1. Module 2: Statement of Cash Flows ACG 2071 Created by M. Mari

2. Statement of Cash Flows Purpose: Reports a firm’s major cash inflows and outflows for a period. Provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet financial obligations, and pay dividends. One of the basic financial statements.

3. Importance We look more favorably at a company that is financing its expenditures with cash from operations than one that does it by selling its assets Whether company has enough cash to pays its existing debts as they mature.

4. Three types of Activities Cash flows from OPERATING ACTIVITIES Cash flows from INVESTING ACTIVITIES Cash flows from FINANCING ACTIVITIES

5. OPERATING ACTIVITIES Include those transactions and events that determine net income Cash inflows –Cash from sales –Cash from credit collections –Cash from interest income Cash outflows –Cash to pay bills –Cash to pay for merchandise –Cash to pay taxes

6. Investing Activities Generally include those transactions and events that affect long term assets –Purchase and sale of short-term investments –Lending and collecting money from notes receivable –Cash inflows Selling securities Selling notes Collecting principal on loans Selling assets –Cash outlfows Make loans to others Purchase securities Purchase assets

7. Financing Activities Include the transactions and events that affect longterm liabilities and equity –Obtaining cash from issuing debt –Receiving cash from or distributing cash to owners –Cash inflows Monies from loans issued Monies from stock sold Monies from bonds issued –Cash outflows Paid on principal of loan Purchase of treasury stock Redeemed bonds

8. Note The sum of the three sections should equal the change in cash from the prior to the current year.

9. Format of Statement of Cash Flows Company Name Statement of Cash Flows For period ended Cash flows from operating activities: Cash inflows -Cash outflows Net cash provided by operating activities $$$$ Cash flows from investing activities: Cash inflows -Cash outflows Net cash provided by operating activities$$$$ Cash flows from financing activities: Cash inflows -Cash outflows Net cash provided by operating activities$$$$ Net increase (decrease) in cash $$$ Cash balance at beg of period $$$ Cash balance at end of period $$$

10. Two methods Direct method –Requires analysis of the cash account Indirect method –Requires analysis of the financial statements

11. Completion of Operating Section Begin with operating section by starting with net income Add any items that are included in net income that are not part of operations. –Such as gains or losses on sale of investments, depreciation, and amortization. Follow by changes in current assets and current liabilities –Decreases in current assets increases cash flows since assets are used instead of purchasing new ones –Increases in current liabilities increase cash flows since we incur debt instead of paying –Increases in current assets decrease cash flows since monies are used to buy assets –Decreases in current liabilities decrease cash flows since monies are used to pay bills –Current assets Accounts receivable Merchandise inventory Prepaid expenses –Current liabilities Accounts payable Accrued expenses Salaries payable Income taxes payable

12. Example Suppose that net income is $34,000

13. Compute the differences Account20052006Difference Cash$10,000$15,0005,000 Accts rec$4,500$6,0001,500 Inventory$20,000$18,000(2,000) Investments$50,0000($50,000) Accts pay$7,000$8,000$1,000 Div Pay$12,000$13,0001,000 Taxes pay$5,000$3,500(1,500)

14. Example 1: Net income$34,000 ADD: depreciation 1,000 Accts payable 1,000 Inventory 2,000 38,000 Deduct: accts rec1,500 Taxes pay1.500 Gain on sale of investments15.000 18.000 Net cash flows from operations$20,000

15. Investing Activities Cash received from sale of assets Less cash paid from purchase of assets Example : Investments costing $20,000 and sold for $45,000. Building constructed for $150,000 and machine purchased for $30,000

16. Example 3 Cash from sale of investments $45,000 Construction of building($150,000) Machine purchased( $30,000) Net cash flow from investing $(135,000)

17. Financing Activities Cash received from the sale of stock or bonds Cash received from the issuance of a mortgage Less: –Cash paid for dividends –Cash paid to retire bonds payable –Cash paid to retire mortgage

18. Example 5 Sold 1,000 shares of stock par $10 for $35 per share. Received from mortgage $100,000, paid bonds of $75,000 off. Dividends payable had a beginning balance of $10,000, ending balance of $15,000 and declared $50,000.

19. Example 5 Cash received for sale of stock$35,000 Cash received from mortgage$100,000 Total135000 Payment on bonds$75,000 Paid dividends$45,000 Total120000 Net cash flow from financing15000