6 - Cash Flow Statement.pdf
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STATEMENT OF CASH FLOW
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A statement reporting the impact of a
firm’s operating, investing , and financing
activities on cash flows over accounting
period.
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A statement reporting the impact of afirm’s operating, investing , and financing
activities on cash flows over accounting
period.
Operating activities
include the net income, depreciation,
amortization and changes in working capitalother than cash and short term debt.
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Depreciation
The charge to reflect the cost of tangible
assets (plant and equipment) used up in the
production process. It is not a cash outlay
Amortization
The noncash charge similar to depreciation
except that it is use to write off the costs of
intangible assets (patents, copyrights, trademarks
and goodwill.)
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Working Capital (WC)
also known as net working capital, or working capital
ratio, is a measure of both a company's efficiency and
its short-term financial health. The working capital
ratio is calculated as:
Working capital = current assets – current liabilities
• company is able to pay off itsshort term liabilitiesIf workingcapital is +
• company is currently unable to meetits short term liabilities with its
current assets
If working
capital is -
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Net Income
+ Depreciation and amortization
+ Decreases in current assets
- Increases in current assets
+ Increases in current liabilities
- Decrease in current liabilities
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Investing activities
include purchases and sales of fixed assets
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Investing activities
include purchases and sales of fixed assets
FIXED ASSETSpurchasing or acquisition → cash is reduced
selling → cash is increased
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Financing activities
include raising cash by issuing short term debt, long
term debt, or stock, or using cash to pay dividends or
to buy back outstanding stocks or bonds
SECURITY TRANSACTIONS AND DIVIDEND
PAYMENTSissuance of stocks or bonds → increase in cash
payment of outstanding debts
buying back of stocks
payment of dividends
decrease in
cash
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Current assets
Long-term assets
Current liabilities
Long-termliabilities
Stockholder’sEquity
Operating cash
flows
Operating cash
flows
Investing cash
flows
Financing cash
flows
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Its main advantages are as follows:
(i) Planning and Co-ordination of Financial Operations. Cash Flow
Statement is useful is evaluating Financial policies and current cashposition. Since cash is the basis for carrying on operations, the Cash Flow
Statement prepared on an estimated basis for the next accounting period
will enable the management to plan and co-ordinate the financial
operations probably. The management comes to know how much cash is
needed in the future and at what time and how can it be arranged-how
much internally and how much from outside. It is especially useful in
preparing cash budgets.
(ii) A Control Device. Cash Flow statement is also a control device for the
management. A comparison of cash flow statement of previous year with
the budget for that year would indicate to what extent the resources of theenterprise were raised an applied according to the plan. Thus a
comparison of original forecast with actual results may highlights trends of
movement that might otherwise go undetected.
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(iii) Useful to internal Financial Management. Since it gives a clear
picture of cash inflow from operations (and not income flow of operation),
it is, therefore, very useful to internal financial management inconsidering the possibility of retiring ling-term debts, in planning
replacement of plant facilities or in formulating dividend policies.
(iv) Profit and Cash Positions. It enables the management to account
for situation when business has earned huge profits yet run withoutmoney or when it has suffered a loss and still has plenty of money at the
bank.
(v) Short-term Financial Decisions. Cash Flow Statement helps the
management in taking short-term financial decisions. Suppose, if firmwants to know its state of solvency after one month from to date, it is
possible only from Cash Flow analysis and not from Fund Flow
Statement. Shorter the period, greater is the importance of Cash Flow
Statement.
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Your also paid dividends of Php51, 000. With this,
you started to do a cash flow statement to get on
with the analysis. How would the cash flowstatement look like?
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Assets January December
Increase/ (Decrease)Cash 62,000.00 38,000.00 (24,000.00)
Accounts Receivable 73,000.00 108,000.00 35,000.00
Inventories 136,000.00 222,000.00 86,000.00
Prepaid Expenses 41,000.00 13,000.00 (28,000.00)
Current Assets 312,000.00 381,000.00 69,000.00
Equipment 236,000.00 486,000.00 250,000.00Less: Depreciation 73,000.00 121,000.00 48,000.00
Net, Equipment 163,000.00 365,000.00 202,000.00
TOTAL 475,000.00 746,000.00 271,000.00
Liabilities and
Stockholder’s Equity
Accounts Payable 76,000.00 85,000.00 9,000.00
Other current liabilities 32,000.00 56,000.00 24,000.00
Bonds Payable 56,000.00 20,000.00 (36,000.00)
Long-term bank borrowing 35,000.00 89,000.00 54,000.00
Common stock 125,000.00 203,000.00 78,000.00
Retained Earnings 151,000.00 293,000.00 142,000.00
TOTAL 475,000.00 746,000.00 271,000.00
C ASH FLOW STATEMENT E XAMPLE
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C ASH FLOW STATEMENT E XAMPLE
Net income = ?!?!
