1 © copyright doug hillman 2000 statement of cash flows

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© Copyright Doug Hillman 2000 Statement of Cash Flows

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Page 1: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

1© Copyright Doug Hillman 2000

Statement of Cash Flows

Page 2: 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

Page 3: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 4: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 5: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 6: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

6© Copyright Doug Hillman 2000

Classification of Cash Receipts and Cash

Payments

Operating activities Investing activities Financing activities

Page 7: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 8: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 9: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 10: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 11: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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?

Page 12: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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?

Page 13: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 14: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 15: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 16: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

16© Copyright Doug Hillman 2000

Cash Receipts from Customers

Take sales amount and

» Add decrease in accounts receivable

» OR

» Subtract increase in accounts receivable

Page 17: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 18: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 19: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 20: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 21: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 22: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 23: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 24: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 25: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 26: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 27: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 28: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 29: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 30: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 31: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 32: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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

Page 33: 1 © Copyright Doug Hillman 2000 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?

Page 34: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows

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?

Page 35: 1 © Copyright Doug Hillman 2000 Statement of Cash Flows