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Whbm13
1.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-1 STATEMENT OF CASH FLOWS Chapter 13
2.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-2 Provides information about the cash receipts and cash payments of a business entity during the accounting period. Provides information about the cash receipts and cash payments of a business entity during the accounting period. Helps investors with questions about the company’s: Ability to generate positive cash flows. Ability to meet its obligations and to pay dividends. Need for external financing. Investing and financing transactions for the period. Helps investors with questions about the company’s: Ability to generate positive cash flows. Ability to meet its obligations and to pay dividends. Need for external financing. Investing and financing transactions for the period. Purpose of the Statement of Cash Flows Purpose of the Statement of Cash Flows
3.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-3
4.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-4 The Statement of Cash Flows must include the following three sections: Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities The Statement of Cash Flows must include the following three sections: Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Classification of Cash FlowsClassification of Cash Flows
5.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-5 Outflows to: Suppliers of merchandise and services. Employees. Lenders for interest. Governments for taxes. Outflows to: Suppliers of merchandise and services. Employees. Lenders for interest. Governments for taxes. Inflows from: Sales to customers. Interest and dividends received. Inflows from: Sales to customers. Interest and dividends received. Cash Flows from Operating Activities Cash Flows from Operating Activities + _ Operating ActivitiesOperating Activities
6.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-6 Cash Flows from Investing Activities Cash Flows from Investing Activities + _ Inflows from: Selling investments and plant assets. Collecting of principal on loans. Inflows from: Selling investments and plant assets. Collecting of principal on loans. Outflows to: Payments to acquire investments and plant assets. Purchase debt or equity investments. Make loans. Outflows to: Payments to acquire investments and plant assets. Purchase debt or equity investments. Make loans. Investing ActivitiesInvesting Activities
7.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-7 + _ Inflows from: Short-term and long-term borrowing. Owners (for example, from issuing stock). Inflows from: Short-term and long-term borrowing. Owners (for example, from issuing stock). Outflows to: Repayments of borrowed funds. Owners for dividends. Purchase treasury stock. Outflows to: Repayments of borrowed funds. Owners for dividends. Purchase treasury stock. Financing ActivitiesFinancing Activities Cash Flows from Financing Activities Cash Flows from Financing Activities
8.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-8 Cash Equivalents CashCash Currency Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes. Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes. Cash and Cash EquivalentsCash and Cash Equivalents
9.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-9 The operating cash flows section can be prepared using either the direct method or the indirect method. The operating cash flows section can be prepared using either the direct method or the indirect method. Let’s look at the Direct Method for preparing the Statement of Cash Flows.
10.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-10 Accrual basis revenue includes sales that did not result in cash inflows. Can be computed as: Cash Received from Customers Cash Received from Customers Decrease in receivables Decrease in receivables Increase in receivables Increase in receivables + – = = Net SalesNet Sales Direct Method Cash Received from Customers Direct Method Cash Received from Customers
11.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-11 + – = = The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? Decrease in receivables Decrease in receivables Increase in receivables Increase in receivables Net Sales $900,000 Net Sales $900,000 Direct Method Cash Received from Customers Direct Method Cash Received from Customers Cash Received from Customers Cash Received from Customers
12.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-12 Cash Received from Customers = $870,000 Cash Received from Customers = $870,000 Decrease in receivables Decrease in receivables $30,000 Increase in receivables $30,000 Increase in receivables– = Net Sales $900,000 Net Sales $900,000 The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? Direct Method Cash Received from Customers Direct Method Cash Received from Customers
13.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-13 Now that we understand the process, let’s look at some simplified formulas for computing direct method cash flows.
14.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-14 Direct Method Interest and Dividends Received Direct Method Interest and Dividends Received
15.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-15 Step 1 Step 2 Direct Method Cash Paid for Merchandise Direct Method Cash Paid for Merchandise
16.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-16 How much did Lug Lite pay for inventory in 2003? a. $900,000 b. $923,000 c. $947,000 d. $877,000 Inventory, 1/1/03 130,000$ A/P, 1/1/03 23,000$ Inventory, 12/31/03 165,000$ A/P, 12/31/03 35,000$ COGS, 12/31/03 900,000$ Direct Method Cash Paid for Merchandise Direct Method Cash Paid for Merchandise Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000 Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000 Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000 Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000
17.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-17 After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. Cash Paid for Expenses = Expenses + Increase in prepaid expenses - Decrease in prepaid expenses + Decrease in accrued liabilities - Increase in accrued liabilities { { Direct Method Cash Payments for Expenses Direct Method Cash Payments for Expenses
18.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-18 Now, let’s prepare a direct method Statement of Cash Flows for Grate Big Company.