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C ASH FLOW STATEMENT E XAMPLE
Recall:
R/E (end) = R/E (beg) + net income – dividends
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C ASH FLOW STATEMENT E XAMPLE
Recall:
R/E (end) = R/E (beg) + net income – dividends
293,000 = 151,000 + net income – 51,000
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C
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Operating
Net Income 193,000.00
Depreciation 48,000.00 241,000.00 Accounts Receivable (35,000.00)
Inventories (86,000.00)
Prepaid Expenses 28,000.00
Accounts Payable 9,000.00
Other Current Liabilities 24,000.00 (60,000.00)
Investing
Equipment (250,000.00) (250,000.00)
Financing
Bonds Payable (36,000.00)LT Bank Borrowing 54,000.00
Common Stock 78,000.00
Dividends (51,000.00) 45,000.00
Net Decrease in Cash (24,000.00)
Cash and Cash Equivalents (Jan.1) 62,000.00
Cash and Cash Equivalents (Dec.31) 38,000.00
C ASH FLOW STATEMENT E XAMPLE
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Assets January December
Increase/ (Decrease)
Cash 62,000.00 38,000.00 (24,000.00) Accounts Receivable 73,000.00 108,000.00 35,000.00
Inventories 136,000.00 222,000.00 86,000.00
Prepaid Expenses 41,000.00 13,000.00 (28,000.00)
Current Assets 312,000.00 381,000.00 69,000.00
Equipment 236,000.00 486,000.00 250,000.00
Less: Depreciation 73,000.00 121,000.00 48,000.00
Net, Equipment 163,000.00 365,000.00 202,000.00
TOTAL 475,000.00 746,000.00 271,000.00
Liabilities and
Stockholder’s Equity
Accounts Payable 76,000.00 85,000.00 9,000.00
Other current liabilities 32,000.00 56,000.00 24,000.00
Bonds Payable 56,000.00 20,000.00 (36,000.00)
Long-term bank borrowing 35,000.00 89,000.00 54,000.00
Common stock 125,000.00 203,000.00 78,000.00
Retained Earnings 151,000.00 293,000.00 142,000.00TOTAL 475,000.00 746,000.00 271,000.00
C ASH FLOW STATEMENT E XAMPLE
CASH FLOW STATEMENT
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Assets JANUARY DECEMBER
Cash 62,000.00 38,000.00
Accounts Receivable 73,000.00 108,000.00
Inventories 136,000.00 222,000.00
Prepaid Expenses 41,000.00 13,000.00
Current Assets 312,000.00 381,000.00
Equipment 236,000.00 486,000.00
Less: Depreciation 73,000.00 121,000.00
Net, Equipment 163,000.00 365,000.00
TOTAL 475,000.00 746,000.00
Liabilities and Stockholder’s Equity Accounts Payable 76,000.00 85,000.00
Other current liabilities 32,000.00 56,000.00
Bonds Payable 56,000.00 20,000.00
Long-term bank borrowing 35,000.00 89,000.00
Common stock 125,000.00 203,000.00
Retained Earnings 151,000.00 293,000.00
TOTAL 475,000.00 746,000.00
You are the owner of a garment company and was wondering how cash
flowed on your operations. Your Accountant gave you the January and
December balance sheets and relayed that you had a net profit of $ 193,000
for the year.
