1. Statement of Cash Flow Analysis MBA Kathmandu University School of Management (KUSOM)

2. Purpose of the Statement of Cash Flows
Explains changes in cash over a period of time
Summarizes cash inflows and outflows from:
Financing
Activities
Operating
Activities
Investing
Activities

3. Cash Flows and Net Income for Four Companies
(in millions)
Increase
(Decrease) Net Income
in Cash (Loss)
$ 5, $14,013
(723) , (471)
(640) (482)
Company Fiscal Year end
Apple, Inc (9/25/10)
Best Buy, Co (2/26/11)
AMR Corp (12/31/10)
U.S. Steel Corp. (12/31/10)

4. Cash Equivalents Readily convertible to cash Examples:
Little risk of price change
Original maturity to investor of three months or less
Examples:
Commercial paper
U.S. Treasury bills
Certain money market funds

5. Statement of Cash Flows Format
outflows
Cash
inflows
Classified by:
Operating activities
Investing activities
Financing activities =
+ Beginning
Cash and
Cash
Equivalents
= Ending
Cash and
Cash
Equivalents
Increase or decrease in cash and cash equivalents

6. Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $ xxx
Cash flows from investing activities:
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $xxx
from balance sheets

7. Operating Activities
Collection of
customer accounts
Cash transactions concerned with acquiring and selling products and services
Payment to suppliers
for inventory
Payment of wages
Payment of taxes

8. Investing Activities
Cash transactions concerned with acquiring and disposing of long-term assets
Capital
expenditures
Purchase/sale of
another company
Sale of property, plant
and equipment

9. Financing Activities
Issuance/repayment
of bank note
Issuance/repurchase
of stock
Cash transactions concerned with the raising and repayment of funds in the form of debt and equity
Issuance/retirement
of bonds
Payment of dividends

10. Categorizing Cash Flow Activities
Current
assets
and
current
liabilities
Operating Activities
Long-term
assets
Investing Activities
Long-term
liabilities or
stockholders’
equity
Financing
Activities

11. Noncash Investing and Financing Activities
Disclose important financing and investing
activities which do not require cash
Exchange stock for assets
Buy assets through debt financing
from supplier

12. Methods to Report Cash from Operating Activities
Direct Method
Reports major classes of gross cash receipts and cash payments
The amount of cash provided by operating activities is the same under both methods
Indirect Method
Adjusts net income to remove the effect of all accruals and deferrals

13. Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $xxx
Cash flows from investing activities:
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:
Net cash provided (used) by financing activities xxx
Net increase (decrease) in cash and cash equivalents $xxx
Cash and cash equivalents at beginning of year xxx
Cash and cash equivalents at end of year $xxx
Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

14. Preparing the Statement Cash Flows: Direct Method
Step 1: Set up three master T accounts
Cash Flows from
Operating Activities
Cash Flows from
Investing Activities
Cash Flows from
Financing Activities
Step 2: Determine the cash flows from
operating activities

15. Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Receivable 670,000
Sales Revenue* ,000
To record sales on account.
*from income statement
Sales on account 670,000
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Accounts Receivable
??? Cash collections

16. Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Receivable 670,000
Sales Revenue* ,000
To record sales on account.
*from income statement
Sales on account 670,000
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Accounts Receivable
664, Cash collections

17. Direct Method: Operating Activities
Review journal entries recorded during period:
Cash ,000
Interest Revenue ,000
To record interest earned and received.
15, Interest
Interest Revenue

18. Direct Method: Operating Activities
Review journal entries recorded during period:
Cost of goods sold* 390,000
Inventory ,000
To record cost of goods sold.
*from income statement
390,000 Cost of goods sold
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Inventory
Purchases on account ??

19. Direct Method: Operating Activities
Review journal entries recorded during period:
Cost of goods sold* 390,000
Inventory ,000
To record cost of goods sold.
*from income statement
390,000 Cost of goods sold
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Inventory
Purchases on
account ,000

20. Direct Method: Operating Activities
Review journal entries recorded during period:
Inventory ,000
Accounts Payable ,000
To record purchases on account.
382, Purchases
31, Bal., Jan. 1
38, Bal., Dec. 31
From Balance
Sheet
Accounts Payable
Cash payments ???