19.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-19 Grate Big Company Comparative Balance Sheets - Assets December 31, 2002 2003 Cash 60,000$ 70,370$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Trading Securities - 25,000 Equipment, net 500,000 425,000 Investment in Tiny Co. 100,000 130,000 Total Assets 917,000$ 885,370$ Direct Method - ExampleDirect Method - Example
20.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-20 Grate Big Company Comparative Balance Sheets - Liabilities and Equity December 31, 2002 2003 Accounts Payable 15,000$ 12,000$ Salaries Payable 7,000 5,000 Interest Payable 11,950 7,350 Income Tax Payable 20,000 17,000 Notes Payable, Bob's Bank 70,000 60,000 Bonds Payable 250,000 150,000 Premium on Bonds Payable 5,000 4,000 Common Stock 450,000 500,000 Retained Earnings 88,050 130,020 Total Liabilities and Equity 917,000$ 885,370$ Direct Method - ExampleDirect Method - Example
21.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-21 Grate Big Company Income Statement Amounts For the Year Ending December 31, 2003 Sales Revenues 800,000$ Cost of Goods Sold 560,000 Depreciation Expense 5,000 Interest Expense 28,050 Income Tax Expense 27,980 Salary Expense 80,000 Other Expenses 71,000 Amortization of Bond Premium 1,000 Gain on Sale of Equipment 3,000 Extraordinary Loss 30,000 Equity in Investee Income 40,000 Net Income 41,970$ Direct Method - ExampleDirect Method - Example
22.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-22 Direct Method - ExampleDirect Method - Example Additional Information Trading Securities were purchased during 2003 at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Equipment with a book value of $30,000 was destroyed during a freak flood in 2003. There was no insurance. Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method. Additional Information Trading Securities were purchased during 2003 at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Equipment with a book value of $30,000 was destroyed during a freak flood in 2003. There was no insurance. Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method.
23.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-23 Direct Method - ExampleDirect Method - Example Additional Information Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny Co. Additional Information Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny Co.
24.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-24 Salary Expense 80,000$ 2000 Add: Decrease in Salary Payable 2,000 Cash Paid to Employees 82,000$ Sales Revenues 800,000$ Less: Increase in A/R (8,000) Cash Received from Customers 792,000$ Direct Method - ExampleDirect Method - Example Cash Received from Customers Cash Paid to Employees
25.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-25 Interest Expense 28,050$ 2000 Add: Decrease in Interest Payable 4,600 Cash Paid for Interest 32,650$ Cost of Goods Sold 560,000$ Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000) Cash Paid for Inventory 533,000$ Direct Method - ExampleDirect Method - Example Cash Paid for Inventory Cash Paid for Interest
26.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-26 Income Tax Expense 27,980$ 2000 Add: Decrease in Taxes Payable 3,000 Cash Paid for Taxes 30,980$ Direct Method - ExampleDirect Method - Example Cash Paid for Taxes Other Operating Cash Flows
27.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-27 Direct Method - ExampleDirect Method - Example Cash Flows From Operating Activities
28.
© The McGraw-Hill
Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-28 Grate Big Company Statement of Cash Flows For the Period Ending December 31, 2003 I. Operating Cash Flows 27,370$ II. Investing Cash Flows Proceeds from sale of Equipment 43,000 III. Financing Cash Flows Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000) Net Cash Flows for the Period 10,370$ Add: Beginning Cash Balance 60,000 Ending Cash Balance 70,370$ Equipment with a book value of $40,000 was sold for $43,000. Equipment with a book value of $40,000 was sold for $43,000. Notes Payable decreased from $70,000 to $60,000 during 2003. Notes Payable decreased from $70,000 to $60,000 during 2003. Bonds Payable decreased from $250,000 to $150,000 during 2003. Bonds Payable decreased from $250,000 to $150,000 during 2003.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-29 Grate Big Company Statement of Cash Flows For the Period Ending December 31, 2003 I. Operating Cash Flows 27,370$ II. Investing Cash Flows Proceeds from sale of Equipment 43,000 III. Financing Cash Flows Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000) Net Cash Flows for the Period 10,370$ Add: Beginning Cash Balance 60,000 Ending Cash Balance 70,370$ Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/03 Cash balance on the Balance Sheet. Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/03 Cash balance on the Balance Sheet.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-30 Let’s look at the Indirect Method that is used by over 97% of all companies.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-31 Net Income Net Income Cash Flows from Operating Activities Cash Flows from Operating Activities Indirect MethodIndirect Method Changes in current assets and current liabilities as shown on the following table. Changes in current assets and current liabilities as shown on the following table. + Losses and - Gains + Losses and - Gains + Noncash expenses such as depreciation and amortization. + Noncash expenses such as depreciation and amortization.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-32 Use this table when adjusting Net Income to Operating Cash Flows. Indirect MethodIndirect Method
