operating Activities (contd.)

Cash Outflows:
1. Payments to suppliers.
2. Payments to employees.
3. Payments for interest expense.
4. Payments for income taxes.
5. Payments for other expenses(i.e., Prepaid
expenses; rent expenses).

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Activities which can either generate cash
or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.

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B. Investing Activities
Investing activities relate to the acquisition and disposal
of long-term tangible and intangible assets and other
investments
Cash flows from investing activities are an indication of
the expansion or downsizing of operating capacity
Examples:
Payments for newly acquired equipment
Receipts from the disposal of a building
Payments for new investments

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Cash Flows from
Investing Activities

Transactions involving acquiring (Investing (Cash
outflows)) and selling (Disinvesting (Cash inflows)) :
a. Property, Plant and Equipment.
b. Investments (current and non-current).
c. Notes Receivable (current and non-current).

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Activities which can either generate cash
or use cash for a business entity
A. Operating activities.
B. Investing activities.
C. Financing activities.

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C. Financing Activities
Financing activities relate to changes in the size and
composition of contributed capital and financial debt
of the company
Examples:
Receipts from issuing new shares or bonds
Receipts from new bank loan
Payments for buy-back of shares
Repayments of loans
Payments of interest and dividend

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III. Procedures for Preparation of the
Statement of Cash Flows
1. Operating Cash Flows (indirect method).
2. Investing Cash Flows.
3. Financing Cash Flows.

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1. Operating Cash Flows
(Indirect Method; Reconciliation Method)
Net Income or Profit after Tax (PAT)
 Adjustments
+ Any increase in current Liabilities (except for N/P)
+ Any decrease in current assets (except for cash)
- Any decrease in current liabilities
- Any increase in current assets (except for cash)

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Indirect Method
Net profit after tax xxxxxxxxxxxx
Add back:
Depreciation xxxxxx
Provisions created xxxxxx
Loss on disposal of assets xxxxxx
Deduct:
Provisions released xxxxxx
Gain on asset disposal xxxxxx
+/- Change in non-cash working
xxxxxx
capital
Net cash flow from operating activities xxxxxx
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2. Investing Cash Flows
Inflows: decrease in noncurrent assets (i.e., long-term
investments) and certain current assets (i.e.,
trading securities).

Outflows: increases in noncurrent assets and certain

current assets

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3. Financing Cash Flows
Inflows: Increases in noncurrent liabilities (i.e., B/P,
N/P), stockholders’ equity and certain
current liability (i.e., N/P).

Outflows:Decreases in noncurrent liabilities,

stockholders’ equity, certain current liability
and dividend payment.

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 Adjustments to Convert Net Income to Net
Cash Flow from Operating Activities
Net Income

+ Depreciation, depletion and amortization

expense, B/D expense
+ Amortization of discount on B/P
+ Amortization of premium on investment in
Adjustments bonds
+ Increase in deferred income tax liability
+ Loss on disposal of assets or liabilities
+ Investment loss under the equity method

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Adjustments to Convert Net Income to Net Cash
Flow from Operating Activities (contd.)
+ Increases in current liabilities other than N/P (i.e.,
A/P, salaries payable, interest payable, I/T payable,
deferred I/T, and any other current liabilities related
to operations)
+ Decreases in current assets other than cash and N/R
(i.e., A/R, interest receivable, inventory, prepaids,
and any other current assets related to operations)

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Adjustments to Convert Net Income to Net
Cash Flow from Operating Activities (contd.)
- Amortization of premium on B/P
- Amortization of discount on investment in
bonds
Adjustments
- Gain on disposal of assets or liabilities
- Investment income under the equity
method
- Decrease in deferred income tax liability
- Decreases in current liabilities
- Increases in current assets
||
Net Cash Flows from Operating Activities
Statement of Cash Flows 25
 Example 1
Layton Company Balance Sheet (12/31/x2)
Balance Balance Change
Accounts 1/1/x2 12/31/x2
Cash 4,000 6,600
A/R 6,300 9,000 2,700
Land 9,000 6,000 3000a
Buildings & Equipment 48,000 60,000 12,000b
Accummulated Depreciation (12,500) (14,800)
Total Assets $54,800 $ 66,800
a. Land was sold at cost for cash during the year.
b. A building was purchased for cash during the year and
no building or equipment was sold during the year.
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Example 1 (contd.)
Layton Company Balance Sheet (12/31/x2)
Balance Balance Change
Accounts 1/1/x2 12/31/x2
A/P 7,500 9,000 1,500
B/P 14,000 21,000 7000a
Common Stock, $10 22,000 22,000 0
Retained Earnings 11,300 14,800
Total Liabilities &
Stockholdrs' Equity $54,800 $66,800
a. Bonds were issued at the end of year.
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Example 1 (contd.)
Income Statement (for the year ended 12/31x2)

Sales Revenue $31,800

Opeating Expenses
Depreciation Expense 2,300
Interest Expense 1,400
Other Expenses 18,100 (21,800)
Income before Income Tax 10,000
Income Tax Expense (3,000)
Net Income $7,000

