BSAD 221
Introductory Financial
Accounting
Donna Gunn, CA
Cash Flow Statement
This statement is a categorized list of all
transactions of the period that affected the Cash
account.
The three categories are . . .
 Operating activities,
 Investing activities, and
 Financing activities.
Classifications of the Cash
Flow Statement
Cash Equivalents
Cash

Short-term, highly liquid
investments.

Readily convertible into cash.
Currency
Statement of Cash Flows
• To assess the firm’s ability to generate cash and
cash equivalents and
• To assess the firm’s cash requirements
• Statement of Cash Flows shows:
• Where the cash came from
• What the cash was used for
• The change in the cash balance
Statement of Cash Flows
Cash activities are divided into three main
categories:
1. Operating Activities
• Main revenue-producing activities
2. Investing Activities
• Changes in long-term assets and investments
3. Financing Activities
• Changes in equity and non-operating liabilities
Cash Flows from
Operating Activities
The Direct Method of presenting the Operating
Activities section of the cash flow statement reports
components of cash flows from operating activities
as gross receipts and gross payments.
The Indirect Method of presenting the Operating
Activities section of the cash flow statement adjusts
net income to compute cash flows from operating
activities.
Cash Flows from Operating
Activities – Direct Method
Inflows from:


Sales to customers
Interest and dividends
received
+
Outflows to:




Purchase goods (for resale)
and services
Salaries and wages
Income taxes
Interest on liabilities
_
Cash
Flows
from
Operating
Activities
Cash Flows from Operating Activities—
Direct Method
Sales revenue
+ Decrease in accounts receivable
- Increase in accounts receivable
= Cash collected from customers
+
+
=
Cost of goods sold
Increase in inventory
Decrease in inventory
Increase in accounts payable
Decrease in accounts payable
Cash payments to suppliers
Cash Flows from Operating ActivitiesIndirect Method
The indirect method adjusts net income by eliminating
non-cash items.
+/- Changes in current
assets and current
liabilities.
Net Income
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization.
Cash Flows from
Operating
Activities - Indirect
Method
Cash Flows from
Operating Activities
Net Income +/- Adjustments
A
Depreciation Expense
B Gains and Losses on the Sale of
Long-Term Assets
Changes
in
the
Current
Asset
and
C
Current Liability Accounts
Make adjustments for changes in current assets and
current liabilities using the decision table above.
ANDREW PELLER LIMITED
CONSOLIDATED BALANCE SHEET - unaudited
Sep 30,
2006
In Thousands of dollars
ASSETS
Current assets:
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property, plant and equipment (net)
Long-term investments
Goodwill
Total assets
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness
Accounts payable
Accrued liabilities
Dividends payable
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Future income taxes
Total liabilities
Stockholders' Equity:
Share capital
Retained earnings
Total shareholders' equity
Total liabilities & shareholders' equity
$
June 30,
2006
Change
27,687
71,870
4,490
104,047
84,863
8,131
36,171
$ 233,212
$
21,682
70,131
3,318
95,131
85,001
8,219
36,171
$ 224,522
6,005
1,739
1,172
$
$
2,098
6,213
565
139
(470)
5
44,080
18,423
7,134
917
5,897
76,451
51,430
12,514
140,395
7,375
85,442
92,817
$ 233,212
41,982
12,210
6,569
778
470
5,892
67,901
52,998
12,445
133,344
7,375
83,803
91,178
$ 224,522
(138)
(88)
-
(1,568)
69
0
1,639
ANDREW PELLER LIMITED
Consolidated Statement of Earnings - Unaudited
(in thousands of dollars)
Net sales
Cost of goods sold
Gross margin
Operating expenses:
Selling, general and administrative
Amortization of plant and equipment
Total operating expenses
Operating income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Quarter ended
Sept. 30, 2006
$
59,413
34,369
25,044
$
17,880
1,908
19,788
5,256
1,383
3,873
1,317
2,556
Operating Activities - Indirect Method
ANDREW PELLER LIMITED
Consolidated Statement of Earnings - Unaudited
(in thousands of dollars)
Net sales
Cost of goods sold
Gross margin
Operating expenses:
Selling, general and administrative
Amortization of plant and equipment
Total operating expenses
Operating income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Quarter ended
Sept. 30, 2006
$
59,413
34,369
25,044
$
17,880
1,908
19,788
5,256
1,383
3,873
1,317
2,556
The Statement
of Cash Flows
will begin with
Net income from
the Statement of
Earnings.
Operating Activities - Indirect Method
ANDREW PELLER LIMITED
Consolidated Statement of Earnings - Unaudited
(in thousands of dollars)
Quarter ended
Sept. 30, 2006
$
59,413
34,369
25,044
The Net
income
number will
be adjusted
for non-cash
items.
Net sales
Cost of goods sold
Gross margin
Operating expenses:
Selling, general and administrative
17,880
Amortization of plant and equipment
1,908
Total operating expenses
19,788
Operating income
5,256
Interest
1,383
In expense
the case of Andrew Peller, those adjustments
Income before income taxes
3,873
amortization
expense
($1,908)
Provision for income taxes
1,317
Net income
$
2,556
included
This is the most common non-cash item and one you will ALWAYS
need to adjust
ANDREW PELLER LIMITED
Consolidate Statement of Cash Flows - Unaudited
For the Quarter Ended September 27, 2003
(All amounts in 000s)
Cash flows from operating activities:
Net income
$2,556
With the indirect method, always
start with the net income or net
loss for the period.
Next, adjust for the non-cash items
included in net income.
Net cash provided by (used in) operating activities
ANDREW PELLER LIMITED
Consolidated Statement of Cash Flows - Unaudited
As at September 30, 2006
3 Months Ended
September 30, 2006
(All amounts in 000s)
Cash flows from operating activities:
To
the Cash flows from operating activities
Netcomplete
earnings
$ 2,556
Items not
affecting
section,
you
mustcash:
examine a comparative balance sheet
Amortization of plant and equipment
1,908
to determine
the
changes
in
current
assets
and
current
Future income taxes
69
Changes in
non-cash
working
capital
items: to the end of
liabilities
from
the operating
beginning
of the
period
Increase in accounts receivable
(6,005)
the
period.
Increase in inventory
(1,739)
Increase in prepaid expenses
(1,172)
Increase in accounts payable
6,213
Increase in accrued liabilities
565
Decrease in income taxes payable
(470)
Net cash provided by (used in) operating activities
$ 1,925
Net Income
Add back amortization
Change in non-cash working capital:
Increase in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Decrease in income taxes payable
Net cash provided by (used in) operating activities
2,556
1,908
(6,005)
(1,739)
(1,172)
6,213
565
(470)
$1,856
Now, make adjustments for changes in current assets and
current liabilities
Direct Method vs. Indirect
Method
The CICA Handbook recommends the
direct method, but it is rarely seen in
practice.
Many financial executives have reported that
they do not use it because it is more
expensive to implement than the indirect
method.
Cash Flows from Investing
Activities
Inflows from:


