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201Lec12.PPT. STATEMENT OF CASH FLOWS. text p. 586. 4th REQUIRED GAAP Statement . Covers a period of time ( like an income statement ). Focuses on: Inflows of CASH Outflows of CASH. Questions the Statement of Cash Flow Answers. Where did the cash come from?.

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STATEMENT OF CASH FLOWS

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Statement of cash flows

201Lec12.PPT

STATEMENT OF CASH FLOWS

text p. 586

  • 4thREQUIRED GAAP Statement.

  • Covers a period of time (like an income statement).

  • Focuses on: Inflows of CASHOutflows of CASH


Questions the statement of cash flow answers

Questions the Statement of Cash Flow Answers

Where did the cash come from?

What was the cash used for?

And least importantly,

What was the change in

the cash balance?


Format of the statement of cash flows

Format of the Statement of Cash Flows

Four parts (called activities):

  • Operating -Cash from sales less cash spent on expenses

    - 2 options: direct or indirect

  • Investing - Cash in and out from buying and selling of balance sheet items

  • Financing - Cash in from borrowing or stock issue less cash out from paying back debt, buying treasury stock or paying dividends

  • Non-cash investing and financing activities(must be “significant” in $$$)


Format 3 main parts plus schedule

SAME

AMOUNT

1 - Cash from OPERATING activities:

text p. 589

FORMAT - 3 main parts plus schedule

Net Income Per income stmt (Accrual basis)xxx

+ or - Adjustments (Convert to cash basis)xxx

Net Cash from Operationsxxx

Called INDIRECT METHOD

A l t e r n a t i v e l y text p. 612

Cash receipts from customers xxx

less Cash payments: suppliersxxx

operating expensesxxx

taxesxxx- xxx

Net Cash from Operationsxxx

Called DIRECT METHOD


Statement of cash flows

2 - Cash from INVESTING activities:

Buy or sell PP&E.xxx

Buy or sell OTHER company’s stock. xxx

Lend Money, Receive repayments.xxxxxx

3 - Cash from FINANCING activities:

Borrow money, pay back debt.xxx

Buy or sell your OWN stock.xxx

Pay dividends.xxxxxx

NET INCREASE (DECREASE) IN CASH XXX

Cash at Beginning of Year (On balance sheet)XXX

Cash at End of Year (On balance sheet) XXX


Statement of cash flows

4 - Supporting Schedule

SIGNIFICANT NON-CASH Transactions should be disclosed in a separate schedule.

For example:Trade stock for a building or

Sign note payable for building.


Examples operating activities adjustments

EXAMPLES: Operating activities adjustments.

1 - Accrual to Cash conversion:

Assume: Sales for year = $100,000.

Beginning A/R = $10,000. Ending A/R = 0.

Cash Collected?

Cash Collected if Ending A/R = $15,000 instead of $0?

Operating Activities:Net incomeXXXX

- Increase in A/R( 5,000)

Cash from OperationsXXXX

If DIRECT method: Operating Activities:Receipts from customers:95,000


Statement of cash flows

Operating activities Indirect Method RULES:

  • Increasesin allcurrent assets(except cash) requirenegativeadjustments to arrive at cash flow.

  • Decreasesin allcurrent assets(except cash) requirepositiveadjustments to arrive at cash flow.

  • Increasesin allcurrent liabilitiesrequirepositiveadjustments to arrive at cash flow.

  • Decreasesin allcurrent liabilitiesrequirenegativeadjustments to arrive at cash flow.


Examples operating activities adjustments1

EXAMPLES: Operating activities adjustments.

2 - Noncash revenues or expenses:

Assume the following:Cash Revenues100,000

Cash Expenses 90,000

Depreciation Exp 50,000

NI(40,000)

What is Cash Flow?

