Transcript Chapter 15
Chapter 12
STATEMENT OF
CASH FLOWS
Compare Companies
INCOME
Sales
Expenses
Net Income
Company A
$500
425
$ 75
Company B
$500
425
$ 75
CASH
Beginning of Year
End of Year
Change in CASH
$25
25
-0-
$25
25
-0-
Cash Activities
Company
A
B
Cash Rec’d
Customers
Sale of PA
Total
$450
5
$455
$350
60
$410
Cash Paid
To suppliers
Purch of PA
Purch Invest
$380
70
5
$400
10
0
Cash Paid
$455
Change in Cash -0-
$410
-0-
Why Are Cash Flows Important?
Cash is what pays the bills.
You must sell your product and collect cash from
your customers in time to:
1. Pay suppliers for merchandise purchases
2. Pay the bank on any loans (debt)
3. Pay employees their wages
4. Pay taxes
5. Purchase new equipment as needed.
Analyzing where a company’s cash is coming from
& where it is being spent may assist in detecting
future profit potential and/or future financial
problems.
NET CASH FLOWS
Cash Inflows
--Cash Outflows
= Net Cash Flows
Two parts of Cash Flow Statement
Activities
Operating
Investing
Financing
Cash Balance verification
Increase (Decrease) in cash
Cash at Beginning of Year
Cash at End of Year (Balance Sheet)
Cash Flows from Operating
Current accounts: current assets, current liabilities
1. Cash received from customer
Cash
A/R
2. Cash paid to suppliers
A/P
Cash
Investing Activities
Invest in Yourself
Purchase of plant assets ( minus cash)
Building
Cash
-- Sale of plant assets ( plus cash)
Cash
Building
Investing Activities (2)
Investments in Others
Purchase of other company’s stock or bonds
Sale of other company’s stock or bonds
Loaning money to other company (N/R)
Collection of principle payments on loan
Financing
1.Equity ( Your own company)
Issuing shares of stock
Retiring shares of stock
Purchasing shares of treasury stock
Selling shares of treasury stock
PAYING CASH DIVIDENDS ON STOCK
Financing 2
2. DEBT
Borrowing cash
Cash
M/P
Repaying Principle on a loan
M/P
Interest Expense
Cash
“Foolers”
Interest Paid
Decision to go into debt is Financing activity
Paying interest on the debt is operating or current
Interest Received
Decision to loan money is an investing activity
Receiving interest on loan is operating or current
Dividends Received
Decision to purchase other company’s stock-investing
Receiving dividends is operating or current
Dividends paid - different
Decision to sell stock is Financing activity
Paying dividend to stockholders is also financing activity
Schedule of Non Cash Activities
Need to be reported if will affect cash flows in the
future.
Activities:
1. Purchasing plant assets by signing a note payable
2. Purchasing a building through a mortgage loan
3. Exchanging stock for plant assets
4. Issuing stock to retire debt
5. Converting preferred stock to common stock
Operating (O), Investing (I), Financing (F)
Source (+), Use (-)
1. Earned a net income
O+
2.Paid Cash Dividend
F3. Issued stock for cash
F+
4. Retired Long Term Debt by issuing stock
Non Cash
5. Paid A/P
O6. Purchased inventory with cash
O-
Review Sheet.
Homework
Read Chapter 12 or whatever book with cash flow
OR
Watch the narrated power slides on book website
DO 12-1, 12-10 – Activities
DO 12-2 Cash Flow from Operations
DO 12-3 Free Cash Flow
DO 12-8 Statement of Cash Flow
12-14 -- Analysis
BASIC STRUCTURE OF A
STATEMENT OF CASH FLOWS
Cash provided (used) by:
Operating activities
Investing activities
Financing Activities
Net Incr (decr) in cash and cash equiv
Cash and Cash Equiv at beginning of year(last year)
Cash and Cash Equiv at end of year
Cash Flow Statement- operating
Start with Income on an Accrual Basis, (Net Income)
Accrual transactions(No cash in transaction):
Dr.
Dr.
A/R
Advertising X
Cr. Sales
Cr. A/P
Then make adjustments (incr or decr) net income to
show income on a Cash Basis.
Indirect method
Income from continuing operations (accrual income)
Add: Depreciation, depletion, and amoritization X
Add/decr changes in Current Assets
Add/Decr changes in Current Liabilities
Add back any non cash losses or decr any non cash
gains
= Net cash flow from operating activities
This number should always be positive
See Page 555
Changes in Current Assets
Current assets increase ---decrease in cash flow
A/R
Sale
I Receive
On Acct I Cash
Inventory
Buy
I Sale
Inventory I Inventory
OPPOSITE
Changes in Current Liabilities
Current liabilities increase ---increase in cash flow
Pay
Cash
A/P
I Purchase
I on acct
SAME
Steps for CFO (Cash flow from Operations)
1. Write down Net Income from Income Statement
2. Add in Depreciation and Amortization
3. Record changes to Current Assets and Current
Liabilities
4. Add in any non cash losses/subtract any non cash
gains (sale of plant assets)
Basic Concepts for Investing and Financing
Section
Paying back decreases cash flow
Buying decreases cash flow
Selling increases cash flow
Sell stock for cash = issue stock increase cash flow
If you sell more plant assets than you buy your
company is contracting
If you buy more than you sell your company is
expanding
Investing Basics-Review Problem
Beginning Balance
PPE Sold
Subtotal
Less Ending Balance
Purchased/DeprX
PPE
309
(12)
297
430
133
A.D
194
(5)
189
218
29
Financing Basics
RETAINED EARNINGS
Beginning
Plus Net Income
Subtotal
Ending Bal
Dividends
92
66
158
110
48
Which one would you want to
work for??????
Last Section (Cash reconciliation)
Change in cash for the period
Add last year cash (beginning cash) from balance
sheet
Should equal cash on balance sheet for current year
(Check figure)
Create a Cash Flow for Shubert