Statement of Cash Flows

Why is it important???

A positive net income on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statement data for learning about the generation of cash from operations is the statement of cash flows
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Statement of Cash Flows

Purpose of the statementThe

companys ability to generate cash flows for future period. The companys ability to meet its obligation and to pay dividends. The companys need for external finance
Is an important analytical tool for creditors, investors and other users of financial statement data

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Statement of Cash Flows

Provides information about cash inflows and outflows during an accounting period
Can be developed from Balance Sheet and Income Statement data

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Statement of Cash Flows

Objectives of the Chapter To explain how the statement of cash flows is prepared To interpret the information presented in the statement

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Preparing a Statement of Cash Flows

Begins with a return to the balance sheet Is prepared by calculating changes in all of the balance sheet accounts

Parts of a statement of cash flows:

1. 2. 3.

Operating activities Investing activities Financing activities

Md Nazmul Hasan(UITS)

Preparing a Statement of Cash Flows

Operating Activities includeDelivering or producing goods for sale and providing services The cash effects of transactions and other events that enter into the determination of income

Md Nazmul Hasan(UITS)

Preparing a Statement of Cash Flows

Operating Activities Examples Cash

flows resulting from sales of goods Purchase of inventories, Payment of operating expenses

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Preparing a Statement of Cash Flows

Investing Activities include Acquiring/disposing

of securities that are not cash equivalents Acquiring/disposing of productive assets Lending money/collecting on loans
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Preparing a Statement of Cash Flows

Financing Activities include Borrowing from creditors/repaying the principal Obtaining resources from owners Providing owners with a return on investment
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Preparing a Statement of Cash Flows

Inflows Operating Activities Investing Activities Financing Activities

Continued

How Cash Flows During an Accounting Period

Outflows

Total Inflows less Total Outflows = Change in cash for the accounting period
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Preparing a Statement of Cash Flows

First Step:

Continued

Look at changes in balance sheet accounts from beginning to end of accounting period

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Preparing a Statement of Cash Flows

Next Step:

Continued

Transfer the account changes to the appropriate area of a statement of cash flows

Md Nazmul Hasan(UITS)

Preparing a Statement of Cash Flows

Inflow - Asset account

Continued

Outflow + Asset account

+ Liability account
+ Equity account

- Liability account
- Equity account

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Calculating Cash Flow from Operating Activities

Firms may use one of two methods prescribed by the FASB: Direct Method Indirect Method

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Calculating Cash Flow from Operating Activities Continued

The Direct Method Shows cash collections from customers, interest and dividends collected, other operating cash receipts, cash paid to suppliers and employees, interest paid, taxes paid and other operating cash payments
Md Nazmul Hasan(UITS)

Calculating Cash Flow from Operating Activities Continued

The Indirect Method Starts with net income and adjusts for deferrals; accruals; noncash items, such as depreciation and amortization; and nonoperating items, such as gains and losses on asset sales
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Analyzing the Statement of Cash Flows

Indicates

Cont.

Firms ability to generate cash flows in the future Firms capacity to meet cash obligations Firms future external financing needs
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Analyzing the Statement of Cash Flows

Cont.

Indicates Firms success in productively managing investing activities Firms effectiveness in implementing financing and investing strategies

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Cash Flow from Operations

Continued

The ongoing operation of any business depends upon its success in generating cash from operations

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Analysis of Cash Inflows

Cont.

When analyzing the cash outflows, the analyst should consider the necessity of the outflow and how the outflow was financed

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Preparing a cash flow statement

CF from Operating activities Net Income

Add Depreciation Adjust for Non-Cash Changes in Current Accounts Subtract increase in net accounts receivable Subtract increase in inventory Subtract increase in prepaid expenses Add increase in accounts payable Add increase in miscellaneous expenses payable Add increase in taxes payable Add Loss on Sale of Assets Subtract Gain on Sales of Assets
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Preparing a cash flow statement

CF from Investing activities Add cash received from Sale of Investments Sales of PP&E Less cash paid for Acquisition of Investments Acquisition of PP&E
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Preparing a cash flow statement

CF from Financing activities Add cash from Debt issues Capital stock issues Less cash paid for Debt repayment Dividends Repurchase of stock
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Example of Cash Flow Statement:

Auto Supply Company Comparative Balance Sheets Assets 2001 Cash $50,000 Marketable Securities 40,000 Accounts Receivables 320,000 Inventory 240,000 Plant Asset 700,000 Accumulated Depreciation (100,000) Totals $1,250,000 Liabilities and SE Accounts Payables $150,000 Accrued Expense Payables 60,000 Mortgage Note Payable (Long Term) -Bonds Payables 500,000 Capital Stock 160,000 Retained Earnings 380,000
Totals $1,250,000

2002 $45000 25,000 330,000 235,000 800,000 (160,000) $1,275,000 $160,000 45,000 70,000 350,000 160,000 490,000
$1,275,000

Changes (15,000) 10,000 (5,000) 100,000 60,000

10,000 (15,000) 70,000 (150,000) 110,000

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Statement of Cash Flow

Additional Info:
Net

Income for the company is $55,000, Dividend Paid on December $15,000 Company purchase plant assets for $100,000 making $30,000 cash paid and rest payment by issuing a mortgage payables.

