Cash Flow Statement
Why Cash Flow Statement?
• Shareholder value is now widely accepted as an
appropriate standard for performance in US
busin...
Basic Form of Cash Flow
Statement
• Cash Flow From Operating Activities
– Direct method or indirect method (direct
require...
Flow from Operating Activities
• Includes:
– Current assets
• except Marketable securities and s-term notes
receivable whi...
Flow from Investing Activities
• Includes:
– Short-term and long-term investments
– Short-term and long term notes receiva...
Flow from Financing Activities
• Includes:
– Short-term and long-term loans
– Capital Stock and Paid in Capital in excess ...
General Theory
• Take revenue or expense account (includes
cash and accrual)
• adjust out accrual amounts
• Result is net ...
Operating Activities
Indirect Method
• Net Income
• + Depreciation exp (noncash exp)
• + Losses from sale of assets
– (ful...
Operating Activities Direct
Method
• + Cash Received from Customers
• - Cash paid for inventory
• - Cash paid for operatin...
Cash Received from Customers
• Sales
• - Increase in A/R (receive less cash) OR
+ Decreases in A/R (receive more cash)
• -...
Cash Received from Customers
(other variations)
• Sales
• + Beg Net A/R
• - End Net A/R
• - Bad debt exp adj
• - Beg unear...
Cash Paid For Inventory
• Cost of Goods Sold
• + End Inventory
• - Beginning Inventory
• = Purchases
• + Beg A/P
• - End A...
Cash Paid for Operating
Expenses
• Operating Expenses (do not include interest
exp., depreciation exp., nor gains & losses...
Cash Paid for Income Taxes
• Income Tax Exp
• + Beg tax payable
• - End tax payable
• = Cash paid for income Taxes
Cash Paid for Interest
• Interest Exp
• + Beg interest payable
• - End interest payable
• = Cash paid for interest
Cash Received from dividends
and interest
• Dividend and Interest Income
• + Beg interest receivable
• - End interest rece...
Cash Flow from Investing
Activities
• Cash received (sale) or paid (purchase) for:
– short term investments
– long-term in...
Example Equipment
• Balance Sheet Amount Change: Beg
$300,000, Ending $400,000
• Can your just say net cash out for
equipm...
Example Equipment Continued
• Sold Equipment for $65,000 cash that had
book value of $40,000 (original cost
$100,000)
• Bo...
Example Equipment
Results on Cash Flow Statement
• Cash from sale of equipment $65,000
• Gain on sale $25,000 subtracted f...
Equipment Example
Think about journal entries
• Cash 65,000
Accum Depr 60,000
Equip 100,000
Gain 25,000
Sale of equipment
...
Financing Activities
• Cash received from:
– sale of stock
– issuance of debt
• Cash paid for
– Payment of debt (principle...
Ways to Check Your Work
• Indirect and Direct methods must equal each other
• Net cash flow added to beginning cash balanc...
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Cash flow

