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Statement of Cash Flows CHAPTER 8 Statement of Cash Flows

PERFORMANCE OBJECTIVES PO1: Explain purposes of budgets; prepare simple operating budget & simple cash budget PO22: Prepare bank reconciliation & adjustments

USER FOCUS What to look for when analyzing statement of cash flows How to prepare bank reconciliation

INSIGHTS How cash flow provides more complete financial analysis

TOPICS Managing cash effectively: SCORE Significance of cash in business decision making How is cash managed? What is statement of cash flows? What are parts of statement of cash flows: CMU cash flow statement

TOPICS (cont.) How is cash flow from operating activities reported? Corporate examples of statements of cash flows

MANAGING CASH Susan’s business (CMU) 8 months old SCORE Business increasing but still vulnerable SCORE Service Corps of Retired Executives Volunteer organization sponsored by Small Business Administration (SBA) to counsel Poor cash management leads to business failures

GUIDELINES FOR MANAGING CASH Always ask: “How will this decision affect cash? Plan use of cash with cash budget Use cash budget Spend cash only when you must Expect cash inflow to be slow

SIGNIFICANCE OF CASH Cash is financial measure Users can easily understand meaning of change in cash Financial experts recognize importance of cash Cash measures relative liquidity of company’s resources

HOW IS CASH MANAGED? CashBB + Cash Receipts – Cash payments = CashEB Cash budgets Schedule of expected cash receipts & payments Reflects this equation CashBB + Cash Receipts – Cash payments = CashEB *BB is Beginning Balance EB is Ending Balance

CASH BUDGET Cash balance 1/1 + Collections Owner contributions Borrowing Savings interest $62,000 30,000 5,000 500 $0 97,500 - Purchases Rent Salaries & withdrawal Miscellaneous Cash balance 12/31 56,000 11,000 20,000 6,500 93,500 $4,000

CASH BUDGET: Cash Flow from Operating Activities Collections from customers Cash paid for inventory Cash paid for rent Cash paid for salary Miscellaneous cash expenses Interest received Net cash provided by operations $62,000 <40,000> <11,000> <10,000> <6,500> 500 $<5,000>

CASH BUDGET: Cash Flow from Investing Activities Acquisition of equipment Net cash used in investing activities $<16,000>

CASH BUDGET: Cash Flow from Financing Activities Cash contribution of owner Borrowing from line of credit Owner withdrawals Net cash provided by financing $30,000 5,000 <10,000> $25,000

CASH BUDGET: Cash Flows Budget Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase in cash Cash at beginning of year Cash at end of year $<5,000> <16,000> 25,000 4,000 $4,000

INTERNAL CONTROL OF CASH Process to reduce inaccuracy in accounting information system Discourages unethical behavior

INTERNAL CONTROL: CASH Key Features Separate handling, accounting for cash List, deposit cash receipts Owner makes all cash payments Reconcile bank statement

CASH BUDGET: Projected & Actual Operating Cash Flows Actual Projected Collected from customers Cash paid for inventory Cash paid for rent Cash paid for salary Cash paid for miscellaneous Interest received Interest paid Net cash provided (used) $84,200 <27,000> <11,000> <8,000> <4,250> 275 <200> $34,025 $62,000 <40,000> <10,000> <6,500> 500 $<5,000>

CASH BUDGET: Projected & Actual Investing Cash Flows Actual Projected Proceeds, sale equipment Payment security deposit Acquisition of equipment Net cash used in investing activities $1,350 <2,000> <17,000> $<17,650> $0 <16,000> $<16,000>

CASH BUDGET: Projected & Actual Financing Cash Flows Actual Projected Owner Contributions Proceeds from credit line Repayment of credit line Withdrawals by owner Net cash provided by financing activities $30,000 5,000 <5,000> <8,100> $21,900 NA <10,000> $25,000

CASH BUDGET: Projected & Actual Cash Flows Actual Projected Net cash provided (used) by operations Net cash used: investing Net cash provided: financing Net increase in cash Cash 1/1 Cash 12/31 $34,025 <17,650> 21,900 38,275 $38,275 $<5,000> <16,000> 25,000 4,000 $4,000

BANK RECONCILIATION Schedule to show cash on hand Match Balance per bank Balance per books

WHAT IS STATEMENT OF CASH FLOWS? Reports past cash flows Helps users evaluate Ability to produce future cash flows Ability to meet obligations, dividends, finance growth internally Need external financing Differences between net income & cash flows Cash, noncash aspects financing, investing

WHAT ARE CASH FLOWS FROM OPERATIONS? Cash receipts From sale of goods, services From loan, investment income Cash payments To suppliers for inventory, expenses To employees To government (taxes) To lenders