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-33 Let’s prepare a complete Statement of Cash Flows using the Indirect Method.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-34 Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended 3/31/03 has also been prepared. Joe needs help preparing the Statement of Cash Flows. Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended 3/31/03 has also been prepared. Joe needs help preparing the Statement of Cash Flows. Joe’s Place Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-35 Joe's Place Income Statement For the Year Ending 3/31/03 Revenues 727,000$ Operating Expenses (748,000) Depreciation Expense (6,000) Gain on Sale of Land 8,000 Net Loss (19,000)$ The $8,000 gain was the result of selling land costing $32,000 for $40,000 during the period. The $8,000 gain was the result of selling land costing $32,000 for $40,000 during the period. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-36 Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-37 Joe’s Place issued $50,000 of no par common stock to settle the $50,000 note payable. Joe’s Place issued $50,000 of no par common stock to settle the $50,000 note payable. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-38 Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-39 With the indirect method, always start with the net income or net loss for the period. With the indirect method, always start with the net income or net loss for the period. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-40 Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-41 Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-42 Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-43 Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-44 Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-45 Add back non-cash expenses.Add back non-cash expenses. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-46 Subtract gains.Subtract gains. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-47 The operating cash flows amount comes from the schedule just prepared. The operating cash flows amount comes from the schedule just prepared. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-48 Land originally costing $32,000 was sold for $40,000. Land originally costing $32,000 was sold for $40,000. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-49 Dividends of $20,000 were paid to owners during the year. Dividends of $20,000 were paid to owners during the year. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-50 Compute the net change in cash for the period. Compute the net change in cash for the period. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-51 Complete the Statement of Cash Flows by reconciling beginning cash to ending cash. Complete the Statement of Cash Flows by reconciling beginning cash to ending cash. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-52 Note that the ending cash amount ties back to the Joe’s Place Balance Sheet at 3/31/03. Note that the ending cash amount ties back to the Joe’s Place Balance Sheet at 3/31/03. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-53 In addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity. In addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-54 In addition, cash interest payments and cash tax payments must also be disclosed separately. In addition, cash interest payments and cash tax payments must also be disclosed separately. Indirect Method - ExampleIndirect Method - Example
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-55 Cash Budgets are used by management to plan and forecast future cash flows. Cash Budgets are used by management to plan and forecast future cash flows. F o r c e m a n a g e m e n t t o c o o r d i n a t e a c t i v i t i e s . P r o v i d e m a n a g e r s w i t h a d v a n c e n o t i c e o f a v a i l a b l e r e s o u r c e s . P r o v i d e t a r g e t s u s e f u l i n e v a l u a t i n g p e r f o r m a n c e . P r o v i d e a d v a n c e w a r n i n g s o f p o t e n t i a l c a s h s h o r t a g e s . A C a s h B u d g e t c a n b e u s e d t o : Managing Cash FlowsManaging Cash Flows
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-56 Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Managing Cash FlowsManaging Cash Flows
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-57 Cash Budgeting Cash Budget May June July August Beginning cash balance 27,500$ 15,000$ -$ -$ Add: Cash receipts 3,500 Total available cash 31,000$ Less: Cash disbursements 16,000 Excess (deficiency) of available cash over cash disbursements 15,000$ Financing needed Financing repayments - Ending cash balance 15,000$ The ending cash balance of one month becomes the beginning cash balance of the next month. The ending cash balance of one month becomes the beginning cash balance of the next month.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-58 Cash BudgetingCash Budgeting Cash Budget May June July August Beginning cash balance 27,500$ 15,000$ 10,000$ 10,000$ Add: Cash receipts 3,500 2,000 9,000 14,000 Total available cash 31,000$ 17,000$ 19,000$ 24,000$ Less: Cash disbursements 16,000 18,000 6,000 8,000 Excess (deficiency) of available cash over cash disbursements 15,000$ (1,000)$ 13,000$ 16,000$ Financing needed 11,000 - - Financing repayments - - 3,000 6,000 Ending cash balance 15,000$ 10,000$ 10,000$ 10,000$ Financing is needed in June because the company must maintain a minimum cash balance of $10,000. Financing is needed in June because the company must maintain a minimum cash balance of $10,000.
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Companies, Inc., 2002McGraw-Hill/Irwin Slide 3-59 End of Chapter 13End of Chapter 13 Chester, ol’Chester, ol’ buddy, I wonder ifbuddy, I wonder if you could helpyou could help me with a littleme with a little cash flowcash flow problem I’mproblem I’m having?having?
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