. STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

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STATEMENT OF CASH FLOWS STATEMENT 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

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Questions the Statement of Cash

Flow Answers

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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 $$$)

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FORMAT

FORMAT - 3 main parts plus schedule - 3 main parts plus schedule

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

Called INDIRECT METHOD

text p. 589

1 - Cash from OPERATING activities:

Cash receipts from customers xxx

less Cash payments: suppliers xxx operating expenses xxx

taxes xxx - xxx

Net Cash from Operations xxx

Called DIRECT METHOD

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

SA M E

A MO UN T

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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

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4 - Supporting Schedule

SIGNIFICANT NON-CASH Transactions should be disclosed in a separate schedule.

For example: Trade stock for a building or Sign note payable for building.

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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

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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.

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EXAMPLES: Operating activities adjustments.

2 - Noncash revenues or expenses:

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

NI (40,000)

What is Cash Flow?

Statement of cash flows:

Net income (40,000)

+ Depreciation 50,000 Cash from Operations 10,000

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

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

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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.)

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EXAMPLES: Investing & Financing activities

3 - Examine all Non-current assets and liabilities beginning and ending balances. Assume selected balances are:

Beginning Ending

Long term assets: Land 100,000 115,000 Long term liabilities: N/P 200,000 175,000 Equity: 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.

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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.

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

END BEGIN

Cash 1,000 1,500 A/R 4,000 5,000

Inventory 9,500 8,000

Prepaid Insurance 1,500 0 Land 10,000 0

Building 60,000 50,000

Accum Depr (19,500) (28,000) Total Assets 66,500 36,500

A/P 6,000 2,000

Unearned Revenue 3,500 7,000 Note Payable 10,000 0

Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par 24,500 15,000

Retained Earnings 21,000 11,500 Total Liabs & Equity 66,500 36,500

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

Sales 100,000

- CGS -60,000

Gross 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

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EXAMPLE:

Sales 100,000

- CGS -60,000

Gross 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

CASH FROM OPERATING ACTIVITIES:

NET INCOME 12,500

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

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EXAMPLE:

END BEGIN

Cash 1,000 1,500 A/R 4,000 5,000

Inventory 9,500 8,000

Building 60,000 50,000

A/P 6,000 2,000

NET INCOME 12,500

+ Decrease in A/R 1,000

- Increase in Inventory ( 1,500) - Increase in Prepaid Insurance ( 1,500)

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EXAMPLE:

END BEGIN

Cash 1,000 1,500 A/R 4,000 5,000

Inventory 9,500 8,000

Building 60,000 50,000

A/P 6,000 2,000

NET INCOME 12,500

+ 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

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EXAMPLE: INVESTING & FINANCING activities.

Analyze all noncurrent accounts END BEGIN

Land 10,000 0

Building 60,000 50,000

Accum Depr ( 19,500) ( 28,000)

N/P 10,000 0

Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par 24,500 15,000

Retained 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

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Buy new building

for

$35,000

cash Sell old building for $9,000 cash

Land 10,000 0

Building 60,000 50,000

Accum Depr ( 19,500) ( 28,000)

N/P 10,000 0

Building

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

Depreciation Expense

28000 19500 Building Accum Depr 50000

60000

15000 25000

35000 6500

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Land 10,000 0

Building 60,000 50,000

Accum Depr ( 19,500) ( 28,000)

N/P 10,000 0

N/P:N/P: Increased $10,000.

Relates to land purchase discussed earlier.

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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.

Land 10,000 0

Building 60,000 50,000

Accum Depr ( 19,500) ( 28,000)

N/P 10,000 0

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3,000 of cash dividends were paid.

Retained Earnings

Retained Earnings: Increased $9,500.

Land 10,000 0

Building 60,000 50,000

Accum Depr ( 19,500) ( 28,000)

N/P 10,000 0

Retained Earnings 11500 21000

12500 = Net Income 3000

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NET INCOME 12,500

+ 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

CASH FROM INVESTNG ACTIVITIES:

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

Net Cash From Investing (26,000)

CASH FROM FINANCING ACTIVITIES:

Proceeds from stock issuance 10,000

Payment 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

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SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:

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

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Cash Provided By Operations – Capital Expenditures

– Dividends Paid

Free Cash Flow

• Considered excess cash

available after spending to

maintain operational efficiency and shareholders satisfied.

Text p 604

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Current Cash Debt Coverage Ratio =

Cash provided by operations Average current liabilities

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

Text p 607