Methods of Cash Flow. by Rashmi

8/3/2019 Methods of Cash Flow. by Rashmi

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Analyzing CashFlows


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How did thebusiness fund its

operations?

Did the businessborrow any funds or

repay any loans?

Does the businesshave sufficient cashto pay its debts as

they mature?

Did the businessmake any dividend

payments?

Importance of Cash Flows


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CashCurrency

CashEquivalents

Short-term, highly liquid investments. Readily convertible into cash.

So near maturity that market value is unaffected byinterest rate changes.

Measuring Cash Flows


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The Statement of Cash Flows includesthe following three sections:

Operating Activities

Investing Activities

Financing Activities

Classifying Cash Flows


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Outflows

Salaries and wages. Payments to suppliers.

Taxes and fines.

Other.

Inflows Receipts from customers.

Cash receipts fromroyalties, fees,commissions and otherrevenue.

Other.

Operating Activities


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Inflows disposal of fixed assets

disposal of investments

Other.

Outflows

acquire fixed assets to acquire shares, warrants or

debt instruments of otherenterprises and interest in jointventures

CashFlowsfrom

InvestingActivities

+

_

Investing Activities


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Inflows Issuing its own equity

securities.

Issuing bonds and notes.

Issuing short-term andlong-term liabilities.

Outflows

Dividend/ Interest paid Buy back of Shares

Redemption of PreferenceShares

Redemption of Debentures

Payment of Loan.

CashFlowsfrom

FinancingActivities

+

_

Financing Activities


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Items requiring separate disclosure include: Retirement of debt by issuing equity stock.

Conversion of preferred stock to common stock.

Lease of assets in a capital lease transaction.

Purchase of long-term asset by issuing a note orbond.

Exchange of noncash assets for other noncashassets.

Purchase of noncash assets by issuing equity ordebt.

Noncash Investing andFinancing

Exh.

12.4


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Exh.

12.5

Cash flows from operating activities:

[List of individual inflows and outflows]

Net cash provided (used) by operating activites $ #####

Cash flows from investing activities:[List of individual inflows and outflows]

Net cash provided (used) by investing activites #####

Cash flows from financing activities:


Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####

Cash (and equivalents) balance at beginning of period #####

Cash (and equivalents) balance at end of period $ #####

Company Name

Statement of Cash Flows

Covered Period


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Cash flows from operating activities:


Net cash provided (used) by operating activites $ #####

Cash flows from investing activities:[List of individual inflows and outflows]

Net cash provided (used) by investing activites #####

Cash flows from financing activities:


Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####

Cash (and equivalents) balance at beginning of period #####

Cash (and equivalents) balance at end of period $ #####

Company Name

Statement of Cash Flows

Covered Period

Exh.

12.5

There are two acceptable methods to determine CashFlows from Operating Activities:

Direct Method

Indirect Method


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D Cash = D Liabilities + D StockholdersEquity - D Noncash Assets

Derives from . . .

Assets = Liabilities + Stockholders Equity

The changes in cash can be determinedby analyzing the noncash accounts on

the balance sheet.

Analyzing Noncash Accounts


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Lets look at theDirect Methodfor preparing

the Cash Flowsfrom Operating

Activitiessection.


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Can be computed two ways:

Obtained from cash receipts journal.Obtained from accrual sales information.

Exh.

12.12

Cash received

from customers= Sales

{- Increase in A/R

+ Decrease in A/R

Direct MethodCash Received from Customers


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Step 1

Step 2

Exh.

12.13

Purchases = COGS {+ Increase in inventory- Decrease in inventory

Cash paid for

merchandise= Purchases { + Decrease in A/P

- Increase in A/P

Direct MethodCash Paid for Merchandise


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Exh.

12.14

The cash paid for wages and other operatingexpenses is affected by

(1) whether the expense was prepaid, and

(2) whether the expense was accrued.

{ {Cash paid for

wages and

other operating

expenses

=

Wages

and other

operating

expenses

+ Increase in

prepaid expenses

- Decrease in

prepaid expenses

+ Decrease in

accrued liabilities

-Increase in

accrued liabilities

Direct MethodWages and Operating Expenses


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Interest

Taxes

Exh.

12.15

Cash paid

for interest =

Interest

Expense

+ Decrease in

interest payable

- Increase ininterest payable{

Direct MethodCash Paid for Interest and Taxes

Cash paid

for taxes=

Tax

Expense

+ Decrease in

taxes payable

- Increase in

taxes payable

{

t t


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Operating cash flowsare not involved.

They are notdisclosed in the

Statement of CashFlows using the directmethod.

rect et oDepreciation, Amortization, and

Depletion Expense


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Gains and losses do

not appear on theStatement of Cash

Flows using the

Direct Method.

Direct MethodGains and Losses


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Lets look at theIndirect Methodfor preparing

the Cash Flowsfrom Operating

Activitiessection.


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97.5% of all companies use the indirect method.

NetIncome

Cash Flows

fromOperatingActivities

Changes in current assetsand current liabilities.

+ Losses and

- Gains

+ Noncash

expenses such asdepreciation and

amortization.

Indirect Method of ReportingOperating Cash Flows


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Use this table when adjusting Net Incometo Operating Cash Flows.

Change in Account Balance During Year

Increase Decrease

Current Subtract from net Add to net income.Assets income.

Current Add to net income. Subtract from net

Liabilities income.

Indirect Method of ReportingOperating Cash Flows


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East, Inc. reports $125,000 net income forthe year ended December 31, 2002.

Accounts Receivable increased by $7,500

during the year and Accounts Payableincreased by $10,000.

During 2002, East reported $12,500 of

Depreciation Expense.

What is East, Inc.s Operating

Cash Flow for 2002?

Indirect MethodOperating Activities Example


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Net income 125,000$

For the indirect

method, start withnet income.


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Net income 125,000$

Add: Depreciation expense 12,500

Add noncash expensessuch as depreciation,

depletion, amortization,or bad debt expense.


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Net income 125,000$


Deduct: Increase in accounts receivable (7,500)


Increase Decrease

Current Subtract from net Add to net income.

Assets income.


Liabilities income.


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Net income 125,000$



Add: Increase in accounts payable 10,000


Increase Decrease

Current Subtract from net Add to net income.

Assets income.


Liabilities income.


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If we used the Direct Method, we would get the same$140,000 for Cash Provided by Operating Activities.

Net income 125,000$



Add: Increase in accounts payable 10,000

Cash provided by operating activities 140,000$


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End of Chapter 12

Methods of Cash Flow. by Rashmi

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