Transcript Slide 1

CHAPTER 13
Cash Flow Statement
• explains the reasons for a change in cash.
• classifies the reasons for the change as an
operating, investing or financing activity.
• reconciles net income with cash flow from
operations.
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Activities
1. Operations -- cash flows related to
selling goods and services; that is, the
principle business of the firm.
2. Investing -- cash flows related to the
acquisition or sale of non-current assets.
3. Financing -- long term and short term
cash flows related to liabilities and owners’
equity; dividends are a financing cash
outflow.
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Classification of Cash in-flows and outflows
From sales of goods and
services to customers
From receipt of interest
or dividends
Operating Activities
To pay wages
To purchase inventory
To pay expenses
To pay interest
To pay taxes
From sale of PPE and other
longterm assets
From sale of short or
longterm securities
From collection of loans
From sale of common or
preferred stock
From issuance of short
or long term debt
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Investing Activities
Financing Activities
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To purchase PPE and
other longterm assets
To purchase longterm
securities
To make loans
To acquire preferred
or common stock
To repay debt
To pay dividends
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Format of the Cash Flow Statement
Name of the Company
Cash Flow Statement
For the period …
Cash from operating activities
A
Cash from investing activities
B
Cash from financing activities
C
Net Change in Cash
D = (A+B+C) increase or (decrease)
+ Beginning Cash balance
CB, from the beginning balance sheet
Ending Cash balance
=CB + D should equal to ending cash
balance in the ending balance sheet
Non-cash Investing and Financing Activities
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Determination of Cash Flows From
Operating Activities
Direct Method
Income Statement items are converted to cash flows
individually
Indirect Method
Net income or loss is adjusted for accruals such as
accounts receivable and payable, and for non-cash
expenses such as depreciation
reconciliation of the accrual based and cash based
accounting
Only operating activities section is different between the
methods, investing and financing sections are the same.
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Illustration of the Preparation of the Cash Flow Statement
EICC A.Ş
Income Statement
For the year 2007
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Net Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Depreciation Expense
Salaries and Wages Exp.
Insurance Expense
Amortization Expense
Operating Income
Non-operating Revenues &
Expenses
Interest Expense
Interest Revenue
Dividend Revenue
Gain on sale of Trading
Securities
Loss on sale of equipment
Income before tax
Income tax
Net Income
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TL 8.750
(4.200)
4.550
TL 380
2.000
900
100
(350)
100
50
300
(50)
(3.380)
1.170
50
1.220
(450)
TL 770
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EICC A.S. Comparative Balance Sheets- In TL
Assets
Liabilities and Shareholders' Equity
31.Ara
2004
2005
1.300
1.000
1.800
900
3.500
4.800
1.500
2.400
800
500
8.900
9.600
Current Liabilities
Bank Notes Payable
Accounts Payable
Salaries & Wages Payable
Dividends Payable
Advances from Customers
Total Current Liabilities
Long-term Assets
Property, Plant and Equipment
Land
Buildings
Equipment
2.200
8.600
12.940
2.200
8.900
13.960
Long-term Liabilities
Bonds Payable
Lease Obligation
Total Long-term Liabilities
Shareholders' Equity
2.800
2.500
5.300
1.500
3.200
4.700
Less Accumulated Depreciation
-6.240
-6.490
Share Capital
3.000
3.600
Total Property, Plant and Equip.
17.500
18.570
Additional Paid in Capital
Legal Reserves
Retained Earnings
2.000
100
12.600
2.100
150
12.920
1.900
1.800
17.700
18.770
28.300
29.970
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Current Assets
Cash
Trading Securities
Accounts Receivable
Inventories
Prepaid Insurance
Total Current Assets
Intangible Assets
Patent
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28.300
Total Shareholders' Equity
Total Liabilities and
29.970
Mugan-Akman 2007 Shareholders' Equity
31.Ara
2004
2005
2.000
2.600
1.900
2.400
400
700
800
400
200
400
5.300
6.500
Illustration-Cash flow statementEICC
Additional Information:
• Company sold equipment with original cost of TL 1.500
and book value of TL 1.370 for TL 1.320.
• Sold trading securities of TL 1.200 with a gain of TL 300,
and purchased some.
• Leased equipment in 2007 for TL 1.000 as a capital
lease.
• Purchased building and equipment.
• Declared and paid dividends.
• Common stock of TL 600 par value was issued for TL
700 cash.
• Accounts payable pertain to merchandise suppliers, and
accounts receivable to customers.
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Indirect Method- operating activities
Net income
+ noncash expenses: depreciation, amortization,
uncollectible account expense,etc
+ loss on sale of asset
+ increases in current liabilities
+ decreases in current assets
- gain on sale of asset
- decrease in current liabilities
- increase in current assets
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Non-cash Expenses
• Non-cash expenses, such as depreciation
expense, are added back
• These are not truly sources of cash even
though they are associated with cash
inflows; rather, this is a reversal of the
accrual process that required the
expenses to be recognized without regard
for the cash flow
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Indirect Method
Investigation of Changes in Specific Accounts
increase
decrease
Assets:
If assets increased,
then cash was spent,
so it is an outflow.
If assets decreased,
then they provided cash
so it is an inflow.
