The document discusses the cash flow statement, which provides important information about a company's cash generation and cash flows between operating, investing, and financing activities. It explains that the cash flow statement has three sections for operating, investing, and financing cash flows. The operating section deals with cash from core business activities and adjustments for non-cash expenses. The investing section includes cash from investing in long-term assets and securities. The financing section includes cash from raising and repaying debt and cash from selling or repurchasing equity.

1. Cash Flow Statement

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Cash Paid For Inventory
• Cost of Goods Sold
• + End Inventory
• - Beginning Inventory
• = Purchases
• + Beg A/P
• - End A/P
• = Cash paid for inventory

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. Cash Paid for Income Taxes
• Income Tax Exp
• + Beg tax payable
• - End tax payable
• = Cash paid for income Taxes

15. Cash Paid for Interest
• Interest Exp
• + Beg interest payable
• - End interest payable
• = Cash paid for interest

16. Cash Received from dividends
and interest
• Dividend and Interest Income
• + Beg interest receivable
• - End interest receivable
• = Cash Received from dividends and
interest

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. 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. 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. 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. 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. 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. 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)