201Lec12.

PPT

STATEMENT OF CASH FLOWS

4th REQUIRED GAAP Statement.

Covers a period of time (like an income statement).
Focuses on: Inflows of CASH
Outflows of CASH

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Questions the Statement of
Cash Flow Answers:

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44 Parts
Parts of
of Statement
Statement of
of Cash
Cash Flows
Flows

1.Operating
Activities 2.Investing
Income Activities
3.Financing
Statement Generally Activities
Items Long-Term
Generally
Use Direct or Asset Items
Long-Term
Indirect method.
Liability &
Equity Items

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4.Significant
Noncash Activities Examples:
1. Issuance of common
GAAP Rule: Companies stock to purchase assets.
report these activities in
2. Conversion of bonds
either a separate schedule
into common stock.
at the bottom of the
statement of cash flows or 3. Issuance of debt to
in the footnotes to the purchase assets.
financial statements. 4. Exchanges of plant
assets.

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 FORMAT
FORMAT -- 33 main
main parts
parts plus
plus schedule
schedule
Net Income Per income stmt (Accrual basis) xxx
+ or - Adjustments (Convert to cash basis) xxx
Net Cash from Operations xxx Called INDIRECT METHOD
S
A
M
E
Cash receipts from customers xxx
A
less Cash payments: suppliers xxx M
O
operating expenses xxx U
taxes, interest xxx -xxx N
T
Net Cash from Operations xxx

Called DIRECT METHOD

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2 - Cash from INVESTING activities:
Buy or sell PP&E. xxx
Buy or sell OTHER company’s 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

DON’T FORGET SIGNIFICANT NON-CASH SCHEDULE

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EXAMPLES: Operating activities adjustments.
1 - Accrual to Cash conversion.
Assume: Sales (all on credit) $100,000
Expenses $60,000
Net Income $40,000 and

a) Beginning A/R = $10,000. Ending A/R = $10,000.

Cash Collected from sales?
Accounts Receivable

1/1/012 Balance 10,000 Cash Receipts from

dr A/R cr Sales 100,000 customers dr cash cr A/R 100,000

12/31/12 Balance 10,000

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EXAMPLES: Operating activities adjustments.
1 - Accrual to Cash conversion.
Assume: Sales (all on credit) $100,000
Expenses $60,000
Net Income $40,000 and

b) Beginning A/R = $10,000. Ending A/R = $15,000.

Cash Collected from sales?
Accounts Receivable

1/1/012 Balance 10,000 Cash Receipts from

dr A/R cr Sales 100,000 customers dr cash cr A/R 95,000

12/31/12 Balance 15,000

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EXAMPLES: Operating activities adjustments.
For b) (A/R balance increases during the year),
Statement of Cash Flows shows
Operating Activities:
Net income 40,000
- Increase in A/R ( 5,000)
Cash from Operating 35,000

The difference in beginning and ending A/R equals the

difference in revenues recorded ($100,000) compared to
cash cash received ($95,000).
If DIRECT method: Operating Activities:
Receipts from customers: 95,000
Payments to vendors (60,000)
Cash from Operating 35,000

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EXAMPLES: Operating activities adjustments.
2 - Accrual to Cash conversion VARIATION:
What if beginning A/P balance = $10,000, Ending
A/P = $15,000.
Accounts Payable

10,000 Beginning
dr A/P cr Cash 55,000 60,000 Dr expense cr A/P
15,000 Ending

Result: Add difference to net income since expenses

recorded ($60,000) are greater than cash paid ($55,000).

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 Operating
Operating activities
activities Indirect
Indirect method
method rules:
rules:

Increases in current assets Adjust cash net

Decreases in current liabilities income down.

Decreases in current assets Adjust cash net

Increases in current liabilities income up.

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EXAMPLES: Operating activities adjustments.
3 - Noncash revenues or expenses:
Assume the following: Cash Revenues 100,000
Cash Expenses 90,000
Depreciation Exp 50,000
Net Loss (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
Additional Indirect
Indirect method
method rules:
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
4 - 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
• Investing or financing?
• How did they change? Cash paid or received ?
• If no cash involved, significant exchange?

**Note no difference if DIRECT method used. Affects only

operating activities section.

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 Investing
Investing and
and Financing
Financing activity
activity rules:
rules:

Review 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 it’s a significant exchange.
Then put on supporting schedule.

