Transcript Dean Maris writes to all ONU students:

Statement of Cash Flows
answers questions such as:
• Is the company generating sufficient positive cash
flows from its ongoing operations to remain viable?
• Will the company be able to meet its financial
obligations to creditors?
• Will the company be able to pay its customary cash
dividend?
• Why is there a difference between net income and
net cash flow for the year?
• To what extent will the company have to borrow
money in order to make needed investments?
Statement of Cash Flows
• Reports the Cash Effects
– of an enterprise’s operations (through CA & CL generally)
– its investing transactions (LT Assets)
– its financing transactions (LT Liabilities & Owners’
Equity)
• Should Reconcile Net Income to Net Cash Flow
from operating activities
• Should report significant noncash investing &
financing transactions
• Cash includes both cash & cash equivalents
Cash Flows
Increases in Cash
Decreases in Cash
Operating
Operating
(receipts from
revenues)
Investing
(receipts from sales of
noncurrent assets)
Financing
(receipts from issuing
equity and debt securities)
(payments for
expenses)
Cash
Investing
(payments for aquiring
noncurrent assets)
Financing
(payments for dividends, and
redemption of debt securities)
Statement of Cash Flows:
Investing Activities
Cash Received From:
• Collection of principal from debtors
• Sale of loans to third parties
• Sale of debt or equity securities of other entities
• Returns of investment in those investments
• Sale of property, plant & equipment
Cash Paid For:
• Loans made or purchased by the entity
• Purchase of debt or equity securities of other
entities
• Purchase of property, plant & equipment
Statement of Cash Flows:
Financing Activities
Cash Received From:
• Issuance of equity securities (stock)
• Issuance of bonds, mortgages, notes & other shortterm or long-term borrowings
Cash Paid For:
• Cash dividends
• Purchase of treasury stock
• Repayment of principal on amounts borrowed,
including capital lease obligations
Statement of Cash Flows:
Operating Activities
Cash Received From:
• Producing & selling goods
• Providing services
• Interest
• Dividends
• Other (includes sale of investments in trading portfolio)
Cash Paid For:
• Inventory
• Salaries & wages
• Taxes, duties, fines, fees, penalties
• Interest
• Other (includes purchase of investments in trading portfolio)
Noncash:
Investing & Financing Activities
• Acquiring an asset through a capital lease
• Conversion of debt to equity
• Exchange of noncash assets or liabilities for other
noncash assets or liabilities
• Issuance of stock to acquire assets
Statement of Cash Flows:
Direct vs. Indirect Methods
Direct Method
• Requires a supplemental
reconciliation of net
income to cash flow from
operating activities.
• Net income is
reconstructed on a cash
basis.
• Used by 2.5% of
companies.
Indirect Method
• No supplemental
schedule is required.
• Net income is reconciled
to cash flow from
operating activities.
• Used by 97.5% of
companies.
Accounts Receivable
Beginning Balance
+ Net Credit Sales
- Net Cash Collected
from Customers
-A/R written off
= Ending Balance
Accounts Payable
Beginning Balance
+ COGS (net of Factory
Depreciation & Amortization)
+ Ending Inventory
- Beginning Inventory
- Net Cash Paid
to suppliers
= Ending Balance
Accrued Expenses Payable
Beginning Balance
+ Operating Expenses
- Cash Paid for Operating
Expenses
+ Ending Prepaid Expenses
- Depr. & Amortization
- Beg. Prepaid Expense
= Ending Balance
Statement of Cash Flows:
Indirect Method
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income
+ “Non-cash” Expenses
- “Non-cash” Revenues
- Increases in Current Assets
+ Decreases in Current Assets
- Decreases in Current Liabilities
+ Increase in Current Liabilities
+/- Losses & Gains Reported on the Income Statement
= Net Cash Flow from Operating Activities
CASH FLOW FROM INVESTING ACTIVITIES:
+ Net Decrease in all other Long Term Assets
- Net Increase in all other Long Term Assets
