Cash Flow Statement Dr. Craig Ruff Department of Finance J. Mack Robinson College of Business Georgia State University © 2014 Craig Ruff

Produced 30,000 packages to sell -$120,000 Remember Derrick? In last video, we had this simple way of analyzing Derrick’s cash flow change from Jan 30th to Feb 30th. Starting Cash (Feb 1) $240,000 Produced 30,000 packages to sell -$120,000 Produced 10,000 packages to add into inventory -$40,000 Cash In $100,000 Ending Cash (Feb 30) $180,000 © 2014 Craig Ruff

Remember Derrick? Now lets link this change in the cash to Derrick’s February ‘income statement’… Starting Cash (Feb 1) $240,000 Produced 30,000 packages to sell -$120,000 Produced 10,000 packages to add into inventory -$40,000 Cash In $100,000 Ending Cash (Feb 30) $180,000 Sales 150,000 COGS -120,000 “Income” 30,000 © 2014 Craig Ruff

Now bring in Derrick’s February ‘income statement’… Remember Derrick? Now bring in Derrick’s February ‘income statement’… Starting Cash (Feb 1) $240,000 Produced 30,000 packages to sell -$120,000 Produced 10,000 packages to add into inventory -$40,000 Cash In $100,000 Ending Cash (Feb 30) $180,000 That $120,000 is reflected there… Sales 150,000 COGS -120,000 “Income” 30,000 © 2014 Craig Ruff

Now bring in Derrick’s February ‘income statement’… Remember Derrick? Now bring in Derrick’s February ‘income statement’… Starting Cash (Feb 1) $240,000 Produced 30,000 packages to sell -$120,000 Produced 10,000 packages to add into inventory -$40,000 Cash In $100,000 Ending Cash (Feb 30) $180,000 There is a disconnect: only $100,000 of that $150,000 was cash in the door. Sales 150,000 COGS -120,000 “Income” 30,000 © 2014 Craig Ruff

Now bring in Derrick’s February ‘income statement’… Remember Derrick? Now bring in Derrick’s February ‘income statement’… The income statement does not reflect this increase in inventory, as that was just a balance sheet effect. The cost of inventory does not go to the income statement until it is sold and subtracted through the cost of goods sold. Starting Cash (Feb 1) $240,000 Produced 30,000 packages to sell -$120,000 Produced 10,000 packages to add into inventory -$40,000 Cash In $100,000 Ending Cash (Feb 30) $180,000 Sales 150,000 COGS -120,000 “Income” 30,000 © 2014 Craig Ruff

For reference, here is the January 30th balance sheet… Balance Sheet: January 30 Cash 240,000 Common Stock 400,000 A/R 100,000 Retained Earnings 20,000 Total Liab. 420,000 And Equity Inv. 80,000 Total 420,000 Assets © 2014 Craig Ruff

For reference, here is the February 30th balance sheet… Balance Sheet: February 30 Cash 180,000 Common Stock 400,000 A/R 150,000 Retained Earnings 50,000 Total Liab. 450,000 And Equity Inv. 120,000 Total 450,000 Assets © 2014 Craig Ruff

Think about how the indirect cash flow statement will pick this up. Income $30,000 Increase in AR from Jan 30 to Feb 30 -$50,000 Increase in Inventory from Jan 30 to Feb 30 -$40,000 SUM -$60,000 © 2014 Craig Ruff

Compare the cash flow statement to the actual change in cash… Income $30,000 Increase in AR from Jan 30 to Feb 30 -$50,000 Increase in Inventory from Jan 30 to Feb 30 -$40,000 SUM -$60,000 Cash on Jan 30 $240,000 Cash on Feb 30 $180,000 Actual Change -$60,000 AR and inventory are operational accounts. The actual change in cash is easy to calculate. The cash flow statement is designed to tell a story. © 2014 Craig Ruff

