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