Download - Statement of Cash Flows.ppt

7/29/2019 Statement of Cash Flows.ppt

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Md Nazmul Hasan(UITS)

Statement of Cash Flows

Why is it important???A positive net income on the income

statement is ultimately insignificant unless

a company can translate its earnings intocash, and the only source in financialstatement data for learning about the

generation of cash from operations is thestatement of cash flows


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Statement of Cash FlowsPurpose of the statement-

The companys ability to generate cash flowsfor future period.

The companys ability to meet its obligation and

to pay dividends.The companys need for external finance

Is an important analytical tool for creditors, investorsand other users of financial statement data


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Provides information about cash inflowsand outflows during an accounting period

Can be developed from Balance Sheetand Income Statement data


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Objectives of the Chapter

To explain how the statement of cash flows is

prepared

To interpret the information presented in the

statement


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Preparing aStatement of Cash Flows

Begins with a return to the balance sheet

Is prepared by calculating changes in allof the balance sheet accounts

Parts of a statement of cash flows:

1. Operating activities

2. Investing activities

3. Financing activities


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Operating Activities include-

Delivering or producing goods for sale andproviding services

The cash effects of transactions and other

events that enter into the determination ofincome


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Operating Activities Examples-

Cash flows resulting from sales of goods

Purchase of inventories,

Payment of operating expenses


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Investing Activities include-

Acquiring/disposing of securities that arenot cash equivalents

Acquiring/disposing of productive assets

Lending money/collecting on loans


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Financing Activities include-

Borrowing from creditors/repaying theprincipal

Obtaining resources from owners

Providing owners with a return oninvestment


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Preparing aStatement of Cash Flows Continued

How Cash Flows During an Accounting Period

Total Inflows less Total Outflows =

Change in cash for the accounting period

Operating Activities

Investing Activities

Financing Activities

Inflows Outflows


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Look at changes in balance sheetaccounts from beginning to end ofaccounting period

First Step:


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Transfer the account changes to theappropriate area of a statement ofcash flows

Next Step:


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Inflow Outflow

- Asset account + Asset account+ Liability account - Liability account

+ Equity account - Equity account


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Calculating Cash Flow fromOperating Activities

Direct MethodIndirect Method

Firms may use one of two methods

prescribed by the FASB:


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Calculating Cash Flow fromOperating Activities Continued

Shows cash collections from customers,interest and dividends collected, otheroperating cash receipts, cash paid to

suppliers and employees, interest paid,taxes paid and other operating cashpayments

The Direct Method


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Calculating Cash Flow fromOperating Activities Continued

Starts with net income and adjusts fordeferrals; accruals; noncash items,such as depreciation and amortization;

and nonoperating items, such as gainsand losses on asset sales

The Indirect Method


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Analyzing theStatement of Cash Flows Cont.

Firms ability to generate cash flows in

the future

Firms capacity to meet cash

obligations

Firms future external financing needs

Indicates


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Analyzing theStatement of Cash Flows Cont.

Firms success in productively managing

investing activities Firms effectiveness in implementing

financing and investing strategies

Indicates


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Cash Flow from OperationsContinued

The ongoing operation of any business

depends upon its success in generatingcash from operations


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Analysis of Cash Inflows Cont.

When analyzing the cash outflows, theanalyst should consider the necessityof the outflow and how the outflow wasfinanced


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Preparing a cash flow statement

CF from Operating activitiesNet IncomeAdd Depreciation

Adjust for Non-Cash Changes in Current

Accounts Subtract increase in net accounts receivable Subtract increase in inventory Subtract increase in prepaid expenses Add increase in accounts payable Add increase in miscellaneous expenses payable Add increase in taxes payable Add Loss on Sale of Assets Subtract Gain on Sales of Assets


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CF from Investing activities

Add cash received from

Sale of Investments Sales of PP&E

Less cash paid for

Acquisition of Investments Acquisition of PP&E


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CF from Financing activities

Add cash from

Debt issues

Capital stock issues

Less cash paid for

Debt repayment

Dividends

Repurchase of stock


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Example of Cash Flow Statement:Auto Supply CompanyComparative Balance Sheets

Assets 2001 2002 ChangesCash $50,000 $45000Marketable Securities 40,000 25,000 (15,000)Accounts Receivables 320,000 330,000 10,000Inventory 240,000 235,000 (5,000)Plant Asset 700,000 800,000 100,000

Accumulated Depreciation (100,000) (160,000) 60,000Totals $1,250,000 $1,275,000Liabilities and SE

Accounts Payables $150,000 $160,000 10,000Accrued Expense Payables 60,000 45,000 (15,000)Mortgage Note Payable (Long Term) -- 70,000 70,000Bonds Payables 500,000 350,000 (150,000)Capital Stock 160,000 160,000 -Retained Earnings 380,000 490,000 110,000Totals $1,250,000 $1,275,000


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Statement of Cash FlowAdditional Info:Net Income for the company is $55,000,

Dividend Paid on December $15,000

Company purchase plant assets for $100,000 making $30,000cash paid and rest payment by issuing a mortgage payables.


