1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18-1 Understanding Cash Flow Analysis

2. CENTURY 21 ACCOUNTING © Thomson/South-Western 2 LESSON 18-1 page 531 CASH FLOW ANALYSIS Cash flow analysis helps owners, creditors, and other interested parties: 1.Determine a company’s potential to produce cash in the future. 2.Judge a company’s ability to pay bills and repay debts. 3.Explain changes in the cash account balance. 4.Evaluate a company’s investment and equity transactions.

3. CENTURY 21 ACCOUNTING © Thomson/South-Western STATEMENT OF CASH FLOW The cash receipts & cash payments of a company are called cash flows A statement that summarizes cash receipts & cash payments from business activities during a fiscal period is called a statement of cash flows Explains the change in Cash during a fiscal period by reporting the sources (inflows or receipts) & uses (outflows or payments) of a company’s cash 3 LESSON 18-1

4. CENTURY 21 ACCOUNTING © Thomson/South-Western STATEMENT OF CASH FLOW Studying a company’s cash flows allows you to analyze why there were profits yet not enough cash to pay bills The income statement & Balance sheet are prepared using an accrual basis of accounting The statement of cash flow is prepared using the cash basis of accounting Recognizes revenue when cash is received & expenses when cash is paid out 4 LESSON 18-1

5. CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 18-1 STATEMENT OF CASH FLOWS page 532  By identifying the sources & uses of cash, the statement of cash flows explains the difference in the beginning & ending balances in the cash account

6. CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 18-1 page 533 Revenue recognized at the time it is earned. Revenues$25,000.00 Expenses0.00 Net Income$25,000.00 Revenue recognized at the time cash is received. Revenues$ 0.00 Expenses0.00 Net Income$ 0.00 TIMING OF REVENUE RECOGNITION Accrual Basis vs. Cash Basis  Assume that Flomax Corp. has sales on account during the year & no expenses. Under the accrual basis for accounting, revenue is recognized at the time it is earned.  If the account receivable remains outstanding at the end of the fiscal year, using the accrual basis the revenue would be $25,000  Under the cash basis of accounting, revenue is not recognized until cash is received so the net income would be $0.00

7. CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 18-1 page 533 Expense recognized at the time it is incurred. Revenues$25,000.00 Expenses3,000.00 Net Income$22,000.00 Expense recognized at the time cash is paid. Revenues$ 0.00 Expenses0.00 Net Income$ 0.00 TIMING OF EXPENSE RECOGNITION Accrual Basis vs. Cash Basis  Assume that Flomax Corp. recognizes one week of salaries earned by employees before the close of the current fiscal year. The salary expense will not be paid until the next fiscal period.  Using the accrual basis, the expense is recognized during the current fiscal year and would equal $3,000  Under the cash basis of accounting, no expenses are reported until actually paid. Since no cash was paid, $0.00 in expenses would be recorded

8. CENTURY 21 ACCOUNTING © Thomson/South-Western CASH FLOWS FROM OPERATING ACTIVITIES 8 LESSON 18-1  The statement of cash flows is divided into three sections:  Cash flows from operating activities  Cash flows from investing activities  Cash flows from financing activities

9. CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 18-1 page 534 CASH FLOWS FROM OPERATING ACTIVITIES Cash Inflows (sources of cash) Cash sales of merchandise Cash sales of services Interest income Dividends received from the ownership of stock in other companies Cash received from charge customers Cash Outflows (uses of cash) Advertising Credit card fees Insurance expense Interest payments Payroll expenses Property tax Utility expenses Income tax  The cash receipts & payments necessary to operate a business on a day-to-day basis are called operating activities  Examples of operating activities:

10. CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 18-1 page 534 CASH FLOWS FROM INVESTING ACTIVITIES Cash Inflows (sources of cash) Sale of property Sale of equipment Sale of building Collections of long-term loans Cash Outflows (uses of cash) Purchase of land Purchase of equipment Purchase of building Purchase of patents or special licenses companies  Cash receipts & cash payments involving the sale or purchase of assets used to earn revenue over a period of time are called investing activities  Examples of investing activities: Loans to other companies Purchase of stock in other companies Purchase of bonds in other

11. CENTURY 21 ACCOUNTING © Thomson/South-Western 11 LESSON 18-1 page 535 CASH FLOWS FROM FINANCING ACTIVITIES Cash Inflows (sources of cash) Capital stock issue Mortgage issue Bond issue Long-term loans Cash Outflows (uses of cash) Purchase of treasury stock Payment of cash dividends Repayment of land/note principal Retirement of bond principal  Cash receipts & payments involving debt or equity transactions are called financing activities  Examples of financing activities:

12. CENTURY 21 ACCOUNTING © Thomson/South-Western 12 LESSON 18-1 page 536 TERMS REVIEW accrual basis of accounting cash basis of accounting cash flows statement of cash flows operating activities investing activities financing activities