THE CASH FLOW STATEMENT

The Statement of Cash Flows

• The statement of cash flows reports the impact of a firm’s

operating, investing, and financing activities on cash flows
during the accounting period.

• In fact, users of financial statements have made the

statement of cash flows one of the most important of the
four required financial statements.
 The Importance of the Cash flow statement
Importance of Cash
• One of the most important resources of any company is cash.
• If a company cannot generate sufficient cash, its ability to continue operations is significantly
limited.

Neither the balance sheet nor the income statement displays the firm’s sources and
uses of cash
The cash flow statement
• summarizes a company’s inflows and outflows of cash over a period of time.
• Informs users on how and why a company’s cash changed during the period.
• classifies the reasons for the change as an operating, investing or financing activity.
• reconciles net income with cash flow from operations.
• reconciles the difference between the beginning and ending cash and cash equivalents balances
from the balance sheet.
The Purpose of the Statement of Cash Flows

* Provides * Provides
information about information about
cash inflows and cash changes
outflows during a between two
period. balance sheet dates.
* Discloses items * Categorizes
that affect the changes as
balance sheet but operating, investing,
don’t show up in the or financing
income statement. activities.
 Preparing the Statement of Cash Flows
Information for the statement of cash flows is collected from a variety of sources

Preparing the statement of cash flows requires an examination of the

changes in all non-cash accounts

Therefore, in order to explain a company’s change in cash, you

must explain the changes in the company’s noncash accounts.
And to do that, you need the following three items:
• A comparative balance sheet
• An income statement
• Additional information on changes in account balances
The Cash Change Equation

Balance Assets = Liabilities + Equity

Sheet
Equation Cash + Noncash Assets = Liabilities + Equity

The
Balance
The
Sheet Change Change in Change in Change in
Company
Equation Company
in Cash + Noncash = Liabilities + Equity
receives pays $50
$100 Cash Cash to a
from a
Cash Change Change in Change in Change in
Change vendor. Noncash
in Cash = Liabilities + Equity -
customer
Equation Assets
 Three Classifications of Cash Flows

Operations Investing Financing

• cash flows • cash flows • long term and

related to related to the short term cash
selling goods acquisition or flows related to
and services; sale of liabilities and
that is, the noncurrent owners’ equity;
principle assets, int/div dividends paid
business of the received. are a financing
firm. cash outflow.
 Reporting Cash Flows: The Statement of Cash Flows
Financing activities Most businesses must raise funds to begin.
• Examples of financing activities:
• Generating cash from loan creditors and investors
• Repaying cash to loan creditors and investors.
After raising sufficient capital, company acquires the revenue- generating
Investing activities assets for operations.
• Examples of investing activities:
• Buying and selling of revenue-generating assets.

Operating Activities After the proper equipment is acquired, a business begins operations.
• Examples of operating activities:
• Cash payment on the purchase of supplies
• the payment of employees,
• Cash generated from sale of products.
 Direct and Indirect Method
Direct method -
calculates cash flow from
operations by subtracting cash Indian
disbursements to supplies, Accounting
employees, and others from Standards
cash receipts from customers. require
companies to
Indirect method - prepare the cash
flow statement
calculates cash flow from under the
operations by adjusting net indirect method
income for noncash revenues
and expenses.
 Reporting Cash Flows from Operating Activities—
Indirect Method
• When reporting operating cash flows under the indirect method, companies
calculate and report net cash flows from operating activities by adjusting net income
from an accrual basis to a cash basis.

• This requires many adjustments, but they can be grouped into three main types:
• Non-cash effects on net income
• Gains and losses from investing and/or financing activities
• Changes in current assets and liabilities

• Depreciation is typically the largest decrease in related noncash assets that must be
added back to net income to obtain cash-based income.
Reporting Cash Flows from Operating Activities—
Indirect Method
Net Income
+ Depreciation / Amortisation
+ Other expenses
- Other revenues
Cash operating profit after tax
+ Increases in related liabilities
+ Decreases in related noncash assets
- Increases in related noncash assets
- Decreases in related liabilities
= Cash flow from operating activities
Other revenues Other expenses
Interest received Interest paid
Dividend received Loss on sale of fixed assets
Profit on sale of fixed assets Loss on sale of long term investments
Profit on sale of long term
investments

• Related non-cash assets typically refers current assets related to

operations like accounts receivable, inventory and prepaid expenses
• Related liabilities typically refers to current liabilities related to operations
like accounts payable, operating expenses payable and taxes payable
Computing Cash Flows from Investing Activities

• To calculate cash flows from investing activities, all changes in non-

current assets must be examined.

• In general, an increase in a non-current asset suggests a purchase and

therefore a cash outflow.

• A decrease suggests a sale and therefore a cash inflow.

Types of Investing Inflows of Cash
Investing Cash Inflows Into Company

• Sale of property, plant, and

equipment,
• The sale of securities (stocks
and bonds) of other
companies, and Company
• The receipt of loan
payments.
• Interest received
• Dividend received
Types of Investing Outflows of Cash

Investing Cash Outflows from Company

• Purchases of property,
plant, and equipment,
• Purchase of securities,
Company
and
• Making loans as
investments.
Computing Cash Flows from Financing Activities

• To calculate cash flows from financing activities, the balances for long-term
liabilities, equity accounts, and dividends must be examined.

• In general, an increase in a liability or an equity account such as common

stock suggests a cash inflow from either borrowing or selling stock.

• A decrease in a liability or an increase in treasury stock or dividends

suggests a cash outflow from payments to creditors or investors.
Types of Financing Inflows of Cash

Financing Inflows Into Company

• Selling Stock,
• Issuing Bonds,
• Contributions from owners,
and Company
• Borrowing from banks on a
long-term basis.
Types of Financing Outflows of Cash

Financing Cash Outflows from Company

• Repayment of notes
and bonds,
• Cash payments to
Company repurchase stock
(treasury stock),
• Payment of dividends.
• Interest paid
Required:
Prepare a complete statement of cash flows for
Blue Bomber for 2013.