Cash Flow Statement

•CFS Reports the entity’s cash flows (cash receipts and cash payments) during the period

Basic Concepts

Purposes of the Statementof Cash Flows•Predict future cash flows•Evaluate management decisions•Determine the ability to pay dividends to stockholders and payments to creditors•Show the relationship of net income to the business’s cash flows

What is Cash?

•Cash on hand•Cash in the bank•Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay

• Money-market investments• Government Treasury bills

Statement of Cash Flows

Sections

Operating, Investing, and Financing Activities•Operating activities create revenues, expenses, gains, and losses.•Investing activities increase and decrease long-term assets.•Financing activities obtain cash from investors and creditors.

Two Formats forOperating Activities•Indirect method reconciles from net income to net cash provided by operating activities•Direct method reports all cash receipts and cash payments from operating activities•The two methods have no effect on investing or financing activities.

Two Formats forOperating Activities

Indirect MethodNet income $XXXAdjustments:Depreciation, etc. $XXXNet income provided by operating activities $XXX

Direct Method

Collection from customers $XXXDeductions:Payment to suppliers, etc. $ XXXNet income provided by operating activities $XXX

The Indirect Operating Section

Operating ActivitiesIndirect Method

Cash flows from operating activities:Net income

Adjustments to reconcile net income to net cash provided by operating activities:

+ Depreciation/amortization expense+ Loss on sale of long-term assets- Gain on sale of long-term assets- Increases in current assets other than cash+ Decreases in current assets other than cash+ Increases in current liabilities- Decreases in current liabilities

Net cash provided by operating activities

Gain or Loss fromLong-Term Assets•Changes to Long-term Assets

• Purchase or Sale• Effect Cash

•They appear in the Investing Section•But... When Sold Are Reported on the Income Statement

• Thus, we need to reverse their effect• Add back the Loss• Subtract out the Gain

Operating Activities fromIndirect Method•Changes in current assets and current liability accounts

• Increase in current asset decreases cash• E.g. Purchase of Inventory for cash

• Decrease in current asset increases cash• E.g. Collections of Accounts Receivable

• Decrease in a current liability decreases cash• E.g. Payment of Accounts Payable

• Increase in a current liability increases cash• E.g.Non-Cash Expense (Accrued Expense)

Decrease in Current AssetsIncreases Cash

•If Accounts Receivable decreases that means we collected Cash

• That cash needs to be added back to Net Income

•If Inventory, Supplies or other current assets decrease that means we debited an expense but did not credit Cash

• So we add back those decreases to Net Income

The Indirect Method:Operating Activities

Positive ItemsNet incomeDepreciation/amortizationLoss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilities

Negative ItemsNet lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities

The Indirect Method:Investing Activities

Positive ItemsSale of plant assetsSale of investments that are not cash equivalentsCollections of loans receivable

Negative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others

The Indirect Method:Financing Activities

Positive ItemsIssuing stockSelling treasury stockBorrowing money

Negative ItemsPayment of dividendsPurchase of treasury stockPayment of principal amounts of debts

Proforma Of CFS

C.F.O.A. $ XXX

C.F.F.A. $ XXX

C.F.I.A. $ XXX

Total $ XXX

+/(-) Extraordinary special items $ XXX

ADD: Opening C.C.E.$ XXX

Closing C.C.E.$ XXX