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Statement of Cash FlowsFor the year ended December 31, 2002.

Cash Flow from operating Activities:Net Income 55,000

Add Depreciation 60,000 115,000Changes in Assets and Liabilities:Add decrease in Inventory 5,000Add increase in A/P 10,000Deduct increase in A/R -10,000

Add decrease in Marketable Securities 15,000Deduct Decrease expense payables -15,000 5,000Cash Flow from Investing Activities:Cash Paid to acquire plant assets (30,000)

(30,000)Cash Flow from Financing Activities:

Decrease payment for bonds Payables (150,000)Add Increase Mortgage on Notes Payable 70,000Dividend Payments (15,000)

(95,000)Net Cash Flow ($5,000)Cash Balance at the beginning (2001) 50,000

Cash Balance at the Ending (2001) $45,000

C C


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ABC CorporationComparative Balance SheetsJune 2005, and 2006

Assets 2006 2005

Cash $105,000 $84,000

Accounts Receivable 336,000 168,000Merchandise Inventory 168,000 189,000

Prepaid Expenses 31,500 52,500

Investment in stock 378,000 315,000

Buildings 798,000 588,000

Accumulated Dep- Buildings -126,000 -105,000

Equipment 1,029,000 840,000

Accumulated Dep- Equipment -315,000 -252,000

Total Assets $2,404,500 $2,404,500

Liabilities and Stockholders Equity 2006 2005

Accounts Payable $294,000 $189,000

Accrued Liabilities Payable 42,000 63,000

Five Years Notes Payable 210,000 -

Capital stock 1680,000 1,470,000

Retained Earnings 178,500 157,500

Total Liabilities and Stockholders Equity $2,404,500 $2,404,500

Additional Information:1.Net Income for the Year Ended 2006, $105,000.

2.Dividend Paid $84,000.


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ABC CorporationComparative Balance SheetsJune 2005, and 2006

Assets 2006 2005 Change

Cash $105,000 $84,000 -$21,000

Accounts Receivable 336,000 168,000 168,000

Merchandise Inventory 168,000 189,000 -21,000

Prepaid Expenses 31,500 52,500 -21,000

Investment in stock 378,000 315,000 63,000

Buildings 798,000 588,000 210,000

Accumulated Dep- Buildings -126,000 -105,000 -21,000

Equipment 1,029,000 840,000 189,000

Accumulated Dep- Equipment -315,000 -252,000 -63,000

Total Assets $2,404,500 $2,404,500

Liabilities and Stockholders Equity 2006 2005 Change

Accounts Payable $294,000 $189,000 $105,000

Accrued Liabilities Payable 42,000 63,000 -21,000

Five Years Notes Payable 210,000 - 21,0000

Capital stock 1680,000 1,470,000 210,000

Retained Earnings 178,500 157,500 21,000

Total Liabilities and Stockholders Equity $2,404,500 $2,404,500


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Liability and Owners Equity

Accounts payables $9,000 $15,000

Accrued Liabilities 2,000 0

Common Stock 90,000 60,000

Retained Earnings 36,000 30,000

Total Liability and Owners Equity $137,000 $105,000

Assets 2007 2006

Cash $21,000 $10,000Accounts Receivables, net 30,000 20,000

Merchandise Inventory 26,000 30,000

Plant Assets 70,000 50,000

Accumulated Depreciation -10,000 -5,000

Total Assets $137,000 $105,000

Asian Exim LtdComparative Balance Sheet

Additional Data:Cash Dividend paid totalled $4,000.Prepare Statement of Cash Flow under Indirect Method.

Sales $140,000

Cost of Goods Sold 100,000

Operating Expense 25,000

Interest Expense 5,000

Asian Exim LtdIncome Statement DataFor the year December 31, 2007

Daugherty Company's Statement of Financial Position


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Asset 2008 2007

Cash $ 7,000 $ 21,000

Accounts receivable 71,000 47,000

Inventory 62,000 44,000

Prepaid expenses 2,000 9,000

Long-term investments 310,000 240,000

Plant and equipment 370,000 370,000

Accumulated depreciation (214,000) (186,000)

Total assets $608,000 $545,000Liability & owners Equity 2008 2007

Accounts payable $ 69,000 $ 48,000

Accrued liabilities 2,000 17,000

Taxes payable 28,000 13,000

Bonds payable 140,000 170,000

Deferred taxes 27,000 17,000

Common stock 90,000 70,000

Retained earnings 252,000 210,000

Total liabilities and owners

equity$608,000 $545,000

Daugherty Company s Statement of Financial Position

Income Statement Data 2008

Sales $890,000Cost of goods sold 510,000

Operating expenses 270,000

Income taxes 48,000

Additional Info:Dividend Paid $20,000.Prepare Statement of Cash FlowUnder Indirect Method.

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