1 © copyright doug hillman 2000 statement of cash flows
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1© Copyright Doug Hillman 2000
Statement of Cash Flows
2© Copyright Doug Hillman 2000
Purpose of Statement of Cash Flows
Provide information about cash receipts and payments during an accounting period
Helps us see how financial position changes during an accounting period
Only statement that collects and shows in one statement the causes of changes in cash during a financial reporting period
3© Copyright Doug Hillman 2000
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits
Cash equivalents are short-term, highly liquid investments that are
4© Copyright Doug Hillman 2000
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits
Cash equivalents are short-term, highly liquid investments that are
» Readily convertible to known amounts of cash
5© Copyright Doug Hillman 2000
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits
Cash equivalents are short-term, highly liquid investments that are» Readily convertible to known amounts of
cash» So near maturity that they are not likely to
change in value due to changes in interest rates
6© Copyright Doug Hillman 2000
Classification of Cash Receipts and Cash
Payments
Operating activities Investing activities Financing activities
7© Copyright Doug Hillman 2000
Operating Activities
Transactions that generally involve producing and delivering goods and providing services
Inflows
» selling goods and services, interest and dividend revenue
Outflows
» inventory, salary exp, interest exp
8© Copyright Doug Hillman 2000
Investing Activities Buying and selling plant assets and
securities, and making loans and collecting on them
Inflows
» sale of plant assets and investment securities, collecting loans
Outflows
» purchasing plant assets, investment securities
9© Copyright Doug Hillman 2000
Financing Activities Obtaining resources from owners and
providing return, and obtaining resources from creditors and repaying principal
Inflows
» issuing stock, bonds, other short and long-term borrowing
Outflows
» purchasing treasury stock, repaying principal, cash dividends
10© Copyright Doug Hillman 2000
Other Cash Flow Considerations
Generally, information on gross receipts and payments more relevant
» When issuing long-term debt to retire other debt, show both
Noncash investing and financing
» Acquiring plant assets by issuing notes payable
» Converting bonds payable into common stock
11© Copyright Doug Hillman 2000
Basic Interpretation of Statement of Cash Flows
Overall, how successful has management been in generating and investing cash flows?
How does accrual basis net income compare with cash basis?
12© Copyright Doug Hillman 2000
Basic Interpretation of Statement of Cash Flows
What cash uses have been made for investing activities, and to what extent has cash from operations been sufficient to pay for these investments?
What sources and uses have been generated from financing activities?
13© Copyright Doug Hillman 2000
Direct versus Indirect Method for Operating
Activities
Direct shows major classes of gross cash receipts and cash payments
» Difference is net cash provided by, used in, operating activities
Indirect starts with net income (loss) and adjusts for revenues and expenses that did not cause changes in cash
FASB encourages use of the direct method
14© Copyright Doug Hillman 2000
Direct Method
Goal to convert each income statement item from accrual to cash basis
First, identify the balance sheet account(s) that relate to each income statement item
Next, combine the change in the balance sheet account with the income statement amount
15© Copyright Doug Hillman 2000
Cash Receipts from Customers
Cash receipts from customers relates sales to change in accounts receivable
If accounts receivable decreased during the period, we collected more cash than amount reported as sales revenue
If accounts receivable increased during the period, we collected less cash that amount reported as sales revenue
16© Copyright Doug Hillman 2000
Cash Receipts from Customers
Take sales amount and
» Add decrease in accounts receivable
» OR
» Subtract increase in accounts receivable
17© Copyright Doug Hillman 2000
Cash Payments to Suppliers
Cash Payments to Suppliers relates cost of goods sold to change in merchandise inventory and change in accounts payable
First use cost of goods sold and change in inventory to calculate purchases
If inventory increased during the period, we purchased more goods than we sold
If inventory decreased during the period, we purchased fewer goods than we sold
18© Copyright Doug Hillman 2000
Cash Payments to Suppliers
To calculate purchases, take cost of goods sold amount and
» Add increase in inventory