Statement of cash flows:

Net income(40,000)

+ Depreciation 50,000

Cash from Operations 10,000

If DIRECT method: Omit any mention of non-cash expenses! Cash Revenues100,000

Cash Expenses 90,000

Net cash flow 10,000


Statement of cash flows

Additional Indirect Method RULES:

  • To arrive at operating activities cash flows: Addback non-cash expenses such as:

    Depreciation

    Amortization

    Loss on sale of assets (Also subtract gains.)


Examples investing financing activities

EXAMPLES: Investing & Financing activities

3 - Examine all Non-current assets and liabilities beginning and ending balances. Assume selected balances are:

BeginningEnding

Long term assets: Land 100,000115,000

Long term liabilities: N/P 200,000175,000

Equity: Common Stock 500,000600,000

  • How did they change? Cash paid or received ?

  • If no cash involved, significant exchange?

  • Investing or financing?

    Note no difference if DIRECT method. Affects only operating activities format.


Statement of cash flows

Investing and financing RULES:

  • Locate investing and financing activity items by reviewing changes in long-term assets, liabilities and equity over the year.

    - If change used or generated cash, then put on statement of cash flows.

    - If cash not involved, do nothing unless it’s a significant exchange. Then put on supporting schedule.


Example

EXAMPLE:

B A L A N C E S H E E T

ENDBEGIN

Cash 1,000 1,500

A/R 4,000 5,000

Inventory 9,500 8,000

Prepaid Insurance 1,500 0

Land10,000 0

Building60,00050,000

Accum Depr (19,500)(28,000)

Total Assets66,50036,500

A/P 6,000 2,000

Unearned Revenue 3,500 7,000

Note Payable10,000 0

Common Stock ( $1 Par) 1,500 1,000

Paid In Capital Excess Par24,50015,000

Retained Earnings21,00011,500

Total Liabs & Equity66,50036,500


Example1

EXAMPLE:

I N C O M E S T A T E M E N T

Sales 100,000

- CGS -60,000

Gross Profit 40,000

- Depreciation Expense -6,500

- Other Expenses -20,000

Net Income from operations 13,500

- Loss on sale of PP&E -1,000

Net Income 12,500

  • Other data:

  • Land was bought by signing a note

  • Old building which cost $25,000, accumulated of $15,000, was sold for $9,000 cash

  • New building was bought for $35,000 cash

  • Stock was issued for $10,000 cash

  • Cash dividends paid were $3,000


Example2

EXAMPLE:

Sales 100,000

- CGS -60,000

Gross Profit 40,000

- Depreciation Expense -6,500

- Other Expenses -20,000

Net Income from operations 13,500

- Loss on sale of PP&E -1,000

Net Income 12,500

CASH FROM OPERATING ACTIVITIES:

NET INCOME12,500

+ Depreciation Expense 6,500

+ Loss on Sale of PP&E 1,000


Example3

EXAMPLE:

ENDBEGIN

Cash 1,000 1,500

A/R 4,000 5,000

Inventory 9,500 8,000

Prepaid Insurance 1,500 0

Land10,000 0

Building60,00050,000

Accum Depr (19,500)(28,000)

Total Assets66,50036,500

A/P 6,000 2,000

Unearned Revenue 3,500 7,000

Note Payable10,000 0

Common Stock ( $1 Par) 1,500 1,000

Paid In Capital Excess Par24,50015,000

Retained Earnings21,00011,500

Total Liabs & Equity66,50036,500

CASH FROM OPERATING ACTIVITIES:

NET INCOME12,500

+ Depreciation Expense 6,500

+ Loss on Sale of PP&E 1,000

+ Decrease in A/R 1,000

- Increase in Inventory ( 1,500)

- Increase in Prepaid Insurance ( 1,500)


Example4

CASH FROM OPERATING ACTIVITIES:

NET INCOME12,500

+ Depreciation Expense 6,500

+ Loss on Sale of PP&E 1,000

+ Decrease in A/R 1,000

- Increase in Inventory( 1,500)