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 B A L A N C E S H E E T
EXAMPLE: BEGIN END
Cash 1,500 1,000
A/R 5,000 4,000
Inventory 8,000 9,500
Prepaid Insurance 0 1,500
Land 0 10,000
Building 50,000 60,000
Accum Depr (28,000) (19,500)
Total Assets 36,500 66,500

A/P 2,000 6,000

Unearned Revenue 7,000 3,500
Note Payable 0 10,000
Common Stock ( $1 Par) 1,000 1,500
Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
Total Liabs & Equity 36,500 66,500

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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 PP&E -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 PP&E -1,000
Net Income ACTIVITIES:
CASH FROM OPERATING 12,500
NET INCOME 12,500
+ Depreciation Expense 6,500
+ Loss on Sale of PP&E 1,000

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EXAMPLE:
BEGIN END
Cash 1,500 1,000
A/R 5,000 4,000
Inventory 8,000 9,500
Prepaid Insurance 0 1,500
Land 0 10,000
Building 50,000 60,000
Accum Depr (28,000) (19,500)
CASH FROM OPERATING ACTIVITIES:
Total Assets 36,500 66,500
NET INCOME 12,500
+ Depreciation Expense 6,500
A/P 2,000 6,000
+ Loss on Sale of PP&E 1,000
Unearned Revenue 7,000 3,500
+ Decrease
NoteinPayable
A/R 1,000 0 10,000
- Increase in Inventory
Common Stock ( $1 Par) ( 1,500)
1,000 1,500
- Increase
PaidinIn
Prepaid
CapitalInsurance
Excess Par ( 1,500)
15,000 24,500
Retained Earnings 11,500 21,000
Total Liabs & Equity 36,500 66,500

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EXAMPLE: CASH FROM OPERATING ACTIVITIES:
NET INCOME BEGIN END
12,500
Cash + Depreciation Expense 1,500 1,000
6,500
A/R + Loss on Sale of PP&E 5,000 4,000
1,000
Inventory+ Decrease in A/R 8,000 9,500
1,000
Prepaid Insurance
- Increase in Inventory 0 1,500
( 1,500)
Land 0
- Increase in Prepaid Insurance 10,000
( 1,500)
Building + Increase in A/P 50,000 60,000
4,000
Accum Depr
- Decrease in Unearned (28,000)
Revenue (19,500)
( 3,500)
Total Assets 36,500
Net Cash From Operations 66,500
18,500

A/P 2,000 6,000

Unearned Revenue 7,000 3,500
Note Payable 0 10,000
Common Stock ( $1 Par) 1,000 1,500
Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
Total Liabs & Equity 36,500 66,500

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EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts BEGIN END
Land 0 10,000
All Building 50,000 60,000
Non - Accum Depr ( 28,000) ( 19,500)
N/P 0 10,000
current
Common Stock ( $1 Par) 1,000 1,500
accounts Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
LAND: Increased $10,000.
Other data - land was bought by signing a note.

Other than cash > Significant non-cash for schedule.

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 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts BEGIN END
Land 0 10,000
Building 50,000 60,000
Accum Depr ( 28,000) ( 19,500)
N/P 0 10,000
Common Stock ( $1 Par) 1,000 1,500
Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
Building:
Building Increased $10,000. Accum Depr: Decreased $8,500.

Building Accum Depr

Buy new 28000
building 50000
Depreciation
for 35000 25000 15000 6500 Expense
$35,000 19500
60000
cash Sell old building
for $9,000 cash

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

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 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts BEGIN END
Land 0 10,000
Building 50,000 60,000
Accum Depr ( 28,000) ( 19,500)
N/P 0 10,000
Common Stock ( $1 Par) 1,000 1,500
Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
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 BEGIN END
Land 0 10,000
Building 50,000 60,000
Accum Depr ( 28,000) ( 19,500)
N/P 0 10,000
Common Stock ( $1 Par) 1,000 1,500
Paid In Capital Excess Par 15,000 24,500
Retained Earnings 11,500 21,000
Retained Earnings:
Earnings Increased $9,500.
Retained Earnings
3,000 of cash dividends 11500
were paid. 3000 12500 = Net Income
21000

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CASH FROM OPERATING ACTIVITIES:
NET INCOME 12,500
+ Depreciation Expense 6,500
+ Loss on Sale of PP&E 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
Free Cash
Cash Flow
Flow Ratio
Ratio

Cash Provided By Operations

– Capital Expenditures
– Dividends Paid
Free Cash Flow

Considered excess cash

available after spending to
maintain operations and
satisfy shareholders.

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 (Current)
(Current) Cash
Cash Debt
Debt Coverage
Coverage Ratio
Ratio

Cash provided by operations

Average current liabilities

Probably better than current ratio in

assessing liquidity.
Replace denominator with Total Liabilities to
evaluate solvency.

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