Introduction to Cash Flow statement

1. Statement of Cash flow
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 1

2. Cash flow statement
 Helping the users to assess the entity’s ability to:
- generate positive future net cash flows = (Liquidity)
- meet Obligations (Solvency)
- & its (financial flexibility )
financial flexibility:
- Describing the company’s ability to react to unexpected
Expenses & investment Opportunities
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 2

3. Primary Purpose
- Provide relevant info about
1- Cash Receipts
2- Cash Payments
Of the entity during the period
- It provide info about:
1- Cash inflows &
2- Cash outflows
From the:
- Operating
- Investing
- Financing activities of the entity
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 3

4. Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 4
Cash Flow
Statement
CFO
Operating
Cash Flow
CFI
Investing
Cash Flow
CFF
Financing
Cash Flow

5. Cash flow statement
It explains the change in:
- Cash &
- Cash equivalents during the period
Cash equivalent:
 It is a highly liquid investment having a maturity of 3 months or less
 It should be at minimal risk of a change in value
 It must be unrestricted (available for immediate use)
Such as: treasury bills, short term government bonds
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 5
- Cash & Cash equivalents:
At the beginning & end of the year are taken
from Balance Sheet

6. Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 6
Balance Sheet
Assets
Current Assets
CFO
(-ve
relationship)
Non- Current
Assets
CFI
Liabilities &
Equity
Current
Liabilities
CFO
(+ve
relationship)
Non-Current
Liabilities +
Equity
CFF

7.  Negative relationship:
Between Changes in Cash & Assets
 Positive relationship :
Between changes in Liability & Equity & Cash
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 7
If the inventory Increase Cash Decrease
If the Account Receivables
A/R
Decrease Cash Increase
If the Account Payable A/p Decrease Cash Decrease
If the Account Payable A/p Increase Cash Increase

8. Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 8
Cash Flow
Statement
Direct Method Indirect method
Both methods give the same results
The only difference is in the presentation of the Net Cash Flows

9. Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 9
Cash Flow
Statement
CFO
Operating
Cash Flow
CFI
Investing
Cash Flow
CFF
Financing
Cash Flow

10. Operating Activities
all the transactions & other events that aren’t financing or Investing activities but they enter
into the determination of Net Income
• Cash inflows
Cash receipts from:
Sales of goods & services including
collections if A/R
Royalties, commissions & other
revenue
Cash received in the form of
Interest or Dividends
• Cash outflows
Cash Payments to:
 suppliers (goods& services)
Employees
Government as
taxes,duties,fines,&penalties
Interest on debt
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 10

11. Investing activities – CFI – Non current Assets
They represent the extent to which Expenditures have been made for Recourses intended to generate
Future income & Cash flows
Cash inflows
• Cash receipts from:
 Sale of PPE,Intangible Assets,other
long-lived Assets
Sale & maturity of: Equity & Debt
instruments of other entities for
investing purposes
Repayment of Cash Advances & loans
made from other parties
Cash outflows
• Cash payments to acquire:
PPE,Intangible Assets,other long-lived
Assets
Equity & Debt instruments of other
entities for investing purposes
Cash advances & loans made to other
parties
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 11

12. Financing Activities – CFF –
They involve the cash effects of transactions & other events that relate to the
issuance,settlement,reacquistion of the Entity’s Debt& Equity Instruments
Cash inflows
Cash proceeds from issuing shares &
other equity instruments
Obtaining recourses from:
- Owners
- Loans
- Notes & bonds
- Other short term or
- Long term borrowings
Cash outflows
Cash payments of:
- amounts borrowed
- Dividends
Cash payments to acquire or redeem
the entity’s own shares
Cash payments by a lessee – capital
lease- to reduce the outstanding
liability
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 12

13. Example- Statement of Cash flows using the Direct & indirect method
Use the following Balance Sheet & Income Statement to prepare a SOCFs under the indirect method
Income statement for 2017 Balance sheets for 2017 & 2016
Assets - Current Assets 2017 2016
Cash $ 33,000 $9,000
Accounts Receivable $10,000 $9,000
Inventory $5,000 $7,000
Non – current Assets
Land $35,000 $40,000
Gross PPE $85,000 $60,000
Accumulated Deprecation ($16,000) ($9,000)
Net PPE $ 69,000 $51,000
Goodwill $10,000 $10,000
Total Assets $162,000 $ 126,000
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 13
Sales $100,000
Expenses
Cost of goods sold ($ 40,000)
Wages ($ 5,000)
Deprecation ($7,000)
Interest ($500)
Income from continuing operations $ 47,500
Gain from sale of Land $10,000
Pretax income $ 57,500
Provision for taxes ($ 20,000 )
Net income $37,500
Common dividends declared $ 8,500

14. Balance sheets for 2017 & 2016
Liabilities – current 2017 2016
Account payables $ 9,000 $ 5,000
Wages payable $ 4,500 $ 8,000
Interest payable $ 3,500 $ 3,000
Taxes payable $ 5,000 $ 4,000
Dividends payable $ 6,000 $ 1,000
Total Current liabilities $28,000 $ 21,000
Balance sheets for 2017 & 2016
Liabilities – non current 2017 2016
Bonds $ 15,000 $ 10,000
Deferred tax liability $20,000 $ 15,000
Total liabilities $63,000 $46,000
stockholders’ Equity
Common Stock $40,000 $50,000
Retained Earnings $59,000 $30,000
Total Equity $ 99,000 $80,000
Total liabilities &
stockholders’ Equity
$ 162,000 $ 126,000
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 14

