How Well Am I Doing Statement of Cash Flows

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How Well Am I Doing?Statement of Cash Flows
Chapter17
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Purpose of the Statement of Cash Flows
Can we meet our obligations to creditors?
Are cash flows sufficient to support ongoing
operations?
Why is there a difference between net income and
net cash flow?
Will the company have to borrow money to make
needed investments?
Can we pay dividends?
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Cash

• The term cash on the statement of cash flows
  refers broadly to both currency and cash
  equivalents.

Cash
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts
Net Cash Flows for a Period
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts

• Increases in noncash asset accounts imply uses of
  cash.

Example Inventory is purchased on credit from a
supplier.
It is implied that cash was used to acquire the
inventory.
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts

• Increases in liability accounts imply sources of
  cash.

Example Inventory is purchased on credit from a
supplier.
It is implied that an increase in a payable has
the effect of increasing cash available for other
uses.
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts

• Decreases in noncash assets accounts imply
  sources of cash.

Example Accounts receivable decreases when a
customer pays their bill.
When the customer pays his bill, the companys
cash increases.
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Constructing the Statement of Cash Flows Using
Noncash Balance Sheet Accounts

• Decreases in liability accounts imply uses of
  cash.

Example The company made a payment on a note
payable held by a creditor.
When the company makes the payment, cash
decreases.
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Organizing a Full-Fledged Statement of Cash Flows
Cash flows are divided into three categories.
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Organizing a Full-Fledged Statement of Cash Flows
A reconciliation of beginning cash to ending cash
is also required.

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Operating Activities
Includes those activities that enter into the
determination of net income
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Operating Activities

• Changes in current assets and current liabilities
  imply changes in cash, as indicated below.

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Operating Activities
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Operating Activities
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Operating Activities
Depreciation and Amortization charges are added
back to net income because they are decreases in
noncash assets.
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Operating Activities
Losses are added back to net income.
Gains are subtracted from net income.
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Investing Activities
Includes transactions that involve the
acquisition or disposal of noncurrent assets.
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Financing Activities
Includes transactions involving receipts from or
payments to creditors and owners.
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Other Cash Flow Issues

• For investing activities and financing
  activities, like-kind inflows and outflows of
  cash must be shown separately on the statement of
  cash flows.

• Example
• XYZ sells an old building for 700,000 and
  purchases a new building for 1,000,000.
• The 700,000 inflow of cash and the 1,000,000
  outflow of cash must be shown separately.

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Direct Method or Indirect Method?

• Indirect Method
• Net income is reconciled to cash flow from
  operating activities.
• No supplemental schedule is required.
• Used by 98.8 of companies.

• Direct Method
• Net income is reconstructed on a cash basis.
• Requires a supplemental reconciliation of net
  income to cash flow from operating activities.
• Used by 1.2 of companies.

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Other Cash Flow Issues

• Direct exchange transactions occur when
  noncurrent balance sheet items are swapped.
• Such exchanges must be disclosed.

• Example
• Bobo, Inc. acquires a building in exchange for
  2,000 shares of common stock.
• This is reported in a separate supplemental
  schedule attached to the statement of cash flows.

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Interpretation of the Statement of Cash Flows

• Examine the operating activities section
  carefully.
• Negative cash flow is usually a sign of
  fundamental difficulties.
• Ultimately, a positive cash flow is necessary to
  avoid liquidating assets or borrowing money to
  pay for day-to-day activities.

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Lets work an Indirect Method Example
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Example - Indirect Method

• Eds Hut is a local pizza restaurant. Ed has
  prepared an adjusted trial balance as of March
  31, 2000. Ed needs help preparing the Statement
  of Cash Flows.
• Examine the information provided and prepare a
  Statement of Cash Flows using the indirect method.

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Example - Indirect Method
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Example - Indirect Method

• Additional Information
• There was a net loss for the year of 27,000.
• Depreciation charges for the year were 6,000.
• During the year, Ed sold land originally costing
  32,000 for 32,000.
• During the year, Ed paid dividends of 3,000 to
  the stockholders.
• Ed issued 50,000 of common stock to settle the
  note due to Joe Doe.

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Example - Indirect Method
Always start with the net income or net loss for
the period.
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Example - Indirect Method
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Example - Indirect Method
Depreciation charges represent a decrease in a
noncash asset that must be added back to net
income.
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Example - Indirect Method
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Example - Indirect Method
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Example - Indirect Method
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Example - Indirect Method
In addition, on the face of the statement or in a
supplemental schedule, disclose the issuance of
50,000 of stock to a creditor, a noncash
financing activity.
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End of Chapter 17
Now, this is what I call CAH FLOW!