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Statement of Cash Flows For the year ended December 31, 2002. Cash Flow from operating Activities: Net Income 55,000 Add Depreciation 60,000 115,000 Changes in Assets and Liabilities: Add decrease in Inventory Add increase in A/P Deduct increase in A/R Add decrease in Marketable Securities Deduct Decrease expense payables Cash Flow from Investing Activities: Cash Paid to acquire plant assets Cash Flow from Financing Activities: Decrease payment for bonds Payables Add Increase Mortgage on Notes Payable Dividend Payments Net Cash Flow Cash Balance at the beginning (2001) Hasan(UITS) Md Nazmul Cash Balance at the Ending (2001) 5,000 10,000 -10,000 15,000 -15,000

5,000

(30,000)
(30,000) (150,000) 70,000 (15,000) (95,000) ($5,000) 50,000 $45,000

ABC Corporation Comparative Balance Sheets June 2005, and 2006

Assets Cash Accounts Receivable Merchandise Inventory Prepaid Expenses Investment in stock Buildings 2006 $105,000 336,000 168,000 31,500 378,000 798,000 2005 $84,000 168,000 189,000 52,500 315,000 588,000

Accumulated Dep- Buildings

Equipment Accumulated Dep- Equipment Total Assets

-126,000
1,029,000 -315,000 $2,404,500

-105,000
840,000 -252,000 $2,404,500

Liabilities and Stockholders Equity

Accounts Payable Accrued Liabilities Payable Five Years Notes Payable Capital stock Retained Earnings Total Liabilities and Stockholders Equity Additional Information: 1.Net Income for the Year Ended 2006, $105,000. Md Nazmul Hasan(UITS) 2.Dividend Paid $84,000.

2006
$294,000 42,000 210,000 1680,000 178,500 $2,404,500 -

2005
$189,000 63,000

1,470,000 157,500 $2,404,500

ABC Corporation Comparative Balance Sheets June 2005, and 2006 Assets
Cash Accounts Receivable Merchandise Inventory Prepaid Expenses Investment in stock Buildings Accumulated Dep- Buildings Equipment Accumulated Dep- Equipment Total Assets

2006
$105,000 336,000 168,000 31,500 378,000 798,000 -126,000 1,029,000 -315,000 $2,404,500

2005
$84,000 168,000 189,000 52,500 315,000 588,000 -105,000 840,000 -252,000 $2,404,500

Change
-$21,000 168,000 -21,000 -21,000 63,000 210,000 -21,000 189,000 -63,000

Liabilities and Stockholders Equity

Accounts Payable Accrued Liabilities Payable

2006
$294,000 42,000

2005
$189,000 63,000

Change
$105,000 -21,000

Five Years Notes Payable

Capital stock

210,000
1680,000

1,470,000

21,0000
210,000

Retained Earnings
Total Liabilities and Stockholders Equity

178,500
$2,404,500

157,500
$2,404,500

21,000

Md Nazmul Hasan(UITS)

Asian Exim Ltd Comparative Balance Sheet

Assets Cash Accounts Receivables, net Merchandise Inventory Plant Assets Accumulated Depreciation Total Assets Liability and Owners Equity Accounts payables Accrued Liabilities Common Stock Retained Earnings Total Liability and Owners Equity $9,000 2,000 90,000 36,000 $137,000 2007 $21,000 30,000 26,000 70,000 -10,000 $137,000 2006

Asian Exim Ltd Income Statement Data For the year December 31, 2007 Sales Cost of Goods Sold Operating Expense Interest Expense $140,000 100,000 25,000 5,000
$10,000 20,000 30,000 50,000 -5,000 $105,000

$15,000 0 60,000 30,000 $105,000

Additional Data: Cash Dividend paid totalled $4,000. Prepare Statement of Cash Flow under Indirect Method.
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Daugherty Company's Statement of Financial Position

Asset Cash Accounts receivable Inventory Prepaid expenses Long-term investments Plant and equipment Accumulated depreciation Total assets Liability & owners Equity Accounts payable Accrued liabilities Taxes payable Bonds payable Deferred taxes Common stock Retained earnings Total liabilities and owners equity 2008 $ 7,000 71,000 62,000 2,000 310,000 370,000 (214,000) $608,000 2008 $ 69,000 2,000 28,000 140,000 27,000 90,000 252,000 $608,000 2007 $ 21,000 47,000 44,000 9,000 240,000 370,000 (186,000) $545,000 2007 $ 48,000 17,000 13,000 170,000 17,000 70,000 210,000 $545,000
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Income Statement Data Sales Cost of goods sold Operating expenses Income taxes

2008 $890,000 510,000 270,000 48,000

Additional Info: Dividend Paid $20,000. Prepare Statement of Cash Flow Under Indirect Method.