21. Direct Method: Operating Activities
Review journal entries recorded during period:
Accounts Payable ,000
Cash ,000
To record cash payments on account.
Cash payments ,000
31, Bal., Jan. 1
38, Bal., Dec. 31
From Balance
Sheet
Accounts Payable
382, Purchases

22. Direct Method: Operating Activities
Review journal entries recorded during period:
Salaries and Wages Expense 60,000
Salaries and Wages Payable ,000
To record salaries and wages.
60, Expense
9, Bal., Jan. 1
7, Bal., Dec. 31
From Balance
Sheet
Salaries and Wages Payable
Cash payments ???

23. Direct Method: Operating Activities
Review journal entries recorded during period:
Salaries and Wages Payable 62,000
Cash ,000
To record cash paid to employees.
Cash payments 62,000
9,000 Bal., Jan. 1
7,000 Bal., Dec. 31
From Balance
Sheet
Salaries and Wages Payable
60,000 New unpaid wages

24. Direct Method: Operating Activities
Review journal entries recorded during period:
Depreciation Expense 40,000
Accumulated Depreciation ,000
To record depreciation.
There is no effect on cash flow from depreciation.

25. Direct Method: Operating Activities
Review journal entries recorded during period:
Insurance Expense 12,000
Prepaid Insurance ,000
To record expiration of insurance.
12,000 Expense
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Prepaid Insurance
Cash payments ??

26. Direct Method: Operating Activities
Review journal entries recorded during period:
Prepaid Insurance 6,000
Cash ,000
To record cash paid for insurance.
Cash payments 6,000
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Prepaid Insurance
12,000 Expense

27. Direct Method: Operating Activities
Review journal entries recorded during period:
Interest Expense 15,000
Cash ,000
To record interest expense.
Cash payments 15,000
Bal., Jan
Bal., Dec
From Balance
Sheet
Interest Expense
15,000 Expense

28. Direct Method: Operating Activities
Review journal entries recorded during period:
Income Taxes Expense 50,000
Income Taxes Payable ,000
To record income taxes.
50, Expense
Income Taxes Payable
5, Bal., Jan. 1
8, Bal., Dec. 31
From Balance
Sheet
Cash payments ???

29. Direct Method: Operating Activities
Review journal entries recorded during period:
Income Taxes Payable 47,000
Cash ,000
To record cash paid in taxes.
Cash payments 47,000
5, Bal., Jan. 1
8, Bal., Dec. 31
From Balance
Sheet
Salaries and Wages Payable
50, Expense

30. Master T Account for Cash Flows from Operating Activities
Cash receipts from:
Cash payments for:
375,000 Inventory purchases
62,000 Salaries and wages
6,000 Insurance
15,000 Interest
47,000 Taxes
Sales on account 664,000
Interest ,000
Net cash inflows ,000

31. Preparing the Statement of Cash Flows: Direct Method
Step 3: Determine the cash flows from investing activities

32. Direct Method: Investing Activities
Review journal entries recorded during period:
Long-Term Investments 30,000
Cash ,000
To record purchase of investments.
Cash payments 30,000
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Long-Term Investments

33. Direct Method: Investing Activities statement of cash flows.
Review journal entries recorded during period:
Land ,000
Notes Payable ,000
To record acquisition of land in exchange for note.
No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the
statement of cash flows.

34. Direct Method: Investing Activities
Review journal entries recorded during period:
Property and equipment 75,000
Cash ,000
To record acquisition of equipment for cash.
Acquisitions ,000
Bal., Jan ,000
Bal., Dec ,000
From Balance
Sheet
Property and Equipment
Disposals 35,000

35. Direct Method: Investing Activities
Book value of equipment sold was $20,000.
Original cost of equipment was $35,000.
75,000 Bal., Jan. 1
100,000 Bal., Dec. 31
From Balance
Sheet
Accumulated Depreciation
Disposals 15,000
40,000 Depreciation Exp.

