STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

• 4th REQUIRED GAAP Statement.• Covers a period of time (like an income statement).• Focuses on: Inflows of CASH

Outflows of CASH

text p. 586

201Lec12.PPT

Questions the Statement of Cash Flow Answers

Format of the Statement of Cash Flows Four parts (called activities):

•Operating - Cash from sales less cash spent on expenses - 2 options: direct or indirect

•Investing - Cash in and out from buying and selling of balance sheet items

•Financing - Cash in from borrowing or stock issue less cash out from paying back debt, buying treasury stock or paying dividends

•Non-cash investing and financing activities(must be “significant” in $$$)

FORMATFORMAT - 3 main parts plus schedule - 3 main parts plus schedule

Net Income Per income stmt (Accrual basis) xxx + or - Adjustments (Convert to cash basis) xxxNet Cash from Operations xxx

Called INDIRECT METHOD

text p. 5891 - Cash from OPERATING activities:

Cash receipts from customers xxxless Cash payments: suppliers xxx

operating expenses xxx taxes xxx -

xxxNet Cash from Operations

xxxCalled DIRECT METHOD

A l t e r n a t i v e l y text p. 612

SAME

AMOUNT

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

4 - Supporting ScheduleSIGNIFICANT NON-CASH Transactions should be disclosed

in a separate schedule.

For example: Trade stock for a building or

Sign note payable for building.

EXAMPLES: Operating activities adjustments.1 - Accrual to Cash conversion:

Assume: Sales for year = $100,000. Beginning A/R = $10,000. Ending A/R = 0.

Cash Collected?Cash Collected if Ending A/R = $15,000 instead of $0?Operating Activities:Net income XXXX

- Increase in A/R ( 5,000)Cash from Operations XXXX

If DIRECT method: Operating Activities:Receipts from customers:

95,000

Operating activities Indirect Method RULES:• Increases in all current assets (except cash) require

negative adjustments to arrive at cash flow.• Decreases in all current assets (except cash) require

positive adjustments to arrive at cash flow.• Increases in all current liabilities require positive

adjustments to arrive at cash flow.• Decreases in all current liabilities require negative

adjustments to arrive at cash flow.

EXAMPLES: Operating activities adjustments.2 - Noncash revenues or expenses:

Assume the following: Cash Revenues 100,000Cash Expenses 90,000Depreciation Exp 50,000

NI (40,000)What is Cash Flow?Statement of cash flows:

Net income (40,000)+ Depreciation 50,000Cash from Operations 10,000

If DIRECT method: Omit any mention of non-cash expenses! Cash Revenues

100,000Cash Expenses 90,000 Net cash flow 10,000

Additional Indirect Method RULES:• To arrive at operating activities cash flows: Addback

non-cash expenses such as:

Depreciation

Amortization

Loss on sale of assets (Also subtract gains.)

EXAMPLES: Investing & Financing activities3 - Examine all Non-current assets and liabilities beginning and

ending balances. Assume selected balances are:Beginning Ending

Long term assets: Land 100,000 115,000Long term liabilities: N/P 200,000 175,000Equity: Common Stock 500,000 600,000

• How did they change? Cash paid or received ?• If no cash involved, significant exchange?• Investing or financing?Note no difference if DIRECT method. Affects only operating

activities format.

Investing and financing RULES:• Locate investing and financing activity items by

reviewing 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.

EXAMPLE:B A L A N C E S H E E T

END BEGIN Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)

Total Assets 66,500 36,500

A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

Total Liabs & Equity 66,500 36,500

EXAMPLE: I N C O M E S T A T E M E N T

Sales 100,000- CGS -60,000Gross 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

EXAMPLE:Sales 100,000- CGS -60,000Gross 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 12,500CASH FROM OPERATING ACTIVITIES:

NET INCOME 12,500+ Depreciation Expense 6,500+ Loss on Sale of PP&E 1,000

EXAMPLE: END BEGIN

Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)

Total Assets 66,500 36,500

A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

Total Liabs & Equity 66,500 36,500

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)

EXAMPLE: END BEGIN

Cash 1,000 1,500A/R 4,000 5,000Inventory 9,500 8,000Prepaid Insurance 1,500 0Land 10,000 0Building 60,000 50,000Accum Depr (19,500) (28,000)

Total Assets 66,500 36,500

A/P 6,000 2,000Unearned Revenue 3,500 7,000Note Payable 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

Total Liabs & Equity 66,500 36,500

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

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN

Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

LAND:LAND: Increased $10,000. If bought with Cash, then Investing Activity

Other data - land was bought by signing a note.

Other than cash > Significant non-cash for schedule.

All

Non -

current

accounts

Buy new building

for $35,000

cash Sell old building for $9,000 cash

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN

Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

BuildingBuilding: Increased $10,000. Accum DeprAccum Depr:: Decreased $8,500.

Depreciation Expense

28000

19500

Building Accum Depr50000

60000

150002500035000 6500

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN

Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

N/P:N/P: Increased $10,000. Relates to land purchase discussed earlier.

Common Stock:Common Stock: Increased $500. Paid In Capital: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.

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN

Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

3,000 of cash dividends were paid.

Retained EarningsRetained Earnings: Increased $9,500.

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accounts END BEGIN

Land 10,000 0Building 60,000 50,000Accum Depr ( 19,500) ( 28,000)N/P 10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par 24,500 15,000Retained Earnings 21,000 11,500

Retained Earnings11500

21000

12500 = Net Income3000

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 18,500CASH FROM INVESTNG ACTIVITIES:

Proceeds from building sale 9,000Purchase of building (35,000)

Net Cash From Investing (26,000)

CASH FROM FINANCING ACTIVITIES:Proceeds from stock issuance 10,000Payment 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

SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:

Land was obtained by signing a $10,000 note payable.

Cash Provided By Operations – Capital Expenditures– Dividends Paid

Free Cash Flow

Free Cash Flow

• Considered excess cash available after spending to maintain operational efficiency and shareholders satisfied.

Text p 604

Current Cash Debt Coverage Ratio =

Cash provided by operationsAverage current liabilities

• Probably better than current ratio in assessing ability to meet current liability payments.

Text p 607