statement of cash flows

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entrepreneurship, business, cash flows, assets The statement of cash flows tells you how much cash went into and out of a company during a specific time frame like a quarter or a year. In other words, it shows how much cash a company is generating from one period to the next--and cash is what matters most. A cash flow statement summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets. A statement a cash flows reveals the movements of cash of a business enterprise for the given accounting period indicating specifically how the cash was generated. Statement of cash flow is required for short range financial planning.

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Statement of Cash FlowsJullenette ArtetaWhat is Cash?Cash on handCash in the bankCash equivalents - highly liquid, short-term investments that can be converted into cash with little delayMoney-market investmentsPhilippine Govt.Treasury bills

22Statement of Cash FlowsReports the entitys cash flows (cash receipts and cash payments) during a specific period

Summarizes cause of changes in cash position

33Statement of Cash FlowsReveals movement of cash indicating specifically how cash was generatedstrips out all the abstract, noncash revenues and expenses that are included in the income statementAccrual accounting

4

Income statement

BS at start Cash flow BS at end

A cash flow statement reflects both profit related and non-profit related activities (investing and financing) with an impact on available cash over the period covered in the income statement6Purposes of CFSPredict future cash flowsEvaluate management decisionsDetermine the ability to pay dividends to stockholders and payments to creditorsShow the relationship of net income to the businesss cash flows77Statement of Cash FlowsSections8Operating, Investing, and Financing ActivitiesOperating activities create revenues, expenses, gains, and losses.

Investing activities increase and decrease long-term assets.

Financing activities obtain cash from investors and creditors.99Two Formats forOperating ActivitiesIndirect 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.

1010Two Formats forOperating ActivitiesIndirect MethodNet incomePXXXAdjustments:Depreciation, etc. XXXNet income provided by operating activitiesPXXXDirect MethodCollection from customersPXXXDeductions:Payment to suppliers, etc. XXXNet income provided by operating activitiesXXX111112Operating ActivitiesIndirect MethodCash flows from operating activities:Net incomeAdjustments 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 liabilitiesNet cash provided by operating activitiesInvesting Activities1213Depreciation, Depletion, Amortization

Depreciation, Depletion and Amortization are not Cash transactions, thusAre ADDED back to Net Income.1314Gain or Loss fromLong-Term AssetsChanges to Long-term AssetsPurchase or SaleEffect Cash They appear in the Investing SectionBut... When Sold Are Reported on the Income StatementThus, we need to reverse their effectAdd back the LossSubtract out the Gain1415Long-Term Assets

1516Operating Activities fromIndirect MethodChanges in current assets and current liability accountsIncrease in another current asset decreases cashPurchase of Inventory for cashDecrease in another current asset increases cashCollections of Accounts ReceivableDecrease in a current liability decreases cashPayment of Accounts PayableIncrease in a current liability increases cashNon-Cash Expense (Accrued Expense)1617Increase in Current AssetsDecreases Cash

So $2,500 in Sales are NOT cashAny increase in Current Assets either uses cashIncrease InventoryDecrease CashOr is increased by a non-cash transactionAccounts Receivable1718Decrease in Current AssetsIncreases CashIf A/R decreases that means we collected CashThat cash needs to be added back to Net IncomeIf Inventory, Supplies or other current assets decrease that means we debited an expense but did not credit CashSo we add back those decreases to Net Income1819Decrease in Current LiabilitiesDecreases CashHow is Accounts Payable decreased?Debit Accounts Payable $1,000Credit Cash $1,000Same for all other Payables1920Increase in Current LiabilitiesIncreases Cash

When Payables IncreaseThey create an ExpenseBut the expense is a non-cash expenseSo, Add back to Net Income2021The Indirect Method:Operating ActivitiesPositive ItemsNet incomeDepreciation/amortizationLoss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilitiesNegative ItemsNet lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities2122The Indirect Method:Investing ActivitiesPositive ItemsSale of plant assetsSale of investments that are not cash equivalentsCollections of loans receivableNegative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others2223The Indirect Method:Financing ActivitiesPositive ItemsIssuing stockSelling treasury stockBorrowing moneyNegative ItemsPayment of dividendsPurchase of treasury stockPayment of principal amounts of debts23Cash Flow StatementExamples