Liabilities
and
Shareholders’
equity
If liabilities or S.H.E.
increased, then cash
was received,
so it is an inflow.
If liabilities or S.H.E.
decreased, then cash
was spent,
so it is an outflow.
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Indirect Method-Operating
31-Dec
2006
2007
Change
Accounts Receivable (net)
3.500
4.800
1.300
Inventories
1.500
2.400
900
Prepaid Insurance
800
500
(300)
Accounts Payable
1.900
2.400
500
Salaries and Wages Payable
400
700
300
Advances from Customers
200
400
200
Depreciation Expense
380
Amortization Expense
100
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Gain on sale of Trading
Securities
300
Loss on sale of equipment
(50)
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Cash Flow from Operating Activities –Indirect Method
EICC A.Ş
For the year 2007
Net Income
T L 770
Depreciation and Amortization
480
Add: increase in Accounts Payable
500
Add: increase in salaries and wages payable
300
Add: Advances from customers
200
Add: Decrease in Prepaid Insurance
300
Add: Loss on Sale of Equipment
50
2.600
Deduct: increase in Accounts Receivable
(1.300)
Deduct: increase in Inventories
(900)
Deduct: Gain on Sale of Marketable Securities
(300)
Net Cash from Operating Activities
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(2.500)
TL 100
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Cash Flows from Investing Activities
2006
Trading Securities
1.800
Property, Plant and Equipment
Land
2.200
Buildings
8.600
Equipment
12.940
Less Accumulated
Depreciation
(6.240)
Equipment
31.12.2006
12.940
Leased Equipment 1.000 Equipment sold-at cost 1.500
Purchased
1.520
31.12.2007
13.960
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31.12.2006
Purchased
31.12.2007
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2007
Change
900
(900)
2.200
8.900
13.960
0
300
1.020
(6.490)
(250)
Trading Securities
1.800
300 Securities sold-at cost 1.200
900
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Cash Flow from Investing Activities
Cash flow from investing activities:
Purchase of building
Sale of equipment
Purchase of equipment
Sale of trading securities
Purchase of trading securities
Net Cash flow from investing activities
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TL (300)
1.320
(1.520)
1.500
(300)
TL 700
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Cash Flow from Financing
Activities
31-Dec
2006
Current Liabilities
Bank Notes Payable
Dividends Payable
Long-term Liabilities
Bonds Payable
Lease Obligation
Shareholders' Equity
Share Capital
Additional Paid in Capital
Legal Reserves
Retained Earnings
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2007
change
TL 2.000
800
TL 2.600
400
TL 600
(400)
2.800
2.500
1.500
3.200
(1300)
700
3.000
2.000
100
12.600
3.600
2.100
150
12.920
600
100
50
320
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Financing Activities
Lease Obligations
31.12.2006
Lease Payments 300 Leased Equipment
31.12.2007
Retained Earnings
Legal Reserves
50 31.12.2006
Dividends Declared 400 Net Income
31.12.2007
2.500
1.000
3.200
12.600
770
12.920
Dividends Payable
31.12.2006
Dividends Paid
800 Dividends Declared
31.12.2007
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800
400
400
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EICC A.Ş,Cash Flow Statement, For the year 2007- Direct Method
C ash f l o w f r o m o p er at i ng act i vi t i es
Cash Receipt s:
Collect ions f rom Cust omers
Dividend and Int erest Revenue
Cash Payment s:
To suppliers
For operat ing expenses
For non-operat ing expenses
For income t ax
TL 4.600
2.300
350
450
N et cash P r o vi d ed b y O p er at i ng A ct i vi t i es
C ash F l o w f r o m I nvest i ng A ct i vi t i es
Purchase of B uildings
Sale of Equipment
Purchase of Equipment
Sale of Trading Securit ies
Purchase of Trading Securit ies
N et C ash F l o w f r o m I nvest i ng A ct i vi t i es
C ash F l o w f r o m F i nanci ng A ct i vi t i es
B ank Loans Received
Issuance of Common St ock
A ddit ional Paid in Capit al
Cash Dividends Paid
B ond Repayment
Lease Obligat ion Payment s
N et C ash F l o w f r o m F i nanci ng A ct i vi t i es
N et i ncr ease ( d ecr ease) i n C ash
Cash at t he beginning of t he period
C ash at t he end o f t he p er i o d
N o n- C ash I nvest i ng and F i nanci ng A ct i vi t i es:
Leasing of equipment
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TL 7.650
150
7.800
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(7.700)
10 0
(300)
1.320
(1.520)
1.500
(300)
70 0
600
600
100
(800)
(1.300)
(300)
( 1. 10 0 )
(300)
1.300
1. 0 0 0
TL 1.000
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External Uses of CFS
• To assess the ability of a firm to manage cash
flows
• To assess the ability of a firm to generate cash
through its operations
• To assess the company’s ability to meet its
obligations and its dividend policy
• To provide information about the effectiveness of
the firm to convert its revenues to cash
• To provide information to estimate or anticipate
the company’s need for additional financing
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Uses of Cash Flow Statement
Information
• pattern of cash flow statements would
provide valuable information about the
growth stage, and possible strategies of
companies
• predicting financial distress
• Operating cash flows
• Free cash flows
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8000
6000
4000
Operating
Investing
Financing
2000
0
-2000
-4000
-6000
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