UNIT #16 - CASH FLOW INITIAL COMPLETED

INSTRUCTIONS FOR UNIT #16

~ In Unit # 15 you prepared the classified balance sheet presenting the financial statement of the accounts at a point in time, e.g. the end of the year. ~ We'll now do the Statement of Cash Flow. This statement will show where the cash came from and where it went, i.e. how it was used. A company's cash derives from its normal operations, the sale of stock, or through borrowing. It applies that cash to pay the expenses of normal operations, invest in equipment, build its assets, retire debt, or pay dividends, etc. That "flow" of cash is critical to the life of the business. Accordingly, the statement of cash flow was developed to "model" or "see" it. There are three categories to the statement, namely, operating, investing, and financing. Operating is the normal day to day buying and selling of inventory, paying expenses, etc. Investing is the acquisition or disposal of long term assets, e.g. land, buildings, machinery, equipment. Financing is issuing stock, or borrowing to obtain capital, and paying dividends. ~ To show how this works, we'll work with the income statement and balance sheet data used in the previous tutorial. ~ Start with Tutorial # 16 Initial. On the left, you will see a listing of various accounts. On the right are beginning and ending balances for some of them. To assist you, some numbers have been entered. ~ On the right, enter these numbers in the cells for beginning and ending: Beginning Ending ~ Accounts receivable change 100 200 ~ Inventory change 200 300 ~ Accounts payable change 50 25 ~ Accrued expense payable 30 130 ~ Wages payable 10 5 ~ Salaries payable 20 120 ~ Prepaid insurance 30 20 ~ Supplies 50 25 ~ Income taxes payable 10 60 ~ Buildings and equipment 200 250 ~ Proceeds from preferred stock 150 150 ~ Proceeds from common stock 100 200 ~ Proceeds (payment) notes payable 100 125 ~ Dividends payable 10 40 As you do this, notice how the number is posted on the left in the appropriate column. This is to demonstrate the impact on cash.

INSTRUCTIONS FOR UNIT

The increase or decrease is looked at in terms of how it affects cash, i.e. does it increase it or decrease it. For example, if receivables go up, you have less cash. A sale was made, but you do not have the cash. If inventory increases, you have to pay for it, however, did you pay for it this period or will you pay for it in the future. Therefore, if accounts payable increases, you will pay for it later, if accounts payable decreases, you pay for it now. Another example would be prepaid insurance. If you prepay insurance, you're using cash; if you prepay less, you are not using cash. Again, each account is looked at in terms of using more or less cash, or generating more or less cash. That is why it is necessary to know the change in accounts and how it impacts cash flow. ~ On the left, enter these numbers in the appropriate cell next to the account: ~ Sales 1,000 ~ Cost of sales -600 ~ Operating expenses, this includes: Wages = 50, salaries = 100, utilities = 50, rent = 50, supplies expense = 25, and insurance expense = 10; total = -285 ~ Income tax expense -50 ~ Dividends -30 ~ As you do this, the cash flow will be calculated. On the left, you will see subtotals for each category, and the grand total, called net cash flow. Look carefully at: ~ Cash from sales ~ Cash payments for merchandise ~ Cash payments for operating ~ Cash for investing ~ Cash from financing ~ Each of these categories is designed to show the user of the statement the source and uses of cash during the year. ~ The Tutorial titled Tutorial # 16 Completed has the correct entries.