STATEMENT OF CASH FLOWS Chapter 12

Compare Companies INCOME Company A Company B Sales$500$500 Expenses Net Income$ 75$ 75 CASH Beginning of Year$25$25 End of Year Change in CASH

Cash Activities Company A B Cash Rec’d  Customers$450$350  Sale of PA 5 60  Total $455$410 Cash Paid  To suppliers$380$400  Purch of PA  Purch Invest 5 0 Cash Paid $455$410 Change in Cash

Why Are Cash Flows Important? Cash is what pays the bills. You must sell your product and collect cash from your customers in time to: 1. Pay suppliers for merchandise purchases 2. Pay the bank on any loans (debt) 3. Pay employees their wages 4. Pay taxes 5. Purchase new equipment as needed. Analyzing where a company’s cash is coming from & where it is being spent may assist in detecting future profit potential and/or future financial problems.

NET CASH FLOWS Cash Inflows --Cash Outflows = Net Cash Flows

Two parts of Cash Flow Statement Activities  Operating  Investing  Financing Cash Balance verification Increase (Decrease) in cash Cash at Beginning of Year Cash at End of Year (Balance Sheet)

Cash Flows from Operating Current accounts: current assets, current liabilities 1. Cash received from customer Cash A/R 2. Cash paid to suppliers A/P Cash

Investing Activities Invest in Yourself  Purchase of plant assets ( minus cash) Building Cash -- Sale of plant assets ( plus cash) Cash Building

Investing Activities (2) Investments in Others  Purchase of other company’s stock or bonds  Sale of other company’s stock or bonds  Loaning money to other company (N/R)  Collection of principle payments on loan

Financing 1.Equity ( Your own company)  Issuing shares of stock  Retiring shares of stock  Purchasing shares of treasury stock  Selling shares of treasury stock  PAYING CASH DIVIDENDS ON STOCK

Financing 2 2. DEBT Borrowing cash Cash M/P Repaying Principle on a loan M/P Interest Expense Cash

“Foolers” Interest Paid  Decision to go into debt is Financing activity  Paying interest on the debt is operating or current Interest Received  Decision to loan money is an investing activity  Receiving interest on loan is operating or current Dividends Received  Decision to purchase other company’s stock-investing  Receiving dividends is operating or current Dividends paid - different  Decision to sell stock is Financing activity  Paying dividend to stockholders is also financing activity

Schedule of Non Cash Activities Need to be reported if will affect cash flows in the future. Activities: 1. Purchasing plant assets by signing a note payable 2. Purchasing a building through a mortgage loan 3. Exchanging stock for plant assets 4. Issuing stock to retire debt 5. Converting preferred stock to common stock

Operating (O), Investing (I), Financing (F) Source (+), Use (-) 1.Earned a net income O + 2.Paid Cash Dividend F- 3. Issued stock for cash F+ 4. Retired Long Term Debt by issuing stock Non Cash 5. Paid A/P O- 6. Purchased inventory with cash O-

Review Sheet. Homework  Read Chapter 12 or whatever book with cash flow  OR  Watch the narrated power slides on book website  DO 12-1, – Activities  DO 12-2 Cash Flow from Operations  DO 12-3 Free Cash Flow  DO 12-8 Statement of Cash Flow  Analysis

BASIC STRUCTURE OF A STATEMENT OF CASH FLOWS Cash provided (used) by: Operating activities Investing activities Financing Activities Net Incr (decr) in cash and cash equiv Cash and Cash Equiv at beginning of year(last year) Cash and Cash Equiv at end of year

Cash Flow Statement- operating Start with Income on an Accrual Basis, (Net Income) Accrual transactions(No cash in transaction): Dr. A/R Cr. Sales Dr. Advertising X Cr. A/P Then make adjustments (incr or decr) net income to show income on a Cash Basis.

Indirect method Income from continuing operations (accrual income) Add: Depreciation, depletion, and amoritization X Add/decr changes in Current Assets Add/Decr changes in Current Liabilities Add back any non cash losses or decr any non cash gains = Net cash flow from operating activities This number should always be positive See Page 555

Changes in Current Assets Current assets increase ---decrease in cash flow A/R Sale I Receive On Acct I Cash OPPOSITE Inventory Buy I Sale Inventory I Inventory

Changes in Current Liabilities Current liabilities increase ---increase in cash flow A/P Pay I Purchase Cash I on acct SAME

Steps for CFO (Cash flow from Operations) 1. Write down Net Income from Income Statement 2. Add in Depreciation and Amortization 3. Record changes to Current Assets and Current Liabilities 4. Add in any non cash losses/subtract any non cash gains (sale of plant assets)

Basic Concepts for Investing and Financing Section Paying back decreases cash flow Buying decreases cash flow Selling increases cash flow Sell stock for cash = issue stock increase cash flow If you sell more plant assets than you buy your company is contracting If you buy more than you sell your company is expanding

Investing Basics-Review Problem PPEA.D Beginning Balance PPE Sold (12) (5) Subtotal Less Ending Balance Purchased/DeprX133 29

Financing Basics RETAINED EARNINGS Beginning 92 Plus Net Income66 Subtotal 158 Ending Bal 110 Dividends 48

Which one would you want to work for??????

Last Section (Cash reconciliation) Change in cash for the period Add last year cash (beginning cash) from balance sheet Should equal cash on balance sheet for current year (Check figure)

Create a Cash Flow for Shubert