- Increase in Prepaid Insurance( 1,500)

EXAMPLE:

ENDBEGIN

Cash 1,000 1,500

A/R 4,000 5,000

Inventory 9,500 8,000

Prepaid Insurance 1,500 0

Land10,000 0

Building60,00050,000

Accum Depr (19,500)(28,000)

Total Assets66,50036,500

A/P 6,000 2,000

Unearned Revenue 3,500 7,000

Note Payable10,000 0

Common Stock ( $1 Par) 1,500 1,000

Paid In Capital Excess Par24,50015,000

Retained Earnings21,00011,500

Total Liabs & Equity66,50036,500

+ Increase in A/P 4,000

- Decrease in Unearned Revenue ( 3,500)

Net Cash From Operations 18,500


Statement of cash flows

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0Building60,00050,000Accum Depr (19,500) (28,000)N/P10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par24,50015,000Retained Earnings21,00011,500

All

Non -

current

accounts

LAND:Increased $10,000.

If bought with Cash, then Investing Activity

Other data - land was bought by signing a note.

Other than cash > Significant non-cash for schedule.


Statement of cash flows

Accum Depr

Building

Buy new building for $35,000 cash

28000

50000

Depreciation Expense

15000

25000

6500

35000

19500

60000

Sell old building for $9,000 cash

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0Building60,00050,000Accum Depr (19,500) (28,000)N/P10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par24,50015,000Retained Earnings21,00011,500

Building: Increased $10,000. Accum Depr:Decreased $8,500.


Statement of cash flows

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0Building60,00050,000Accum Depr (19,500) (28,000)N/P10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par24,50015,000Retained Earnings21,00011,500

N/P:Increased $10,000.

Relates to land purchase discussed earlier.


Statement of cash flows

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0Building60,00050,000Accum Depr (19,500) (28,000)N/P10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par24,50015,000Retained Earnings21,00011,500

Common Stock:Increased $500.

Paid In Capital:Increased $9,500.

Other data – Stock was issued for $10,000 cash so 500 shares must have been issued for $20 per share.

Financing Activities: $10,000 inflow.


Statement of cash flows

Retained Earnings

3,000 of cash dividends were paid.

11500

3000

12500 = Net Income

21000

EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0Building60,00050,000Accum Depr (19,500) (28,000)N/P10,000 0Common Stock ( $1 Par) 1,500 1,000Paid In Capital Excess Par24,50015,000Retained Earnings21,00011,500

Retained Earnings:Increased $9,500.


Statement of cash flows

CASH FROM OPERATING ACTIVITIES:

NET INCOME12,500

+ Depreciation Expense 6,500

+ Loss on Sale of PP&E 1,000

+ Decrease in A/R 1,000

- Increase in Inventory( 1,500)

- Increase in Prepaid Insurance( 1,500)

+ Increase in A/P 4,000

- Decrease in Unearned Revenue( 3,500)

Net Cash From Operations 18,500

CASH FROM INVESTNG ACTIVITIES:

Proceeds from building sale 9,000

Purchase of building (35,000)

Net Cash From Investing(26,000)

CASH FROM FINANCING ACTIVITIES:

Proceeds from stock issuance 10,000

Payment of Dividends( 3,000)

Net Cash From Financing 7,000

NET DECREASE IN CASH( 500)

Cash at beginning of year 1,500

Cash at end of year 1,000


Statement of cash flows

SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:

Land was obtained by signing a $10,000 note payable.


Free cash flow

Text p 604

Free Cash Flow

Cash Provided By Operations

– Capital Expenditures

– Dividends Paid

Free Cash Flow

  • Considered excess cash available after spending to maintain operational efficiency and shareholders satisfied.


Current cash debt coverage ratio

Text p 607

Current Cash Debt Coverage Ratio =

Cash provided by operations

Average current liabilities

  • Probably better than current ratio in assessing ability to meet current liability payments.


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