201Lec12.

PPT
STATEMENT OF CASH FLOWS
• 4th REQUIRED GAAP Statement.text p. 586
• Covers a period of time (like an income
statement).
• Focuses on: Inflows of CASH Outflows of
CASH
Questions the Statement of
Cash Flow Answers
 Format of the Statement of Cash
Flows
Four parts (called activities):
• Operating - Cash from sales less cash spent on
expenses
- 2 options: direct or indirect
• Investing - Cash in and out from buying and selling
of balance sheet items
• Financing - Cash in from borrowing or stock issue
less cash out from paying back debt, buying
treasury stock or paying dividends
• Non-cash investing and financing activities (must
be “significant” in $$$)
 FORMAT - 3 main parts plus schedule
1 - Cash from OPERATING activities:text p. 589
Net Income Per income stmt (Accrual basis) xxx
+ or - Adjustments (Convert to cash basis) xxx
Net Cash from Operations xxx
Called INDIRECT METHOD S
A
M
A l t e r n a t i v e l y text p. 612 E
Cash receipts from customers xxx A
M
less Cash payments: suppliers xxx O
operating expenses xxx U
taxes xxx - xxx N
Net Cash from Operations xxx T
Called DIRECT METHOD
2 - Cash from INVESTING activities:
Buy or sell PP&E. xxx
Buy or sell OTHER company’s stock. xxx
Lend Money, Receive repayments. xxx xxx
3 - Cash from FINANCING activities:
Borrow money, pay back debt. xxx
Buy or sell your OWN stock. xxx
Pay dividends. xxx xxx
NET INCREASE (DECREASE) IN CASH XXX
Cash at Beginning of Year (On balance sheet) XXX
Cash at End of Year (On balance sheet) XXX
4 - Supporting Schedule
SIGNIFICANT NON-CASH Transactions should be
disclosed in a separate schedule.
For example: Trade stock for a building or
Sign note payable for building.
EXAMPLES: Operating activities
adjustments.
1 - Accrual to Cash conversion:
Assume: Sales for year = $100,000.
Beginning A/R = $10,000. Ending A/R = 0.
Cash Collected?
Cash Collected if Ending A/R = $15,000 instead of $0?
Operating Activities: Net income XXXX
- Increase in A/R ( 5,000)
Cash from Operations XXXX

If DIRECT method: Operating Activities: Receipts from

customers: 95,000
Operating activities Indirect Method
RULES:
• Increases in all current assets (except cash)
require negative adjustments to arrive at cash
flow.
• Decreases in all current assets (except cash)
require positive adjustments to arrive at cash
flow.
• Increases in all current liabilities require
positive adjustments to arrive at cash flow.
• Decreases in all current liabilities require
negative adjustments to arrive at cash flow.
EXAMPLES: Operating activities
adjustments.
2 - Noncash revenues or expenses:
Assume the following: Cash Revenues 100,000
Cash Expenses 90,000
Depreciation Exp 50,000
NI (40,000)
What is Cash Flow?
Statement of cash flows:
Net income (40,000)
+ Depreciation 50,000
Cash from Operations 10,000
If DIRECT method: Omit any mention of non-cash
expenses! Cash Revenues 100,000
Cash Expenses 90,000
Net cash flow 10,000
Additional Indirect Method RULES:
• To arrive at operating activities cash flows: Addback
non-cash expenses such as:
Depreciation
Amortization
Loss on sale of assets (Also subtract gains.)
EXAMPLES: Investing & Financing activities
3 - Examine all Non-current assets and liabilities beginning
and ending balances. Assume selected balances are:
Beginning Ending
Long term assets: Land 100,000 115,000
Long term liabilities: N/P 200,000 175,000
Equity: Common Stock 500,000 600,000
• How did they change? Cash paid or received ?
• If no cash involved, significant exchange?
• Investing or financing?
Note no difference if DIRECT method. Affects only
operating activities format.
Investing and financing RULES:
• Locate investing and financing activity items by
reviewing changes in long-term assets, liabilities and
equity over the year.
- If change used or generated cash, then put on
statement of cash flows.
- If cash not involved, do nothing unless it’s a
significant exchange. Then put on supporting schedule.
BALANCESHEET
EXAMPLE:
END BEGIN
Cash 1,000 1,500
A/R 4,000 5,000
Inventory 9,500 8,000
Prepaid Insurance 1,500 0
Land 10,000 0
Building 60,000 50,000
Accum Depr (19,500) (28,000)
Total Assets 66,500 36,500

A/P 6,000 2,000

Unearned Revenue 3,500 7,000
Note Payable 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
INEXAMPLE:
COMESTATEMENT
Sales 100,000
- CGS -60,000
Gross Profit 40,000
- Depreciation Expense -6,500
- Other Expenses -20,000
Net Income from operations 13,500
- Loss on sale of PP&E -1,000
Net Income 12,500