C ASH FLOW STATEMENT E XAMPLE
CASH FLOW STATEMENT
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Assets JANUARY DECEMBER
Cash 62,000.00 38,000.00
Accounts Receivable 73,000.00 108,000.00
Inventories 136,000.00 222,000.00
Prepaid Expenses 41,000.00 13,000.00
Current Assets 312,000.00 381,000.00
Net, Equipment 163,000.00 365,000.00
TOTAL 475,000.00 746,000.00
Liabilities and Stockholder’s Equity Accounts Payable 76,000.00 85,000.00
Other current liabilities 32,000.00 56,000.00
Bonds Payable 56,000.00 20,000.00
Long-term bank borrowing 35,000.00 89,000.00
Common stock 125,000.00 203,000.00
Retained Earnings 151,000.00 293,000.00
TOTAL 475,000.00 746,000.00
You are the owner of a garment company and was wondering how cash
flowed on your operations. Your Accountant gave you the January and
December balance sheets and relayed that you had a net profit of $ 193,000for the year.
C ASH FLOW STATEMENT E XAMPLE
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C ASH FLOW STATEMENT (FIXED ASSETS, NET)
Fixed asset (end / new)
+ depreciation
- Fixed asset (beg / old)
Residual
Use of cash (e.g. acquisition)
Source of cash (e.g. selling)
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2009 2008
Income Tax Payable $ 8,130 $ 8,240
Plant and Equipment 54,600 51,400
Accumulated Depreciation 18,000 13,500
Accounts Payable 12,140 13,610
Inventory 14,280 12,430
Cash 16,400 17,250
Capital Stock 12,000 8,000
Accounts Receivable 18,920 16,480
Accrued Wages 7,320 7,890Notes Payable 24,000 30,000
Prepaid Insurance 2,630 2,280
Retained Earnings 19,240 13,600
Short-term Bank Loans 6,000 5,000
The following are the ABC Company’s year-end balance sheets for December 31
for the past two years ..
Required: Cash Flow Statement
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The following are the ABC Company’s year-end balance sheets for
December 31 for the past two years . Prepare cash flow statement.
. ACCOUNTS 2010 2009 Increase /
Decrease
Income Tax Payable $8,130 $8,240 ($110)
Plant and Equipment 54,600 51,400 $3,200
Accumulated Depreciation 18,000 13,500 $4,500 Accounts Payable 12,140 13,610 ($1,470)
Inventory 14,280 12,430 $1,850
Cash 16,400 17,250 ($850)
Capital Stock 12,000 8,000 $4,000
Accounts Receivable 18,920 16,480 $2,440 Accrued Wages 7,320 7,890 ($570)
Notes Payable 24,000 30,000 ($6,000)
Prepaid Insurance 2,630 2,280 $350
Retained Earnings 19,240 13,600 $5,640
Short-term Bank Loans 6,000 5,000 $1,000
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Financial statements for Mabini Construction Company are given 2009 and 2010
in summary form. The president of the company is considering expansion and would like
your views on the firm’s ability to generate funds.
Net sales 8,716
Cost of construction
billed 5,552
Operating expenses 1,085 Depreciation expense 232
Interest expense 290
Net income 1,557
2010 2011
Cash 386 607
Marketable securities 920 1,320
Accounts receivable 1,472 1,890 Inventory 746 1,046
Plant and equipment (net) 3,762 3,816
Total assets 7,286 8,679
Accounts payable 856 831
Bank loans payable 482 643
Long-term notes payable 1,800 1,200
Common stock 2,500 3,700
Retained earnings 1,648 2,305
Total equities 7,286 8,679
Mabini Construction Company
Income Statement for the Year 2011
(in thousand)
Mabini Construction Company
Balance Sheet for Year 2010 - 2011(in thousand)
The following financial statements are from Lucena Company in ($):
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g p y ($)
Dec. 31, 2010 Dec. 31, 2011
Cash 14,000 16,000
Accounts Receivable (net) 22,000 28,000
Inventories 65,000 55,000
Fixed Assets (net) 85,000 79,000
TOTAL ASSETS 186,000 178,000
Accounts Payable 30,000 15,000
Bonds Payable 60,000 75,000
Common Stock (par value of $10) 60,000 60,000
Retained Earnings 36,000 28,000
TOTAL L AND SE 186,000 178,000
INCOME STATEMENT FOR 2011Sales 360000
Cost of Goods Sold 240000
Gross Margin 120000
Operating Expenses (including $20,000 of depreciation expense) 100000
Income before Taxes 20000
Income Taxes 8000