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Cash Flow Statement. Why Cash Flow Statement?.

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Cash Flow Statement

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why cash flow statement
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.)
basic form of cash flow statement
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
flow from operating activities
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)
flow from investing activities
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
flow from financing activities
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
general theory
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
operating activities indirect method
Operating ActivitiesIndirect 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
operating activities direct method
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
cash received from customers
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
cash received from customers other variations

+ Beg Net A/R

- End Net A/R

- Bad debt exp adj

- Beg unearned rev

+ End undearned rev

= Cash from Customers


+ Beg A/R

- End A/R

- writeoffs

= beg allowance + bad debt exp. - ending allowance

- Beg unearned rev

+ End unearned rev

= Cash from Customers

Cash Received from Customers(other variations)
cash paid for inventory
Cash Paid For Inventory
  • Cost of Goods Sold
  • + End Inventory
  • - Beginning Inventory
  • = Purchases
  • + Beg A/P
  • - End A/P
  • = Cash paid for inventory
cash paid for operating expenses
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
cash paid for income taxes
Cash Paid for Income Taxes
  • Income Tax Exp
  • + Beg tax payable
  • - End tax payable
  • = Cash paid for income Taxes
cash paid for interest
Cash Paid for Interest
  • Interest Exp
  • + Beg interest payable
  • - End interest payable
  • = Cash paid for interest
cash received from dividends and interest
Cash Received from dividends and interest
  • Dividend and Interest Income
  • + Beg interest receivable
  • - End interest receivable
  • = Cash Received from dividends and interest
cash flow from investing activities
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
example equipment
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?
example equipment continued
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
example equipment results on cash flow statement
Example EquipmentResults 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
equipment example think about journal entries
Equipment ExampleThink about journal entries
  • Cash 65,000Accum 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
financing activities
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)
ways to check your work
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)