36. Master T Account for Cash Flows from Investing Activities
Cash receipts from:
Cash payments for:
Sale of machine ,000
30, Purchase of
investments
75, Purchase of
property and
equipment
80, Net cash outflows

37. Preparing the Statement of Cash Flows: Direct Method
Step 4: Determine the cash flows from financing activities

38. Direct Method: Financing Activities statement of cash flows.
Review journal entries recorded during period:
Land ,000
Notes Payable ,000
To record acquisition of land in exchange for note.
No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the
statement of cash flows.

39. Direct Method: Financing Activities
Review journal entries recorded during period:
Loss on Retirement of Bonds (Retained Earnings) 3,000
Bonds Payable ,000
Cash ,000
To record retirement of bonds.
Retirement ,000
260, Bal., Jan. 1
200, Bal., Dec. 31
From Balance
Sheet
Bonds Payable

40. Direct Method: Financing Activities
Review journal entries recorded during period:
Cash ,000
Capital Stock ,000
To record issuance of stock in exchange for cash.
25, Stock issued
75, Bal., Jan. 1
100, Bal., Dec. 31
From Balance
Sheet
Capital Stock

41. Direct Method: Financing Activities
Review journal entries recorded during period:
Retained Earnings 67,000
Cash ,000
To record cash dividends paid.
Cash dividends ,000
193, Bal., Jan. 1
246, Bal., Dec. 31
From Balance
Sheet
Retained Earnings
120, Net income 2012

42. Master T Account for Cash Flows from Financing Activities
Cash receipts from:
Cash payments for:
63, Retirement of bonds
67, Payment of cash
dividends
Issuance of stock ,000
105, Net cash outflows

43. Indirect Method: Operating Activities
Income Statement
Conversion
of accrual
to cash
basis
Cash Flows from Operating Activities

44. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease $6,000
Accounts Receivable
Bal. Jan ,000
Bal. Dec ,000
Net increase 6,000

45. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase $8,000
Inventory
Bal. Jan ,000
Bal. Dec ,000
8, Net decrease

46. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Increase $7,000
Accounts Payable
31, Bal. Jan. 1
38, Bal. Dec. 31
7, Net increase

47. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory 8,000
Increase in accounts payable 7,000
Decrease in salaries and wages payable (2,000)
Salaries and Wages Payable
Increase $2,000
9, Bal. Jan. 1
7, Bal. Dec. 31
Net decrease 2,000

48. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance ,000
Decrease $6,000
Prepaid Insurance
Bal. Jan ,000
Bal. Dec ,000
6, Net decrease

49. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance 6,000
Increase in income taxes payable 3,000
Increase $3,000
Income Taxes Payable
5, Bal. Jan. 1
8, Bal. Dec. 31
3, Net increase

50. Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xx,xxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (6,000)
Decrease in inventory ,000
Increase in accounts payable ,000
Decrease in salaries and wages payable (2,000)
Decrease in prepaid insurance ,000
Increase in income taxes payable ,000
Gain on sale of machine (5,000)
Depreciation expense 40,000
Loss on retirement of bonds ,000
Gain is not part of operating activities
Add back noncash expense
Report entire outflow as a financing activity

51. Cash Flow Adequacy
Measures company’s ability to meet principal and interest obligations
Creditors concerned with cash available to repay debts after company has replaced and updated its existing base of long-term assets
Cash Flow from Operating Activities – Capital Expenditures
Average Amount of Debt Maturing over Next Five Years

52. Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows
Appendix
Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows

53. Indirect Method: Using a Work Sheet
12/31/ /31/11
Enter account balances

54. Indirect Method: Using a Work Sheet
Record investing and financing activities
12/31/ /31/11

55. Indirect Method: Using a Work Sheet
12/31/ /31/11
Enter net income

56. Indirect Method: Using a Work Sheet
12/31/ /31/11
Enter noncash
revenues or expenses

57. Indirect Method: Using a Work Sheet
12/31/ /31/11
Extend current
assets and
current
liabilities

58. Indirect Method: Using a Work Sheet
12/31/ /31/11
Total columns

59. Indirect Method: Using a Work Sheet
12/31/ /31/11
Determine net cash inflow (outflow)

60. Any Questions???

61. Thank You 