Sale or disposal of property,
plant, and equipment.
Sale or maturity of investments
in securities.
+
Outflows to:


Purchase property, plant, and
equipment.
Purchase investments in
securities.
_
Cash
Flows
from
Investing
Activities
Cash Flows from Financing
Activities
Inflows from:


Borrowing on notes,
mortgages, bonds, etc. from
creditors
Issuing equity securities to
shareholders
+
Outflows to:



Repay principal to creditors
(excluding interest)
Repurchase equity securities
from owners
Pay dividends to shareholders
_
Cash
Flows
from
Financing
Activities
Relationship to the Balance
Sheet and Income Statement
Information needed to prepare a cash flow
statement:

Comparative Balance Sheets

Income Statement

Additional details concerning different types
of transactions and events
Relationship to the Balance
Sheet and Income Statement
Cash =
Liabilities
Shareholders’ Equity
cash Assets
Non-
Derives from . . .
Assets = Liabilities
Shareholders’
Equity
Additional Cash Flow
Disclosures
Required Supplemental Information
1. Reconciliation of net income to cash flow
from operations.
2. Cash paid for income taxes and interest.
3. Significant non-cash investing and
financing activities.
Adjustment for Gains and
Losses
Transactions that cause gains and losses should be classified on
the cash flow statement depending on their dominate
characteristics.
For example, if the sale of equipment produced a gain, it would be
classified as an investing activity.
Gains
Gains must be subtracted from net
income to avoid double counting the
gain.
Losses
Losses must be added to net income
to avoid double counting the loss.
Interpreting Cash Flows from
Operating Activities
Accounts
Receivable
Changes
Managers sometimes attempt to boost
declining sales by extending credit
terms or by lowering credit standards.
The resulting increase in accounts
receivable can cause net income to
outpace cash flows from operations.
Inventory
Changes
Inventory growth can be a sign that
planned sales growth did not
materialize. A decline in inventory can
be a sign that the company is
anticipating lower sales in the next
quarter.
Interpreting Cash Flows from
Financing Activities
The long-term growth of a company is normally
financed from three sources:
1. internally generated funds,
2. the issuance of shares, and
3. money borrowed on a long-term basis.
The statement of cash flows shows how
management has elected to fund its growth. This
information is used by analysts who wish to evaluate
the capital structure and growth potential of a
business.