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Cash flow

  1. 1. Cash Flow Statement
  2. 2. Why Cash Flow Statement? • Shareholder value is now widely accepted as an appropriate standard for performance in US business. The stock market sends a clear message that earning per share is not the most important measure. Now is growth for growth’s sake. What matters is long-term cash generation. (Werner & LeBer, “Managing for Shareholder Value--From Top to Bottom,” Harvard Busines Review, Nov.- Dec. 1989 pp. 52-65.)
  3. 3. Basic Form of Cash Flow Statement • Cash Flow From Operating Activities – Direct method or indirect method (direct requires also a reconciliation of net income to cash flow from operating activities) • Cash Flow from investing activities • Cash Flow from financing activities • Total (positive or negative) cash flow is added to beginning cash balance and should result in ending cash balance
  4. 4. Flow from Operating Activities • Includes: – Current assets • except Marketable securities and s-term notes receivable which are investing – Current Liabilities • except s-t notes payable which are financing – Revenue and Expenses (includes interest expense and revenue, and dividends received)
  5. 5. Flow from Investing Activities • Includes: – Short-term and long-term investments – Short-term and long term notes receivable – Property, Plant and Equipment (depreciation affects operating activities) – Intangible Assets
  6. 6. Flow from Financing Activities • Includes: – Short-term and long-term loans – Capital Stock and Paid in Capital in excess of par – Retained earnings (net income aspect is operating) – Dividends Paid
  7. 7. General Theory • Take revenue or expense account (includes cash and accrual) • adjust out accrual amounts • Result is net cash in or out. • Too expensive to classify all cash transactions into operating, financing, investing activities. Cheaper to use accrual systems and adjust out accrual information
  8. 8. Operating Activities Indirect Method • Net Income • + Depreciation exp (noncash exp) • + Losses from sale of assets – (full amount of sale already included in investing section) • - Gains from sale of assets – (full amount of sale already included in investing section) • - increases in current assets • + decreases in current assets • + increases in current liabilities • - decreases in current liabilities • = Net cash from operating activities
  9. 9. Operating Activities Direct Method • + Cash Received from Customers • - Cash paid for inventory • - Cash paid for operating expenses • - Cash paid for income taxes • - Cash paid for interest • + Cash received from dividends and interest • = Net cash from operating activities
  10. 10. Cash Received from Customers • Sales • - Increase in A/R (receive less cash) OR + Decreases in A/R (receive more cash) • - writeoffs (beg allowance + bad debt exp. - ending allowance) • + Increase in unearned revenue (receive more cash) OR - Decrease in unearned revenue (receive less cash) • = Cash Received from Customers
  11. 11. Cash Received from Customers (other variations) • Sales • + Beg Net A/R • - End Net A/R • - Bad debt exp adj • - Beg unearned rev • + End undearned rev • = Cash from Customers • Sales • + Beg A/R • - End A/R • - writeoffs – = beg allowance + bad debt exp. - ending allowance • - Beg unearned rev • + End unearned rev • = Cash from Customers
  12. 12. Cash Paid For Inventory • Cost of Goods Sold • + End Inventory • - Beginning Inventory • = Purchases • + Beg A/P • - End A/P • = Cash paid for inventory
  13. 13. Cash Paid for Operating Expenses • Operating Expenses (do not include interest exp., depreciation exp., nor gains & losses from sale of investments) • - Beg prepaids • + End prepaids • + Beg accrued exp • - End accrued exp • = Cash paid for operating expenses
  14. 14. Cash Paid for Income Taxes • Income Tax Exp • + Beg tax payable • - End tax payable • = Cash paid for income Taxes
  15. 15. Cash Paid for Interest • Interest Exp • + Beg interest payable • - End interest payable • = Cash paid for interest
  16. 16. Cash Received from dividends and interest • Dividend and Interest Income • + Beg interest receivable • - End interest receivable • = Cash Received from dividends and interest
  17. 17. Cash Flow from Investing Activities • Cash received (sale) or paid (purchase) for: – short term investments – long-term investments – property plant and equipment • Whole cash amount received or paid. • Look at change in investment and fixed asset accounts but may need more specific information
  18. 18. Example Equipment • Balance Sheet Amount Change: Beg $300,000, Ending $400,000 • Can your just say net cash out for equipment was $100,000? • Why?
  19. 19. Example Equipment Continued • Sold Equipment for $65,000 cash that had book value of $40,000 (original cost $100,000) • Bought equipment $200,000 with $80,000 down and the rest on a long term note payable • Accumulated depreciation increased by $50,000
  20. 20. Example Equipment Results on Cash Flow Statement • Cash from sale of equipment $65,000 • Gain on sale $25,000 subtracted from NI on indirect method (make sure amt is not included in direct method either) • Depreciation exp $110,000 ($50,000 increase in accum deprec from B/S + $60,000 acum depr reduced when sold equip added back in indirect method (make sure amt is not included in direct method operating expenses • Cash paid for purchase of equipment $80,000 • Noncash investing & financing Activities – Issued long-term note payable for some equipment $120,000
  21. 21. Equipment Example Think about journal entries • Cash 65,000 Accum Depr 60,000 Equip 100,000 Gain 25,000 Sale of equipment • Depr Exp 110,00 Accum. Depr 110,000 Year end Adj J/E for equip depr. • Equipment 200,000 Cash 80,000 L-T Note Payable 120,000 Equip Purchase
  22. 22. Financing Activities • Cash received from: – sale of stock – issuance of debt • Cash paid for – Payment of debt (principle only, interest is in operating activities) – Payment of dividends • Look at change in stock, debt and retained earnings (May need more details) (for R/E only dividends portion applies to financing activities while net income portion should tie into indirect method in operating activities)
  23. 23. Ways to Check Your Work • Indirect and Direct methods must equal each other • Net cash flow added to beginning cash balance must equal ending cash balance (Marketable securities are most often included as part of these cash balances.) • In template must account for every change in B/S accounts and every item on income statement (some noncash items are adjusted out or not included in cash flow calculations)

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