CASH FLOW STATEMENT

D S Prasad

CASH PAID TO SUPLLIERS AND EMPLOYEES

• Cash paid to suppliers for purchase of materials and for services, including suppliers of insurance, advertising and the like and to employees for services.

• Cash paid to suppliers and employees is calculated by adjusting cost of goods sold and expenses on the profit and loss account for the change in inventory, bills payable, creditors, and pre-paid expenses and for non-cash expenses.

COGS

• Sales--------------------------------- $100,000 • Cost of Goods Sold• Inventory 01/01/03-- $ 5,000 • Purchases------------ 45,000 • Direct Labor--------- 30,000 _______ 80,000 • Less: Inventory 12/31/03----- 10,000 • Net Cost of Goods Sold---------------- 70,000

Gross Profit on Sales------------------ $30,000

Cost of Goods Sold

• COGS must be adjusted for the change in inventory to arrive at purchases.

• In financial accounting, cost of goods sold (COGS) or cost of sales includes the direct costs attributable to the production of the goods sold by a company.

• This amount includes the materials cost used in creating the goods along with the direct labour costs used to produce the good.

• It excludes indirect expenses such as distribution costs and sales force costs.

• COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin.

The cost of goods attributed to a company's products is expensed as the company sells these goods.

• There are several ways to calculate COGS but one of the basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period, and then deducting the ending inventory.

• This calculation gives the total amount of inventory (the cost of this inventory) sold by the company during the period.

• Therefore, if a company starts with $10 million in inventory, makes $2m in purchases and ends the period with $9m in inventory, the company's cost of goods for the period would be $3m ($10m + $2m - $9m).

Cash Paid For Inventory

• Cost of Goods Sold• + End Inventory• - Beginning Inventory• = Purchases• + Beg A/P• - End A/P• = Cash paid for inventory

• If the COGS in the current period is more than the purchases, then there will be a decrease in inventory, and if the COGS is less than purchases, there will be an increase in inventory.

• If the credit purchases are more than cash paid to suppliers , then there will be an increase in creditors or bills payable and vice versa.

Cash payment for services differs from expenses appearing in the profit and loss account.

• Adjustment must be made for the changes in prepaid expenses and for non-cash expenses.

• If expenses on the profit and loss account are more than cash payments, then there will be a decrease in prepaid expenses, and if expenses, and if expenses are less than cash payments , there will be an increase in prepaid expenses.

• Expenses like depreciation do not entail a cash payment in the current period , must not be considered for calculating expenses paid in cash.

Cash paid to Suppliers and Employees

• = COGS+S&A EXP – Dep exp(1) –Bad debts (2) expense +inc(-dec) in inventories+ inc(-dec) in pre-paid expenses _dec(-inc) in Creditors +dec(-inc) in B/P.

• (1) if included in COGS• (2) if included in S&A

Cash Paid for Income Taxes

• Income Tax Exp• + Beg tax payable• - End tax payable• = Cash paid for income Taxes

Cash Paid for Interest

• Interest Exp• + Beg interest payable• - End interest payable• = Cash paid for interest

Cash Received from dividends and interest

• Dividend and Interest Income• + Beg interest receivable• - End interest receivable• = Cash Received from dividends and interest

Ways to Check Your Work

• Indirect and Direct methods must equal each other• Net cash flow added to beginning cash balance must

equal ending cash balance (Marketable securities are most often included as part of these cash balances.)

• In template must account for every change in B/S accounts and every item on income statement (some noncash items are adjusted out or not included in cash flow calculations)