15. Direct Method
Cash paid as interest = zero
Interest payable – BS 3,000- 3,500=
500 (+ve)
Cash increase
5,00
Interest – expenses – IS - Cash decrease = (5,00 )
Cash paid as taxes = ($14,000)
Tax payable- BS (+ve)
4,000- 5,000= 1,000
Cash increase
1,000
DTL – BS – (+ve)
15,000- 20,000= 5,000
Cash increase 5,000
Provision for tax – IS
20,000
Cash decrease( 20,000)
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 15
Cash received from the customer
Sales _ Increase in A/R = +$ 99,000
A/R 9,000- 10,000 = 1,000
B.S – (-ve relationship)
A/R
increases
$1,000
Cash
decrease
($1,000)
Sales – Revenue –
$100,000
Income statement
Sales
$100,000
Cash
increase
$100,000
Cash paid to the suppliers =
( COGS)+ Decrease in Inventory +Increase in A/P ($34,000)
Inventory – BS – (-ve)
7,000 – 5,000 = 2,000
Inventory
Decrease
$2,000
Cash
Increase
$2,000
Account payable – BS (+ve)
5,000 – 9,000 = 4,000
A/p
Increase
4,000
Cash
Increase
4,000
Cost of Goods Sold - IS 40,000 Cash decrease
(40,000)
Cash paid to employees = ($8,500)
Wages – payable – BS
8,000- 4,500= 3,500
Cash decrease 3,500
Wages – I.S = 5,000 Cash decrease 5,000
CFO = $ 42,500
Cash received from the customer $ 99,000
Cash paid to the suppliers = ($34,000)
Cash paid to employees = ($8,500)
Cash paid as interest ZERO
Cash paid as taxes ($14,000)

16. Indirect method
we should begin with the bottom of Income Statement – Net Income
+ Add
Losses that resulted from financing or investing cash flows
• Loss from selling land – CFI
• Loss from extinguishment of debt CFF
• All non cash charges to income
- Deprecation , amortization
- Impairment loss
- Undistributed earnings of premium om bonds
• Changes to BS operating accounts
Such as :
- Decrease in the operating asset accounts
- Increase in the operating liability accounts
_ Subtract
Gains that resulted from financing or investing cash
flows
• Gains from Sale of Land – CFI
• Gains on extinguishment of debt CFF
• All non cash components of revenue
• Changes to BS operating accounts
Such as :
- increase in the operating asset accounts
- Decrease in the operating liability accounts
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 16

17. Indirect method
Net income 37,500
Add Non – cash item –Depreciation + 7,000 Increase
Less Gain from selling land – CFI (10,000) Decrease
Changes in B.S
- Ve A/R (9,000 – 10,000 )= 1,000 increase (1000) Decrease
- Ve Inventory (7,000 – 5,000) = 2,000 decrease 2,000 Increase
+ ve A/ p (5,000 – 9,000_) = 4,000 4,000 Increase
+ ve Wages payable (8,000 – 4,500) = 3,500 (3,500) Decrease
+ ve Interest payable (3,000- 3,500)= 500 increase 500 Increase
+ ve Taxes payable ( 4,000 – 5,000) = 1,000 increase 1,000 Increase
+ ve Deffered Tax liability ( 15,000 – 20,000) = 5,000 increase 5,000 Increase
42,500 CFO
Feb-20
Prepared By Faten Al Joaid _ Certified Auditor _ LACPA
17

18. Investing cash flow – CFI – NON current assets
BS -ve Gross PPE – (60,000- 85,000)= 25,000 increase (25,000) decrease
BS - VE Land ( 40,000 – 35,000) = 5,000 decrease 5,000 increase
IS + ve Gain from sale land – 10,000 10,000
CFI (10,000)
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 18
Remark :
Cash from Selling the land = 15,000
Book value = 40,000 – 35,000 = 5,000
15,000
5,000
Book value
10,000 gain

19. Financing Cash flow – CFF –
non current liabilities + Equity
BS
non current
liabilities
+ ve Bonds ( 10,000 – 15,000) = 5,000 increase 5,000 increase
BS – Equity + ve Common Stock ( 50,000 – 40,000) = 10,000 decrease (10,000) decrease
Dividends (3,500)
CFF (8,500)
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 19
BS – Current
Liabilities
+ ve Dividends Payable (1000 – 6000)= 5,000
increase
5,000
IS – Common
Dividends Declared
– given
Less 8,500 (8,500)
(3,500)

20. Cash at the end of the year 2017
CFO 42,500
CFI (10,000)
CFF (8,500)
Total 24,000
PLUS – CASH at the beginning 2017 9,000
Cash at the end of the year 2017 = Total 33,000
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 20

21. GAAP # IFRS
Feb-20 Prepared By Faten Al Joaid _ Certified Auditor _ LACPA 21
GAAP IFRS
Interest paid CFO CFF – Financing
Interest received CFO CFI – Investing
Taxes CFO CFO – CFI – CFF
Dividends received CFO CFI – investing
Dividends Paid CFF – Financing CFF – Financing