CASH FLOWS FROM OPERATIONS Collected from customers Cash paid for inventory Cash paid for rent Cash paid for salary Cash paid for miscellaneous Interest received Interest paid Net cash provided $84,200 <27,000> <11,000> <8,000> <4,250> 275 <200> $34,025

WHAT ARE CASH FLOWS FROM INVESTING? Cash receipts From sales property, plant, equipment From sale business unit From sale investments From collection of loans Cash payments To acquire property, plant, equipment To acquire business, investments To make loans

CASH FLOWS FROM INVESTING Proceeds, sale equipment Payment security deposit Acquisition of equipment Net cash used in investing activities $1,350 <2,000> <17,000> $<17,650>

WHAT ARE CASH FLOWS FROM FINANCING? Cash receipts From sale capital stock From issuance bonds, mortgages, notes, other borrowings Cash payments To acquire treasury stock To pay dividends To repay borrowings

CASH FLOWS FROM FINANCING Owner Contributions Proceeds from credit line Repayment of credit line Withdrawals by owner Net cash provided by financing activities $30,000 5,000 <5,000> <8,100> $21,900

STATEMENT OF CASH FLOWS Net cash provided by operations Net cash used: investing Net cash provided: financing Net increase in cash Cash 1/1 Cash 12/31 $34,025 <17,650> 21,900 38,275 $38,275

NONCASH INVESTING, FINANCING ACTIVITIES: Example 1 By direct exchange, stock investment for equipment Account Equipment Investment Assets = 200,000 <200,000> Liabilities + Equity Activity Invest

NONCASH INVESTING, FINANCING ACTIVITIES: Example 2 By direct exchange, capital stock to pay liability Account Capital stock Notes payable Assets = Liabilities + <100,000> Equity 100,000 Activity Finance

NONCASH INVESTING, FINANCING ACTIVITIES: Example 3 By direct exchange, land for note payable Account Land Notes payable Assets = 50,000 Liabilities + Equity Activity Invest Finance

CLASSIFYING TRANSACTIONS 1 Description Activity E C2 F&K1 G H Paid security deposit Paid for equipment Borrowed, repaid money Acquired inventory Acquired van Operating Investing Financing

CLASSIFYING TRANSACTIONS 2 Description Activity I J1 J2 L Receiving cash advances Paid for inventory Refinance accounts payable with note payable Direct exchange Operating Investing Financing

CLASSIFYING TRANSACTIONS 3 Description Activity M N O1 Cash sales goods, services Credit sales goods, services Interest revenue earned Operating

CLASSIFYING TRANSACTIONS 4 Description Activity P Q1 R S K2 Paid rent Record depreciation Cash sale equipment Paid salaries Paid interest expense Operating Investing

CLASSIFYING TRANSACTIONS 5 Description Activity T U V W Paid expenses NA Collected cash from accounts receivable Owner cash withdrawal Operating Financing

CLASSIFYING TRANSACTIONS 6 Description Activity A2 O2, X, Y, Q2, Z Owner contribution of inventory Various revenue & expense accounts NA Operating

REPORTING CASH FLOW FROM OPERATING ACTIVITIES Direct method Converts accrual to cash for revenues & expenses Indirect method Adjusts net income for revenues, expenses, gains, losses that do not affect cash

CASH FLOW OPERATIONS: Direct Method Net income + Expenses, losses not using cash Decreases in noncash current assets Increases in noncash current liabilities - Revenues, gains not providing cash Increases in noncash current assets Decreases in noncash current liabilities = Net cash provided by operations

CASH FLOW OPERATIONS: Direct Increases to Net Income + Depreciation, loss Decrease in noncash current assets (none) Increases in noncash current liabilities (accounts, salaries, note payable, deferred revenue) $2,950 9,100 $30,000 $12,050 $42,050

CASH FLOW OPERATIONS: Decreases to Net Income Subtotal of increases Deduct from net income Revenues, gains not providing cash Increases noncash current assets Decreases noncash current liabilities Net cash from operations $0 8,025 $42,050 $34,025

USER FOCUS 8-1: Analyzing Cash Flows What is amount of cash flow from operations? Can company pay bills? Are cash receipts larger than cash payments? Mix of investing, financing related to strength of operations

INSIGHT: Cash Flow Information More Complete Use in combination with ratios for measuring liquidity Helps evaluate cash flows in seasonal business cycles

USER FOCUS 8-2: Bank Reconciliations Balance per bank Adjusted for transactions known to company + Deposits in transit - (Outstanding checks + bank error) Balance per books Adjusted for transactions known to bank + (Recording error + cash collections by bank) - Service charge

CMU Bank Reconciliation Balance per bank + Deposits in transit Outstanding checks Adjusted balance per bank Balance per books + Error -(NSF check + service charge) Adjusted balance per books 620 $28,425 1,885 <310> $30,000 $30,350 270