Chapter 5 Reporting Cash Flows

The Statement of Cash Flows Identifies the primary activities that resulted in cash ________ and ________ Reports cash flow resulting –__________ Activities Presented in two formats –________

The Statement of Cash Flows Operating Section –Reports Cash Collected from _______________ Cash Paid for ____________, Wages, Utilities, etc. GAAP requires Cash Paid for __________ be reported with Operating Activities Depreciation and Amortization are _______________ expense and never appear on a cash flow statement under the direct format –Operating cash flows are the cash accounting representation of accrual accounting __________________. –The Operating Section of the Statement of Cash Flows and the Income Statement are two representation of the same transactions. –GAAP requires a schedule to reconcile cash flows from operating activities with net income when the direct format is used. The Direct Format

The Statement of Cash Flows Mom’s Cookie Company Statement of Cash Flows For the Year Ended December 31, 2004 Operating Activities Receipts: Collections from customers$662,080 Payments: For inventory(471,590) To employees(70,800) For rent(24,000) For utilities(4,500) For supplies(15,990) For insurance(3,700) For advertising(6,500) For interest(4,150) For income tax (22,710) Net cash flow from operating activities 58,140 Exhibit 1  Cash Flow from Operating Activities Cash Received from Operating Activities Cash Paid for Operating Activities – Net Cash from (for) Operating Activities = The Direct Format

The Statement of Cash Flows Investing Section –Reports Cash Paid to acquire _______________________ Cash Received from the disposal of _____________________. –Some transactions affect investing and financing activities without affecting ________ directly. –Investing and financing activities that do not affect cash have to be reported in the ________. The Direct Format

The Statement of Cash Flows  Cash Flow from Investing Activities Cash Received from Investing Activities Cash Paid for Investing Activities – Net Cash from (for) Investing Activities = The Direct Format Mom’s Cookie Company Statement of Cash Flows For the Year Ended December 31, 2004 Exhibit 1 Net cash flow from operating activities $ 58,120 Investing Activities Payments for purchase of equipment (216,000) Receipts from sale of equipment 340 Net cash flow for investing activities (215,660)

The Statement of Cash Flows Financing Section –Reports Cash Received from ____________ _________ Cash Repaid for ________ Cash Received from investment by owners Cash Distributed to owners –Some transactions affect investing and financing activities without affecting _________ directly. –Investing and financing activities that do not affect cash have to be reported in the _______________. The Direct Format

The Statement of Cash Flows Mom’s Cookie Company Statement of Cash Flows For the Year Ended December 31, 2004 Net cash flow for operating activities $ 58,120 Net cash flow for investing activities (215,660) Financing Activities Receipts from sale of common stock 100,000 Payment of dividends (10,000) Receipts from borrowing 80,000 Repayment of debt (1,800) Net cash flow from financing activities 168,200 Net increase in cash10,680 Cash balance, December 31, Cash balance, December 31, 2004 $ 10,680 Exhibit 1  Cash Flow from Operating Activities Cash Received from Financing Activities Cash Paid for Financing Activities – Net Cash from (for) Financing Activities = The Direct Format

Exhibit 3 Calculation of Operating Cash Flows

The Statement of Cash Flows The difference between the direct and indirect formats are in the operating section only. Most major corporations use the indirect format Operating Section –Is reconciliation of ________________ and cash –Starts with _________________ and adjust for Non-cash income statement items Increases in ____________________. Decreases in ____________________. Increases in ________________________. Decreases in ________________________. Net cash flows from all sections are the same under the direct method and the indirect method. The Indirect Format

Mom’s Cookie Company Statement of Cash Flows For the Year Ended December 31, 2004 Operating Activities Net income$ 52,990 Depreciation expense25,500 Increase in accounts receivable(8,570) Increase in merchandise inventory(23,600) Increase in supplies(690) Increase in prepaid rent(2,000) Increase in accounts payable9,610 Increase in unearned revenue4,250 Increase in interest payable 650 Net cash flow from operating activities 58,140 ContinuedContinued From the income statement Exhibit 4

The Statement of Cash Flows The Operation Section –Starts with net income and then Depreciation Expense is added because it is an expense that does not require a cash payment. _______________ Increases in current assets ADD Decreases in current assets _______________ Increases in current liabilities SUBTRACT Decreases in current liabilities The Indirect Format

Net income +Depreciation and Amortization Expense – Increases in Current Asset Accounts +Decreases in Current Asset Accounts +Increases in Current Liability Accounts –Decreases in Current Liability Accounts =Cash Flow from Operating Activities Summary of Adjustments for the Indirect Format

Current Assets Current Liabilities Add To Net Income Increases in Decreases in Subtract from Net Income

Cash Flow Patterns and the Financial Health of a Company Operating cash flows are positive Investing cash flows are negative Financing cash flows are positive These normally are a sign of a ___________ and__________ company.

Cash Flow Patterns and the Financial Health of a Company Operating cash flows are negative Investing cash flows are positive Financing cash flows are positive The company is facing __________ financial ____________. It is selling assets and using financing activities to meet current cash needs.

Cash Flow Patterns and the Financial Health of a Company Operating cash flows are positive Investing cash flows are positive or negative Financing cash flows are negative The company is ___________ but may not have a lot of good ________ opportunities. It is using operating cash to pay off debt and pay stockholders.