A more complicated (and comprehensive) example…   2010 2011 Cash $1,000 $1,800 Account receivable $5,200 $4,200 Inventory $12,400 $13,500 Total current assets $18,600 $19,500 Gross fixed assets $64,600 $74,800 (Accumulated depreciation) ($10,200) ($11,300) Net fixed assets $54,400 $63,500 Total assets $73,000 $83,000 Notes payable $1,400 Accounts payable $1,700 $3,100 Accruals $900 $600 Total current liabilities $3,600 $5,100 Long-term debt $23,800 $27,900 Common stock at par $7,000 $8,000 Additional paid in capital $18,200 $19,000 Retained earnings $20,400 $23,000 Total liabilities and equity Additional Data from 2011 Income Statement:   Sales in 2011 $238,000 Net income in 2011 $9,000 © 2014 Craig Ruff

NIDD Cash Flow from Operations Cash Flow from Investing Cash Flow from Financing © 2014 Craig Ruff

NIDD Cash Flow from Operations Net Income $9,000 Additional Data from 2011 Income Statement:   Sales in 2011 $238,000 Net income in 2011 $9,000 Cash Flow from Operations NIDD   2010 2011 Cash $1,000 $1,800 Account receivable $5,200 $4,200 Inventory $12,400 $13,500 Total current assets $18,600 $19,500 Gross fixed assets $64,600 $74,800 (Accumulated depreciation) ($10,200) ($11,300) Net fixed assets $54,400 $63,500 Total assets $73,000 $83,000 Notes payable $1,400 Accounts payable $1,700 $3,100 Accruals $900 $600 Total current liabilities $3,600 $5,100 Long-term debt $23,800 $27,900 Common stock at par $7,000 $8,000 Additional paid in capital $18,200 $19,000 Retained earnings $20,400 $23,000 Total liabilities and equity Net Income $9,000 Depreciation Expense $1,100 Accts. Rec $1,000 Inventory -$1,100 Accts. Pay $1,400 Accruals -$300 OPERATIONS $11,100

Cash Flow from Investing Additional Data from 2011 Income Statement:   Sales in 2011 $238,000 Net income in 2011 $9,000 Cash Flow from Investing   2010 2011 Cash $1,000 $1,800 Account receivable $5,200 $4,200 Inventory $12,400 $13,500 Total current assets $18,600 $19,500 Gross fixed assets $64,600 $74,800 (Accumulated depreciation) ($10,200) ($11,300) Net fixed assets $54,400 $63,500 Total assets $73,000 $83,000 Notes payable $1,400 Accounts payable $1,700 $3,100 Accruals $900 $600 Total current liabilities $3,600 $5,100 Long-term debt $23,800 $27,900 Common stock at par $7,000 $8,000 Additional paid in capital $18,200 $19,000 Retained earnings $20,400 $23,000 Total liabilities and equity Gross Fixed -$10,200 INVESTING -$10,200

NIDD Cash Flow from Financing Notes Payable $400 Long Term Debt $4,100 Additional Data from 2011 Income Statement:   Sales in 2011 $238,000 Net income in 2011 $9,000 Cash Flow from Financing   2010 2011 Cash $1,000 $1,800 Account receivable $5,200 $4,200 Inventory $12,400 $13,500 Total current assets $18,600 $19,500 Gross fixed assets $64,600 $74,800 (Accumulated depreciation) ($10,200) ($11,300) Net fixed assets $54,400 $63,500 Total assets $73,000 $83,000 Notes payable $1,400 Accounts payable $1,700 $3,100 Accruals $900 $600 Total current liabilities $3,600 $5,100 Long-term debt $23,800 $27,900 Common stock at par $7,000 $8,000 Additional paid in capital $18,200 $19,000 Retained earnings $20,400 $23,000 Total liabilities and equity Notes Payable $400 Long Term Debt $4,100 NIDD Common Stock at Par $1,000 Addt. Pd. in Capital $800 Dividends -$6,400 FINANCING -$100

Cash Flow from Operations Cash Flow from Investing INVESTING -$10,200 Cash Flow from Financing FINANCING -$100 SUM $800 Compare to actual change in cash: $1,800 - $1,000 = $800 It is the story. © 2014 Craig Ruff

End © 2014 Craig Ruff