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Example 1 (contd.)
Layton Company Retained Earnings (20x2)

Beginning Retained Earnings $11,300

Add: Net Income 7,000
$18,300
Less: Dividends (3,500)
Ending Retained Earnings $14,800

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 Layton Company
Statement of Cash Flows
For the Year Ended December 31, 20x2
Net cash flow from operating activities:
Net Income Rs. 7,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Add: Depreciation expense 2,300
Increase in A/P 1,500
Less: Increase in A/R (2,700)
Net cash provided by
operating activities Rs. 8,100
Statement of Cash Flows 30
 Layton Company
Statement of Cash Flows (contd.)
Cash flows from investing activities:
Proceeds from sale of land Rs. 3,000
Payments for
purchase of building (12,000)
Net cash used
by investing activities (9,000)
Cash flows from financing activities:
Proceeds from issuance of bonds 7,000
Payments of dividends (3,500)
Net cash provided by
financing activities 3,500

Statement of Cash Flows 31

 Layton Company
Statement of Cash Flows (contd.)

Net increase in cash Rs. 2,600

Cash, Jan 1, 20x2 Rs. 4,000
Cash, Dec 31, 20x2 Rs. 6,600

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Example 2: (Student Activity)
Green Company Balance Sheet
Accounts 1/1/x2 12/31/x2 Difference
Cash Rs. 3,500 Rs. 5,500
A/R 4,400 3,600 800 
Inventory 5,000 6,600 1,600 
Land 8,200 12,200 4,000c 
Building & Equip 35,700 48,700 13,000a,d 
Acc. Depr. (6,000) (8,700)
Total Assets Rs. 50,800 Rs. 67,900

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Green Company Balance Sheet (contd.)
A/P Rs. 5,100 Rs. 3,200 1,900
Salary Payable 1,400 1,800 400
B/P, 10% 7,000 15,000 8,000b
Common Stock, Rs. 10 par 8,000 9,000 1,000
Paid-in Capital 16,000 19,000 3,000
R/E 13,300 19,900
Total Liabilities
& Equity Rs. 50,800 Rs. 67,900

Statement of Cash Flows 34

 Income Statement
For the Year Ended 12/31/20x2
Sales Revenue Rs. 80,000
Cost of goods sold
(48,600)
Gross Profit Rs. 31,400
Operating Expenses:
Deprecation Expense Rs. 3,400
Other Expenses 15,900 (19,300)
Rs. 12,100
Other Revenues & Expenses
Gains on Sale of Equipment Rs. 600
Interest Expense (700) (100)
Income Before Income Tax Rs. 12,000
Income Tax Expense (3,600)
Net Income Rs. 8,400 .

Statement of Cash Flows 35

35
 Retained Earnings (20x2)
Beginning balance
of retained earnings Rs. 13,300
Add: Net Income 8,400
21,700
Less: Dividends (1,800)
Ending balance
of retained earning Rs. 19,900
Statement of Cash Flows 36
Supplemental Information for 20x2
(a) Equipment was purchased for cash at a cost of
Rs. 15,200.
(b) Ten-year bonds payable with a face value of Rs.
8,000 were issued for Rs. 8,000 at the end of
the year.
(c) Land was acquired through the issuance of 100
shares of Rs. 10 par common stock when the
stock was selling at a market price of Rs. 40 per
share.
(d) Equipment with a cost of Rs. 2,200 and a book
value of Rs. 1,500 was sold for Rs. 2,100 cash.

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 GREEN Company
Statement of Cash Flows
For the Year Ended December 31, 20x2
Net cash flows from operating activities:
Net Income Rs. 8,400
Adj. To reconcile net income to net
cash provided by operating activities:
Add: Depreciation Expense 3,400
Decrease in A/R 800
Increase in S/P 400
Less: Increase in Inventory (1,600)
Decrease in A/P (1,900)
Gain on sale of Equipment (600)
Net cash provided by operating activities Rs. 8,900

Statement of Cash Flows 38

 GREEN Company
Statement of Cash Flows (contd.)
Cash flows from investing activities:
Payments for purchase of equip. (15,200)
Proceeds from sale of equipment 2,100
Net cash used by investing activities (13,100)
Cash flows from financing activities:
Proceeds from issuance of bonds 8,000
Payments of dividends (1,800)
Net cash provided by financing activities 6,200
Net increase in cash (see Schedule 1) Rs. 2,000
Cash, Jan 1, 20x2 Rs. 3,500
Cash, Dec 31, 20x2 Rs. 5,500
39

Statement of Cash Flows 39

 GREEN Company
Statement of Cash Flows (contd.)

Schedule 1: Investing & financing activities not

affecting cash flows:
Investing activities:
Acquisition of land by Issuance of
common stock (Rs. 4,000)
Financing Activities:
Issuance of common stock for land Rs. 4,000

40
Statement of Cash Flows 40
THANKS !

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