= Net Cash Flow from Investing Activities
CASH FLOW FROM FINANCING ACTIVITIES:
+ Net Decrease in all other LT Liabilities & Equities
- Net Increase in all other LT Liabilities & Equities
= Net Cash Flow from Financing Activities
“Ada” Memory Tool
Asset
Decreases -Add to Income
Working Paper Template for the Statement of Cash Flow
Company Name: __________________________________
For the Year Ended: ____________________________
Based on Balance Sheet Accounts
Example Template
From Exhibit 9
(Text, page 595)
Account Balances
End of Prior Year
from Before …
Prepare a
Statement
of
Cash Flows:
Indirect Method
Analysis of Transactions
Debit
Credit
explain net change
Account Balances
End of Current Year
… to After
Debit Balance Accounts
Cash
Accounts Receivable (net)
Inventories
Land
Building
26,000
65,000
180,000
125,000
200,000
71,500
9,000
15,000
60,000
8,000
60,000
97,500
74,000
172,000
80,000
260,000
Crebit Balance Accounts
Accum. Depr. - Building
Accounts Payable
Accrued Expense Payable
Income Tax Payable
Dividend Payable
Bonds Payable
Common Stock
Add'l Pd-in Capital
Retained Earnings
58,300
46,700
24,300
8,400
10,000
150,000
16,000
80,000
202,300
Totals
7,000
3,200
2,200
500
4,000
50,000
28,000
237,200
+
8,000
40,000
108,000
237,200
65,300
43,500
26,500
7,900
14,000
100,000
24,000
120,000
282,300
-
Cash flows from operating activities:
Net income, per income statement
Add: Depreciation
Decrease in inventory
Increase in accrued expenses
using a
worksheet
108,000
7,000
8,000
2,200
9,000
3,200
500
12,000
Deduct: Increase in accounts receivable
Decrease in accounts Payable
Decrease in Income Tax Payable
Gain on Sale of Land
100,500
Net cash flow from operating activities:
Cash flows from investing activities:
Sale of land
72,000
15,000
60,000
Purchase of land
Purchase of building
(3,000)
Net cash flow from investing activities:
Cash flows from financing activities:
Issued comon stock
48,000
50,000
28,000
Retired bonds payable
Declared cash dividends
Increas in dividend payable
Net cash flow from financing activities:
Net Increase (Decrease) in Cash
4,000
(26,000)
71,500
Interpretation of the Statement
of Cash Flows
• Examine the operating activities section
carefully.
– Negative cash flow is usually a sign of
fundamental difficulties.
– Ultimately, a positive cash flow is necessary to
avoid liquidating assets or borrowing money to
pay for day-to-day activities.
DIRECT METHOD
STATEMENT OF CASH FLOWS
Cash flows from operating activities
Cash collections from Customers
Less: Cash paid for merchandise
Less: Cash paid for operating expenses
Less: Cash paid for income taxes
Net cash provided by operating activities
CASH FLOW FROM INVESTING ACTIVITIES:
Plus cash received from acquiring Long Term Assets
Less cash paid from selling Long Term Assets
= Net Cash Flow from Investing Activities
CASH FLOW FROM FINANCING ACTIVITIES:
Plus cash received from securing LT Liabilities & Equities
Less cash paid to reduce LT Liabilities & Equities
= Net Cash Flow from Financing Activities
Net increase in cash
Cash, BOY
Cash, EOY
Finding Cash Collected from Customers
Accounts Receivable
Beginning Balance
+ Net Credit Sales
- Net Cash Collected
from Customers
-A/R written off
= Ending Balance
Cash
Collected
from Customers
=
Net
Sales
+ Decrease in A/R
- Increase in A/R
Finding Cash Paid to Suppliers
Accounts Payable
Beginning Balance
+ COGS (net of Factory
- Net Cash Paid
to suppliers
Depreciation & Amortization)
+ Ending Inventory
- Beginning Inventory
= Ending Balance
Cash
Payments = COGS
to Suppliers
+ Incr in Inventory
- Decr in Inventory
+ Decrease in A/P
- Increase in A/P
Finding Cash Paid for Operating Expenses
Accrued Expenses Payable
Beginning Balance
+ Operating Expenses
- Cash Paid for Operating
Expenses
- Depr. & Amortization
- Beg. Prepaid Expense
+ Ending Prepaid Expenses
= Ending Balance
+ Increase in Prepaid Expenses
- Decrease in Prepaid Expenses
Cash
Operating
Payments = Expenses
for Operating
net of
+ Decrease in Accrued Expenses
Expenses
depreciation - Increase in Accrued Expenses