242425Comparative Balance SheetsAssetsCurrent: Cash Accounts receivable Interest receivable Inventory Prepaid expensesLong-term receivablePlant assets, net Total$ 22 93 3 135 8 11 453$725$ 42 80 1 138 7 219$487$ (20) 13 2 (3) 1 11 234$238(In thousands)20x220x1Inc/dec)Anchor Corporation December 3126Comparative Balance SheetsLiabilitiesCurrent: Accounts payable Salary payable Accrued liabilitiesLong-term debtStockholders equityCommon stockRetained earnings Total$91 34 1 160

359 110$725$ 5763 77

258 86$487$ 34 (2) (2) 83

101 24$238(In thousands)20x220x1Inc/dec)Anchor Corporation December 3127Income StatementRevenues and gains:Sales revenue$284Interest revenue 12Dividend revenue 9Gain on sale of plant assets 8Total revenues and gains$313Anchor CorporationYear Ended December 31, 20x2 (In thousands)28Expenses:Cost of goods sold$150Salary and wage expense56Depreciation expense18Other operating expense17Interest expense16Income tax expense15Total expenses$272Income StatementAnchor CorporationYear Ended December 31, 20x2 (In thousands)29Total revenues and gains$313Total expenses 272Net income$ 41Income StatementAnchor CorporationYear Ended December 31, 20x2 (In thousands)30Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)Cash flows from operating activities:Net Income $41Adjustments to reconcile net income tonet cash provided by operating activities:ADepreciation18BGain on sale of plant(8)Statement of Cash Flows:Operating ActivitiesDepreciation does not affect cash, but it decreases net income add it back in.Sales of long-term assets are investingActivities remove gains from net income. 31CIncrease in accounts receivable(13)CIncrease in interest receivable(2)CDecrease in inventory3CIncrease in prepaid expenses(1)CIncrease in accounts payable34CDecrease is salary payable(2)CDecrease in accrued liabilities (2) 27Net cash provided by operating activities$68Statement of Cash Flows: Operating ActivitiesStatement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)32Changes in Current Asset and Current Liability Accounts 1. An increase in a current asset other than cash indicates a decrease in cash.2. A decrease in a current asset other than cash indicates an increase in cash.3. A decrease in a current liability indicates a decrease in cash.4. An increase in a current liability indicates an increase in cash.33Statement of Cash Flows:Investing ActivitiesCash flows from investing activities:Acquisition of plant assets$(306)Loan to another company(11)Proceeds from sale of plant assets 62 Net cash used for investing activities$(255)Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)34Statement of Cash Flows:Financing ActivitiesCash flows from financing activities:Proceeds from issuance of common stock$101Proceeds from issuance of long-term debt94Payment of long-term debt(11)Payment of dividends (17) Net cash provided by financing activities$167Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)35Statement of Cash FlowsNet cash provided by operating activities$ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash$ (20)Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2$ 22Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)36Noncash Investing andFinancing ActivitiesSuppose Anchor Corporation issued Common stock valued at $300,000 to acquire a warehouse.Warehouse Building300,000Common Stock300,000Noncash Investing andFinancing ActivitiesNoncash Investing and Financing Activities:Acquisition of building by issuing common stock$300Acquisition of land by issuing note payable 70Payment of long-term debt by issuing common stock100Total noncash investing and financing activities$47037References:Cash Flows. Accessed at : http://news.morningstar.com/classroom2/course.asp?docId=145092&page=2&CN=. Date accessed: 1/13/13 Quintana, Olga. 2002. Statements of Cash Flows, Financial Accounting 5/e. University of Miami. Accessed at: financialaccounting.wikispaces.com. Date accessed: 1/16/13.

SERDEF. 1997. Introduction to Entrepreneurship. Revised Edition 1997. U.P. Institute for small-scale industries. Pp296, 299, 17:304-308.38Sheet1Sales$10,000CGS3500Gross Profit6500Depreciation4000Net Income$2,500

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Sheet1Sales$10,000CGS3,500Gross Profit6,500Loss on Sale of Equipment575Depreciation4,000Net Income$1,925Entry for Sale of Equipment:DebitCreditCash4,500A/D - Depreication1,500Loss on Sale575Equipment6,575

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Sheet1Sales$10,000CGS3,500Gross Profit6,500Loss on Sale of Equipment575Depreciation4,000Net Income$1,925Sales Journal Entries:DebitCreditCash7,500Sales7,500Accounts Receivable2,500Sales2500

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Sheet1Sales$10,000CGS3,500Gross Profit6,500Salary Expense1,000Loss on Sale of Equipment575Depreciation4,000Net Income$925Salary Expense Journal Entries:DebitCreditSalary Expense875Cash875Salary Expense125Salary Payable125

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