Other data:
• Land was bought by signing a note
• Old building which cost $25,000, accumulated of
$15,000, was sold for $9,000 cash
• New building was bought for $35,000 cash
• Stock was issued for $10,000 cash
• Cash dividends paid were $3,000
 EXAMPLE:
Sales 100,000
- CGS -60,000
Gross Profit 40,000
- Depreciation Expense -6,500
- Other Expenses -20,000
Net Income from operations 13,500
- Loss on sale of PP&E -1,000
Net Income 12,500
CASH FROM OPERATING ACTIVITIES:
NET INCOME 12,500
+ Depreciation Expense 6,500
+ Loss on Sale of PP&E 1,000
 EXAMPLE:
END BEGIN
Cash 1,000 1,500
A/R 4,000 5,000
Inventory 9,500 8,000
Prepaid Insurance 1,500 0
Land 10,000 0
Building 60,000 50,000
Accum Depr (19,500) (28,000)
CASH FROM
Total Assets 66,500OPERATING
36,500 ACTIVITIES:
NET INCOME 12,500
+ Depreciation
A/P 6,000 2,000 Expense 6,500
+ Loss
Unearned on Sale3,500
Revenue of PP&E
7,0001,000
Note Payable 10,000
+ Decrease 0 1,000
in A/R
Common Stock (in
- Increase $1Inventory
Par) 1,500( 1,500)
1,000
Paid In- Capital
IncreaseExcess Par 24,500
in Prepaid 15,000
Insurance ( 1,500)
Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
 EXAMPLE: CASH FROM OPERATING ACTIVITIES:
END BEGIN NET INCOME 12,500
Cash 1,000 1,500 + Depreciation Expense 6,500
A/R 4,000 5,000 + Loss on Sale of PP&E 1,000
Inventory 9,500 8,000+ Decrease in A/R 1,000
Prepaid Insurance 1,500 0
- Increase in Inventory ( 1,500)
Land 10,000 0 - Increase in Prepaid Insurance ( 1,500)
Building 60,000 50,000
+ Increase in A/P 4,000
Accum Depr (19,500) (28,000)
- Decrease in Unearned Revenue ( 3,500)
Total Assets 66,500 36,500
Net Cash From Operations 18,500
A/P 6,000 2,000
Unearned Revenue 3,500 7,000
Note Payable 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
Total Liabs & Equity 66,500 36,500
 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0
BuildingAll
60,000 50,000
AccumNonDepr- ( 19,500) ( 28,000)
current
N/P 10,000 0
account
Common Stock ( $1 Par) 1,500 1,000
s
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
LAND: Increased $10,000.
If bought with Cash, then Investing Activity
Other data - land was bought by signing a note.
Other than cash > Significant non-cash for schedule.
 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0
Building 60,000 50,000
Accum Depr ( 19,500) ( 28,000)
N/P 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
Building: Increased $10,000. Accum Depr: Decreased $8,500.

Building Accum Depr

Buy new
50000 28000
building Depreciation
for 35000 25000 15000 6500 Expense
$35,000
cash 60000 19500
Sell old building
for $9,000 cash
 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0
Building 60,000 50,000
Accum Depr ( 19,500) ( 28,000)
N/P 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
N/P: Increased $10,000.
Relates to land purchase discussed earlier.
 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0
Building 60,000 50,000
Accum Depr ( 19,500) ( 28,000)
N/P 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
Common Stock: Increased $500.
Paid In Capital: Increased $9,500.
Other data – Stock was issued for $10,000 cash so 500
shares must have been issued for $20 per share.
Financing Activities: $10,000 inflow.
 EXAMPLE: INVESTING & FINANCING activities.
Analyze all noncurrent accounts END BEGIN
Land 10,000 0
Building 60,000 50,000
Accum Depr ( 19,500) ( 28,000)
N/P 10,000 0
Common Stock ( $1 Par) 1,500 1,000
Paid In Capital Excess Par 24,500 15,000
Retained Earnings 21,000 11,500
Retained Earnings: Increased $9,500.
Retained Earnings
3,000 of cash 11500
dividends were paid. 3000 12500 = Net Income
21000
CASH FROM OPERATING ACTIVITIES:
NET INCOME 12,500
+ Depreciation Expense 6,500
+ Loss on Sale of PP&E 1,000
+ Decrease in A/R 1,000
- Increase in Inventory ( 1,500)
- Increase in Prepaid Insurance ( 1,500)
+ Increase in A/P 4,000
- Decrease in Unearned Revenue ( 3,500)
Net Cash
CASH From
FROM Operations
INVESTNG 18,500
ACTIVITIES:
Proceeds from building sale 9,000
Purchase of building (35,000)
Net Cash From Investing (26,000)
CASH FROM FINANCING ACTIVITIES:
Proceeds from stock issuance 10,000
Payment of Dividends ( 3,000)
Net Cash From Financing 7,000
NET DECREASE IN CASH ( 500)
Cash at beginning of year 1,500
Cash at end of year 1,000
SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES:
Land was obtained by signing a $10,000 note
payable.
 Free Cash Flow Text p 604
Cash Provided By Operations
– Capital Expenditures
– Dividends Paid
Free Cash Flow
• Considered excess cash
available after spending to
maintain operational
efficiency and shareholders
satisfied.
 Current Cash Debt Text p 607
Coverage Ratio =
Cash provided by operations
Average current liabilities

• Probably better than current ratio in

assessing ability to meet current liability
payments.
Prepared by

P.Ravikishore b.com,ACA

Contact me at
ravikishoreforall@yahoo.com