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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
Md Nazmul Hasan(UITS)
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
Md Nazmul Hasan(UITS)
Provides information about cash inflows and outflows during an accounting period
Can be developed from Balance Sheet and Income Statement data
Md Nazmul Hasan(UITS)
Md Nazmul Hasan(UITS)
Begins with a return to the balance sheet Is prepared by calculating changes in all of the balance sheet accounts
Md Nazmul Hasan(UITS)
flows resulting from sales of goods Purchase of inventories, Payment of operating expenses
Md Nazmul Hasan(UITS)
of securities that are not cash equivalents Acquiring/disposing of productive assets Lending money/collecting on loans
Md Nazmul Hasan(UITS)
Continued
Total Inflows less Total Outflows = Change in cash for the accounting period
Md Nazmul Hasan(UITS)
Continued
Look at changes in balance sheet accounts from beginning to end of accounting period
Md Nazmul Hasan(UITS)
Continued
Transfer the account changes to the appropriate area of a statement of cash flows
Md Nazmul Hasan(UITS)
Continued
+ Liability account
+ Equity account
- Liability account
- Equity account
Md Nazmul Hasan(UITS)
Md Nazmul Hasan(UITS)
Cont.
Firms ability to generate cash flows in the future Firms capacity to meet cash obligations Firms future external financing needs
Md Nazmul Hasan(UITS)
Cont.
Indicates Firms success in productively managing investing activities Firms effectiveness in implementing financing and investing strategies
Md Nazmul Hasan(UITS)
Continued
The ongoing operation of any business depends upon its success in generating cash from operations
Md Nazmul Hasan(UITS)
Cont.
When analyzing the cash outflows, the analyst should consider the necessity of the outflow and how the outflow was financed
Md Nazmul Hasan(UITS)
CF from Financing activities Add cash from Debt issues Capital stock issues Less cash paid for Debt repayment Dividends Repurchase of stock
Md Nazmul Hasan(UITS)
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
Md Nazmul Hasan(UITS)
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.
Md Nazmul Hasan(UITS)
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
-126,000
1,029,000 -315,000 $2,404,500
-105,000
840,000 -252,000 $2,404,500
2006
$294,000 42,000 210,000 1680,000 178,500 $2,404,500 -
2005
$189,000 63,000
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
2006
$294,000 42,000
2005
$189,000 63,000
Change
$105,000 -21,000
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 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
Additional Data: Cash Dividend paid totalled $4,000. Prepare Statement of Cash Flow under Indirect Method.
Md Nazmul Hasan(UITS)
Income Statement Data Sales Cost of goods sold Operating expenses Income taxes
Additional Info: Dividend Paid $20,000. Prepare Statement of Cash Flow Under Indirect Method.