1. The Statement Of Cash Flows

2. “The fact is that one of the earliest lessons I learned in business was that balance sheets and Income Statements are fiction. Cash flow is reality.” -Mr. Chris Chocola

3. Financial Statements Income Statement Statement of Retained Earnings
Cash flow Statement
Statement Of Balance Sheet

4. Introduction Summarizes a company’s cash inflows and outflows.
Summarizes the operating, investing and financing activities of the business.
Provides complementary information to accrual based income statement.

5. Why is Cash Flow Statement prepared?
Income Statement only deals with operating activities and is based on accrual basis.
It is not the change in cash that is emphasized but the explanation for change in cash.
It helps to evaluate management’s decision.
Determines the ability to pay dividends to stockholders and payment to creditors

6. The Definition Of Cash
Cash in hand
Cash in bank
Cash equivalent

7. Classification Of Cash Flows
Financing activities
Investing activities
Operating activities

10. Financing activities
Concerned with raising and repaying of funds in the form of debt and equity.
Examples:-
Cash proceeds from issuing shares and other similar instruments
Cash proceeds from issuing debentures, loans, notes, bonds and other short or long term borrowings

11. Cash repayment of amounts borrowed
Dividends paid

13. Investing activities
Activities concerned with acquisition and disposal of long term assets.
Examples:-
Cash payments to acquire fixed assets
Cash receipts from disposal of fixed assets
Cash payments to acquire shares, warrants or debt instruments of other enterprises
Cash receipts from disposal of shares, warrants and debt instruments

15. Operating activities
It is the principal revenue producing activities of the enterprise.
It is a key indicator of the extent to which operations of the enterprise have generated sufficient cash flows.

16. Examples:-
Cash receipts from the sale of goods and the rendering of services.
Cash receipts from royalties, fees , commissions and other revenues.
Cash payments to suppliers for goods and services.
Cash receipts and payments to insurance enterprise for premiums and claims, annuities and other benefits.
Cash payments and refund of income taxes.

18. Non cash investing and financing activities
Companies sometimes engage in important investing and financing activities that do not affect cash and are required to disclose it.
Exchange stocks for assets
Buy assets through debt financing
from supplier

19. Foreign Currency Cash flows
Cash flows arising in foreign currency shall be recorded in entity’s functional value by applying exchange rate.
Cash flows from foreign subsidiary shall be translated into functional currency.

20. Interest and dividends
Cash flows from interest and dividends received and paid shall be disclosed in a consistent manner from period to period as either operating, investing or financing activities.

21. Taxes on income
Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

22. Acquisitions and disposal of subsidiaries
The aggregate cash flows arising from acquisitions and disposal of subsidiary or other business units shall be presented separately and classified as investing activities.

23. Methods to Report Cash from Operating Activities
1. 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
2. Indirect Method
Adjusts net income to remove the effect of all accruals and deferrals
(The two methods are simply different computational approaches to arrive at the cash generated from operational activities.)

24. 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)

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

27. Assets
Cash
Assets
Cash
Liabilities
Cash
Liabilities
Cash

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

29. 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

30. For the Year Ended December 31, 2008
Julian Corp.
Income Statement
For the Year Ended December 31, 2008
Revenues and gains:
Sales revenue (1)
$670,000
Interest revenue (2)
$15,000
Gain on sale of machine (a)
$5,000
Total revenues and gains
$690,000
Expenses and losses:
Cost of goods sold (3)
$390,000
Salaries and wages (4)
$60,000
Depreciation (c.)
$40,000
Insurance (5)
$12,000
Interest (6)
Income taxes (7)
$50,000
Loss on retirement of bonds (b)
$3,000
Total expenses and losses
$570,000
Net income (13)
$120,000

31. Comparative Balance Sheets Total liabilities and stockholder's equity
Julian Corp.
Comparative Balance Sheets
December 31
Assets
2008
2007
Liabilities + Equity
Cash
$35,000
$46,000
Accounts payable (3)
$38,000
$31,000
Accounts receivable (1)
$63,000
$57,000
Salaries and wages payable (4)
$7,000
$9,000
Inventory (3)
$84,000
$92,000
Income taxes payable (7)
$8,000
$5,000
Prepaid insurance (5)
$12,000
$18,000
Total current liabilities
$53,000
$45,000
Total Current assets
$194,000
$213,000
Notes payable (9)
$85,000
Long-term investments (8)
$120,000
$90,000
Bonds payable (11)
$200,000
$260,000
Land (9)
$150,000
$100,000
Property and equipment (10)
$320,000
$280,000
Total long-term liabilities
$285,000
$295,000
Accumulated Depreciation
($100,000)
($75,000)
Capital stock (12)
$75,000
Total long-term assets
$490,000
$395,000
Retained earnings (13)
$246,000
$193,000
Total stockholder's equity
$346,000
$268,000
Total assets
$684,000
$608,000
Total liabilities and stockholder's equity

32. Additional Information
(8) Long-term investments were purchased for $30,000. The securities are classified as available for sale.
(9) Land was purchased by issuing a $50,000 note payable.
(10) Equipment was purchased for $75,000.
(a) A machine with an original cost of $35,000 and a book value of $20,000 was sold for $25,000.
(11) Bonds with a face value of $60,000 were retired by paying $63,000 in cash.
(12) Capital stock was issued in exchange for $25,000 in cash.

33. Partial Statement of Cash Flows For the year Ended December 31, 2007
Julian Corp.
Partial Statement of Cash Flows
For the year Ended December 31, 2007
Direct Method
Indirect Method
Cash flows from operating activities
Cash receipts from:
Net cash flows from operating activities
Sales on account (1)
$664,000
Net income
$120,000
Interest (2)
$15,000
Adjustments to reconcile net income to net cash provided by operating activities:
Total cash receipts
$679,000
Increase in accounts receivable
($6,000)
Cash payments for:
Gain on sale of machine (a)
($5,000)
Inventory purchases (3)
($375,000)
Decrease in inventory
$8,000
Salaries and wages (4)
($62,000)
Increase in accounts payable
$7,000
Insurance (5)
Decrease in salaries and wages payable
($2,000)
Interest (6)
($15,000)
Depreciation expense ©
$40,000
Taxes (7)
($47,000)
Decrease in prepaid insurance
$6,000
Total cash Payments
($505,000)
Increase in income taxes payable
$3,000
Loss on retirement of bonds (b)
Net cash provided by operating activities
$174,000

34. Statement of Cash flows For the Year Ended December 31, 2007
Julian Corp.
Statement of Cash flows
For the Year Ended December 31, 2007
Cash flows from Operating activities
$174,000
Cash flows from investing activities
Purchas of investments (8)
($30,000)
Purchase of property and equipment (10)
($75,000)
Sale of machine (a)
$25,000
Net cash used by investing activities
($80,000)
Cash flows from financing activities
Retirement of bonds (11)
($63,000)
Issuance of stock (12)
Payment of cash dividends (13)
($67,000)
Net cash used by financing activities
($105,000)
Net decrease in cash
($11,000)
Cash Balance, December 31, 2006
$46,000
Cash Balance, December 31, 2007
$35,000
Supplemental Schedule of noncash investing and financing activities
Acquisition of land in exchange for note payable (9)
$50,000

35. Any Questions???

36. Thank You 