The Statement of Cash Flows Cash, liquidity, and the cash flow cycle The cash flow statement preparing a cash flow statement –It’s as easy as 1,2,3

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<ul><li><p>The Statement of Cash FlowsCash, liquidity, and the cash flow cycleThe cash flow statementpreparing a cash flow statementIts as easy as 1,2,3</p></li><li><p>Cash and LiquidityCash includes highly liquid marketable securities.These are items that can be converted to cash quickly without loss of value. ( Treasury bills, notes, negotiable CDs, and commercial paper.)Liquidity refers to a firms ability to meet financial obligations when due, and the ability to fund investment opportunities. </p><p>A firms cash flow cycle significantly impacts its liquidity.</p></li><li><p>The Cash Flow CycleThe movement of cash through fixed assets and inventory, into accounts receivable, and finally back to cash.</p><p>Factors affecting the cash flow cycleinventory turnover, collection period, payable period</p></li><li><p>THE CASH CONVERSION CYCLE</p><p> + A/R Period + Inventory Period - A/P Period = Cash Conversion Period</p><p>The length of time between when we pay cash for inventory and collect cash from our customers</p><p> A/R Cash Sale InventoryLabor Assets, Taxes, Profits...</p></li><li><p>The Statement of Cash FlowsFocuses on the liquidity of a business, by measuring cash inflows and outflows. Shows where money comes from and where it goesThree components of cash flow statement:+/- Operating Cash Flows+/- Investing Cash Flows+/- Financing Cash Flows </p></li><li><p> The Cash Flow Statement</p><p>- Operating Activities- Investing Activities - Financing Activities </p><p>Cash flow from operations:Net Income $ 1,000 Depreciation 500 Decrease in Accounts Rec. 100 Increase in Inventory (1,200) Increase in Accounts Payable 600 Decrease in Accruals (100)Operating cash flow 900Cash flow from investing activities: Purchase Plan &amp; Equipment (2,000)Investing cash flow (2,000)Cash flow from financing activities: Increase in Long-term Debt 1,200 Sale of Common Stock 800 Dividends (500)Financing cash flow 1,500 Change in cash 400 Beginning cash 1,000 Ending cash 1,400 </p></li><li><p>Operating ActivitiesInflows:Sale of goodsRevenue from servicesInterest incomeOutflows:Pay wagesPurchase inventoryPay other expensesPay interestPay taxes</p></li><li><p>Investing ActivitiesInflows:Sale of fixed assetsSale of investment securities</p><p>Outflows:Purchase of fixed assetsPurchase of investment securities</p></li><li><p>Financing ActivitiesInflows:New loansSale of stockOutflows:Repayment of loansRepurchase of a firms own securities (treasury stock)Payment of dividends</p></li><li><p>Preparing a Cash Flow Statement(Three easy steps!)1.Calculate the change in all balance sheet accounts.Identify whether the changes result in increases or decreases in cash flows.Identify the source of the changes: operating, investing, or financing activities.Note: Some changes involve multiple activities.</p></li><li><p>Use the balance sheet to explain the change in cash!The balance sheet or accounting equation:A = L + ESince the accounting equation must remain in balance:A = L + E The change in cash can be written as:cash = L + E - (non-cash assets) </p></li><li><p>The change in cash:The change in cash can be explained in terms of all other balance sheet accounts:cash = L + E - (non-cash assets) </p></li><li><p>CASH FLOW RULES Asset Increase=UseAsset Decrease=SourceLiability Increase= SourceLiability Decrease=Use</p></li><li><p>BUILDING THE STATEMENT OF CASH FLOWS Belfry CompanyBalance SheetFor the Period Ended 12/31/00</p><p>ASSETS12/31/99 12/31/00</p><p>Cash $1,000 $1,400Accts. Receivable 3,000 2,900Inventory 2,000 3,200CURRENT ASSETS $6,000 $7,500</p><p>Fixed AssetsPlant &amp; Equip. $4,000 $6,000 Accum. Depr. (1,000) (1,500)Net $3,000 $4,500</p><p>TOTAL ASSETS $9,000 $12,000LIABILITIES 12/31/99 12/31/00</p><p>Accts. Payable $1,500 $2,100Accruals 500 400CURRENT LIABIL. $2,000 $2,500</p><p>Long-term debt $5,000 $6,200</p><p>Common Stock 500 1,300Retained Earn 1,500 2,000TOTAL EQUITY $2,000 $3,300</p><p>TOTAL LIABILITIES AND EQUITY $9,000 $12,000</p><p>Slide 8 of 9 </p></li><li><p>The change in Retained EarningsBeginning RE$1,500+ Net Income 1,000- Dividends - 500 Ending RE $2,000</p></li><li><p>BUILDING THE STATEMENT OF CASH FLOWSBelfry CompanyIncome Statement For the Period Ended 12/31/00</p><p>Sales$10,000COGS 6,000Gross Margin$ 4,000</p><p>Expense$ 1,600Depreciation 500EBIT$ 1,900Interest 400EBT$ 1,500Tax 500Net Income$ 1,000</p></li><li><p> The Cash Flow Statement</p><p>- Operating Activities- Investing Activities - Financing Activities </p><p>Cash flow from operations:Net Income $ 1,000 Depreciation 500 Decrease in Accounts Rec. 100 Increase in Inventory (1,200) Increase in Accounts Payable 600 Decrease in Accruals (100)Operating cash flow 900Cash flow from investing activities: Purchase Plan &amp; Equipment (2,000)Investing cash flow (2,000)Cash flow from financing activities: Increase in Long-term Debt 1,200 Sale of Common Stock 800 Dividends (500)Financing cash flow 1,500 Change in cash 400 Beginning cash 1,000 Ending cash 1,400 </p></li><li><p>CASH COVERAGE A variation on TIE to better get at cash flow</p><p> Slide 2 of 3</p></li><li><p>FIXED CHARGE COVERAGE A variation on TIE to include lease payments as fixed financial charges equivalent to interest</p><p> Interpretation: Failure from excessive debt is due to the inability to pay interest (fixed) charges which depend on the amount of debt and the interest rate. Coverage ratios measure financial charges relative to available income. </p><p> Slide 3 of 3</p></li></ul>