Statement of Cash Flows Provides liquidity information about a firm. Broken down by firm activity areas: Operating: normal business cash flows Investing: cash flows from collecting loans, buying or selling investments, and buying or selling property, plant, and equipment Financing: cash flows to/from creditors (debt) or owners (equity)

Statement of Cash Flows To prepare the statement:

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations.

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. (Note: The following method is called the indirect method. It is the most commonly used and intuitive method.)

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. Net Income NCF from Ops =

Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. NCF from Ops =

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. If non-cash Assets decrease then we sold them or used them, which provides or saves cash. Therefore, we add any decrease amount to Net Income. NCF from Ops = Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. Similarly, if non-cash Asset accounts increase then we must have paid out some cash for asset purchases. Therefore, we subtract any increase amount from Net Income. NCF from Ops = Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. + Increase in Payable accounts (or) - Decrease in Payable accounts NCF from Ops = Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. If Payable accounts increase then we avoided having to pay cash (we made purchases on credit). Therefore, we add any increase amount to Net Income. NCF from Ops = + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. Similarly, if Payable accounts decrease then we had to pay out cash to our creditors (to settle up our debts). Therefore, we subtract any decrease amount from Net Income. NCF from Ops = + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. + Non-cash write-downs to Net Income NCF from Ops = + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. We need to add back depreciation expense, and amortization of intangibles, since these reduced net income, yet did not require a cash outflow. NCF from Ops = + Non-cash write-downs to Net Income + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. NCF from Ops = + Asset Sales losses (or) - Asset Sales gains + Non-cash write-downs to Net Income + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. Losses reduce Net Income without any cash outflow. So, we need to add back the amount of any loss. NCF from Ops = + Asset Sales losses (or) - Asset Sales gains + Non-cash write-downs to Net Income + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. Similarly, gains increase Net Income without any cash inflow. So, we need to subtract the amount of any gain. NCF from Ops = + Asset Sales losses (or) - Asset Sales gains + Non-cash write-downs to Net Income + Increase in Payable accounts (or) - Decrease in Payable accounts Net Income+ Decrease in current non-cash Asset accounts (or) - Increase in current non-cash Asset accounts

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. 2.Compute net cash flows from investing.

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. 2.Compute net cash flows from investing. 3.Compute net cash flows from financing.

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. 2.Compute net cash flows from investing. 3.Compute net cash flows from financing. 4.Determine net change in cash flows for the period.

Statement of Cash Flows To prepare the statement: 1.Compute net cash flows from operations. 2.Compute net cash flows from investing. 3.Compute net cash flows from financing. 4.Determine net change in cash flows for the period. 5.Reconcile with beginning and ending cash balances on the balance sheet.

Statement of Cash Flows Example: Paterno Corp. had net income of $500,000 and the following balance sheet information: AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000 Accts. Pay.$20,000$35,000 Inventory$130,000$125,000 Building*$800,000 * Depreciates Straight-Line over 40 years. Paterno also received $250,000 from stock sales, and paid $100,000 to extinguish long-term debt.

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 Side note: Because this relates to Property, Plant, and Equipment, any non-zero change here would be due to investing, and not operating activity.

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000 – 20,000

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000 – 20, ,000

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000 – 20, , ,000

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000 – 20, , , ,000 Building Depreciation = $800,000 / 40 yrs = $20,000

Statement of Cash Flows First, compute NCF from Operations. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0 NCF Ops = $500,000 – 20, , , ,000 = $520,000

Statement of Cash Flows Next, compute NCF from Investing. None for the year.

Statement of Cash Flows Next, compute NCF from Financing. NCF Financing = $250,000 – 100,000 = $150,000 Stock sales inflows Debt payment outflows

Statement of Cash Flows Finally, compute total Net Cash Flows NCF Operations + NCF Investing + NCF Financing = $520, $150,000 = $670,000

Statement of Cash Flows Finally, compute total Net Cash Flows NCF Operations + NCF Investing + NCF Financing = $520, $150,000 = $670,000 Which reconciles with the cash balances on the balance sheet. AccountBeg. Balance Ending Balance ChangeIncrease or Decrease Cash$200,000$870,000$670,000 Accts. Rec.$90,000$110,000$20,000Increase Accts. Pay.$20,000$35,000$15,000Increase Inventory$130,000$125,000$5,000Decrease Building*$800,000 0