Module 2: Statement of Cash Flows

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Module 2 Statement of Cash Flows

• ACG 2071
• Created by M. Mari

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Statement of Cash Flows

• Purpose
• Reports a firms major cash inflows and outflows
  for a period.
• Provides useful information about a firms
  ability to generate cash from operations,
  maintain and expand its operating capacity, meet
  financial obligations, and pay dividends.
• One of the basic financial statements.

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Importance

• We look more favorably at a company that is
  financing its expenditures with cash from
  operations than one that does it by selling its
  assets
• Whether company has enough cash to pays its
  existing debts as they mature.

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Three types of Activities

• Cash flows from OPERATING ACTIVITIES
• Cash flows from INVESTING ACTIVITIES
• Cash flows from FINANCING ACTIVITIES

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OPERATING ACTIVITIES

• Include those transactions and events that
  determine net income
• Cash inflows
• Cash from sales
• Cash from credit collections
• Cash from interest income
• Cash outflows
• Cash to pay bills
• Cash to pay for merchandise
• Cash to pay taxes

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Investing Activities

• Generally include those transactions and events
  that affect long term assets
• Purchase and sale of short-term investments
• Lending and collecting money from notes
  receivable
• Cash inflows
• Selling securities
• Selling notes
• Collecting principal on loans
• Selling assets
• Cash outlfows
• Make loans to others
• Purchase securities
• Purchase assets

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Financing Activities

• Include the transactions and events that affect
  longterm liabilities and equity
• Obtaining cash from issuing debt
• Receiving cash from or distributing cash to
  owners
• Cash inflows
• Monies from loans issued
• Monies from stock sold
• Monies from bonds issued
• Cash outflows
• Paid on principal of loan
• Purchase of treasury stock
• Redeemed bonds

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Note

• The sum of the three sections should equal the
  change in cash from the prior to the current year.

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Format of Statement of Cash Flows
Company Name Statement of Cash Flows For period
ended Cash flows from operating activities Cash
inflows -Cash
outflows Net cash provided by operating
activities Cash flows from investing
activities Cash inflows
-Cash outflows Net cash provided by operating
activities Cash flows from financing
activities Cash inflows
-Cash outflows Net cash
provided by operating activities Net
increase (decrease) in cash Cash
balance at beg of period


Cash balance at end of period



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Two methods

• Direct method
• Requires analysis of the cash account
• Indirect method
• Requires analysis of the financial statements

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Completion of Operating Section

• Begin with operating section by starting with net
  income
• Add any items that are included in net income
  that are not part of operations.
• Such as gains or losses on sale of investments,
  depreciation, and amortization.
• Follow by changes in current assets and current
  liabilities
• Decreases in current assets increases cash flows
  since assets are used instead of purchasing new
  ones
• Increases in current liabilities increase cash
  flows since we incur debt instead of paying
• Increases in current assets decrease cash flows
  since monies are used to buy assets
• Decreases in current liabilities decrease cash
  flows since monies are used to pay bills
• Current assets
• Accounts receivable
• Merchandise inventory
• Prepaid expenses
• Current liabilities
• Accounts payable
• Accrued expenses
• Salaries payable
• Income taxes payable

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Example

• Suppose that net income is 34,000

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Compute the differences
Account 2005 2006 Difference
Cash 10,000 15,000 5,000
Accts rec 4,500 6,000 1,500
Inventory 20,000 18,000 (2,000)
Investments 50,000 0 (50,000)
Accts pay 7,000 8,000 1,000
Div Pay 12,000 13,000 1,000
Taxes pay 5,000 3,500 (1,500)
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Example 1
Net income 34,000
ADD depreciation 1,000
Accts payable 1,000
Inventory 2,000
38,000
Deduct accts rec 1,500
Taxes pay 1.500
Gain on sale of investments 15.000
18.000
Net cash flows from operations 20,000
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Investing Activities

• Cash received from sale of assets
• Less cash paid from purchase of assets
• Example Investments costing 20,000 and sold
  for 45,000. Building constructed for 150,000
  and machine purchased for 30,000

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Example 3
Cash from sale of investments 45,000
Construction of building (150,000)
Machine purchased ( 30,000)
Net cash flow from investing (135,000)

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Financing Activities

• Cash received from the sale of stock or bonds
• Cash received from the issuance of a mortgage
• Less
• Cash paid for dividends
• Cash paid to retire bonds payable
• Cash paid to retire mortgage

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Example 5

• Sold 1,000 shares of stock par 10 for 35 per
  share. Received from mortgage 100,000, paid
  bonds of 75,000 off. Dividends payable had a
  beginning balance of 10,000, ending balance of
  15,000 and declared 50,000.

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Example 5
Cash received for sale of stock 35,000
Cash received from mortgage 100,000
Total 135000
Payment on bonds 75,000
Paid dividends 45,000
Total 120000
Net cash flow from financing 15000 15000