Cash Flow

1
Aligning the
Cash Flow
Income Statement
Balance Sheet
2
Here are the three financial statements you will
be using
Cash Flow Statement
Income Statement
Balance Sheet
Each form has pull-down menus.
Each form has calculation buttons.
3
There are five factors that can easily be
acquired from the Cash Flow Statement and used in
the Income Statement. (These will be repeated,
in detail, later in this sequence.)

• The horizontal total of Current Sales and
  Receivables
• will transfer to become the Total Income figure.

2. Monthly expenses like rent, utilities,
insurance, and salaries can be added
horizontally to get yearly totals, then
transferred to the Expense section.
3. Inventory purchases can be transferred to the
Cost of Goods Sold section of the Income
Statement.
4. Loan interest can be totaled and transferred
to Other Expenses.
5. While equipment or fixture purchases are not
transferred to the Income Statement, the
amount is used to calculate depreciation.
The slides that follow will detail how each of
these are done.
4
Add each months sales and receivables to acquire
Total Income.
1
Then, add expected next year receivables, if any.
45,400 21,950
2,000 (Jan. rec.) 69,350
This total can be used in your Income Statement.
5
The Cash Flows cash sales receivables should
directly relate to Total Income on the Income
Statement for the same time-frame.
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2
Simply total the monthly expenses for rent,
utilities, salaries, etc. and transfer the
totals to the Income Statement in the Expenses
section.
Do not total the costs for inventory, equipment,
interest, or loan principle payments. They will
be treated separately.
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On the Income Statement, expenses will be
subtracted from the Gross Profit on Sales to
reduce business income and lower the tax burden
for the business.
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3
Cash payments for Inventory will also transfer
to the Income Statement.
A. If the first purchase is for initial
start-up Inventory, transfer it to the
Income Statement as the Beginning Inventory.
B. Inventory purchases throughout the year will
transfer to the Income Statement as purchases in
Cost of Goods Sold section.
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When an estimate of ending inventory is
subtracted from the accumulated beginning
inventory and purchases, the result is called
Cost of Goods Sold and subtracted from the Total
Income figure to get Gross Profit on Sales.
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4
If the interest paid on a loan is already
separated from the principal, add the total
interest paid for the year and transfer it to the
Income Statement.
3,867
11
Since the interest isnt an expense directly
associated with business activity, it is
identified as Other Expense.
12
Purchase price for equipment will not appear on
income statement, but will be depreciated over
time. Example 5 years depreciation using
straight-line method, with an ending scrap value
of 5,000.
5
30,000 -5,000 scrap value 25,000
25,000 / 5 years 5,000 depreciation
per year
13
Depreciation expense appears on the Income
Statement.
And provides a deduction from income to
eventually lower taxes.
NOTE Depreciation is also one of four items
that are transferred directly from
the Cash Flow Statement to the
Balance Sheet.
14
Capital items purchased for a business are
usually depreciated over several years to allow
the business to reduce taxes over more than one
tax period.
To elaborate Equipment cost 30,000
Scrap Value 5,000
Depreciable value 25,000 Using
straight-line depreciation over a 5-year
life Year 1 value 30,000
- 5,000 Year 2 value
25,000 - 5,000 Year 3 value
20,000
- 5,000 Year 4 value 15,000
-
5,000 Year 5 value 10,000
- 5,000
5,000
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The four items that are drawn from the Cash
Flow Statement and the Income Statement, then
placed on the Balance Sheet are

• The accumulated depreciation (based on the
• depreciation schedule) is a deduction
  from
• the initial asset purchase price taken
  from the
• Cash Flow statement.

2. The Cash amount is Decembers ending cash
as shown on the Cash Flow Statement.
3. Accounts Receivable is what was estimated for
January of next year. .

• The Cost of Goods Sold section of the Income
• statement provides the ending inventory
  which
• is a current asset.

The slides that follow will detail how each of
these are done.
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Depreciation Expense transfers to the Balance
Sheet as Accumulated Depreciation and is
subtracted from the purchase amount to acquire
the current value that exists at the time of the
statement. Next year, the accumulated
depreciation will be the total of the previous
years depreciation plus this years amount.
1
Note that this produces a lower net value of
the equipment and more accurately reflects the
value of the business assets.
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To determine the cash figure, go to the
bottom-right corner of the Cash Flow Statement
and select the ending cash balance for December.
2
And, notice that the estimated accounts
receivable is now located in the Current Assets
portion of the Balance sheet.
3
4
Then, notice that the Ending Inventory is also
acquired from the Cost of Goods Sold section of
the Income Statement.
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So, you can see that the Cash Flow Statement Is
very useful to the construction of the Income
Statement and Balance Sheet. Please refer to
this slide sequence oftenas you encounter
construction of each of the three financial
statements.