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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    Md Nazmul Hasan(UITS)

    Statement of Cash Flows

    Provides information about cash inflowsand outflows during an accounting period

    Can be developed from Balance Sheetand Income Statement data

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    Statement of Cash Flows

    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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    Preparing aStatement of Cash Flows

    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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    Preparing aStatement of Cash Flows

    Operating Activities Examples-

    Cash flows resulting from sales of goods

    Purchase of inventories,

    Payment of operating expenses

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    Preparing aStatement of Cash Flows

    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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    Preparing aStatement of Cash Flows

    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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    Preparing aStatement of Cash Flows Continued

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

    First Step:

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    Preparing aStatement of Cash Flows Continued

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

    Next Step:

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    Preparing aStatement of Cash Flows Continued

    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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    Md Nazmul Hasan(UITS)

    Preparing a cash flow statement

    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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    Preparing a cash flow statement

    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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    Md Nazmul Hasan(UITS)

    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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