» OR
» Subtract decrease in inventory This gives us accrual purchases
19© Copyright Doug Hillman 2000
Cash Payments to Suppliers
Second use purchases and change in accounts payable to calculate cash payments to suppliers
If accounts payable increased during period, we paid less cash than purchases
If accounts payable decreased during period, we paid more cash than purchases
20© Copyright Doug Hillman 2000
Cash Payments to Suppliers
To calculate cash payments to suppliers, take purchases amount and
» Add decrease in accounts payable
» OR
» Subtract increase in accounts payable
21© Copyright Doug Hillman 2000
Other Expenses That Affect Cash
Cash payments for expenses relate the expense to a change in an accrued expense account or a prepaid expense
» Cash payments for wages relates wages expense and change in wages payable
» Cash payments for office supplies relates office supplies expense and changes in office supplies
22© Copyright Doug Hillman 2000
Other Expenses That Affect Cash
To calculate cash payments for expenses, take the expense amount and
» Add decrease in accrued expense» OR
» Subtract increase in accrued expense» OR
» Add increase in prepaid expense» OR
» Subtract decrease in prepaid expense
23© Copyright Doug Hillman 2000
Other Revenues That Affect Cash
Cash receipts for revenues relate the revenue to a change in an unearned revenue account or accrued revenue
» Cash receipts from interest relates interest revenue and change in interest receivable
» Cash receipts from subscriptions relates subscriptions revenue and changes in unearned subscriptions
24© Copyright Doug Hillman 2000
Other Revenues That Affect Cash
To calculate cash receipts from revenues, take the revenue amount and
» Add decrease in accrued revenue» OR
» Subtract increase in accrued revenue» OR
» Add increase in unearned revenue» OR
» Subtract decrease in unearned revenue
25© Copyright Doug Hillman 2000
Indirect Method for Operating Activities
Starts with net income(loss) from the income statement.
Adjusts for revenues and expenses that did not cause a change in cash
Results in same total as direct method FASB encourages use of direct Believes that reconciliation of net income to
cash provided by operations is useful information
26© Copyright Doug Hillman 2000
Indirect Method Step 1
Net income Add
» Expenses that did not use cash and losses on sale of noncurrent assets
Subtract
» Gains on sales of noncurrent assets
27© Copyright Doug Hillman 2000
Indirect Method Step 2
Add
» Decreases in operating current assets
» Increases in operating current liabilities Subtract
» Increases in operating current assets
» Decreases in operating current liabilities
28© Copyright Doug Hillman 2000
Cash Flows from Investing Activities
Analyze changes in nonoperating current assets and noncurrent assets
» If equipment increased, there was a purchase of new equipment
» If equipment decreased, there was a disposal of old equipment
If there was more than one change, analyze each separately
Identify the cash flow from each transaction
29© Copyright Doug Hillman 2000
Cash Flows from Financing Activities
Analyze changes in nonoperating current liabilities, noncurrent liabilities, paid-in capital, and nonoperating changes to retained earnings(dividends)
» If bonds increased, there was an issuance of bonds
» If paid-in capital increased, there was an issuance of stock
30© Copyright Doug Hillman 2000
Cash Flows from Financing Activities
If dividends were declared, combine amount declared with change in dividends payable to get cash dividends
If there was more than one change, analyze each separately
Identify the cash flow from each transaction
31© Copyright Doug Hillman 2000
Steps in Preparing Statement of Cash Flows
Compute the net change in cash and cash equivalents
Compute the amount of net cash provided by (used in) operating activities by direct method
Prepare the reconciliation of net income to net cash provided by (used in) operating activities by indirect method
32© Copyright Doug Hillman 2000
Steps in Preparing Statement of Cash Flows
Compute the amount of net cash provided by (used in) investing and financing activities
Prepare the statement of cash flows
33© Copyright Doug Hillman 2000
Interpretation of Information in Statement
of Cash Flows
Overall, how successful has management been in generating and investing cash flows during the period?
How does accrual net income compare with cash net income?
34© Copyright Doug Hillman 2000
Interpretation of Information in Statement
of Cash Flows
What cash uses have been made for investing activities and to what extent has cash from operations been sufficient to pay for these investments?
What sources and uses have been generated from financing activities?