MSE608C – Engineering and Financial
Cost Analysis
The Cash Flow Statement
What It Is! Why It Is!
It provides a complete picture of:
– The net change in the asset
Cash and
– In what areas did changes
in cash appear and by how
much.
•
While the Balance Sheet and
Income Statement are based on
Accrual accounting, Cash Flow
is a Cash Basis report.
•
Cash: Important to maintain
the operation of a business.
– A company can be
profitable but cash poor or
– Can be cash-rich and losing
money.
MATADOR INC.
Cash Flow Statement
Year Ending December 31, 2004 (in OOOs)
Cash Flows from Operating Activities
Net income
Depreciation
Amortization
Supplies
Accrued liabilities
Accounts receivable
Inventory
Accounts payable
$135
30
10
14
5
(40)
(30)
(25)
Cash Flows from Investing Activities
Purchase of equipment
Purchase of land
(30)
(62)
Cash Flows from Financing Activities
Increase (decrease) in Notes Payable
Cash dividends
Increase (decrease) in Common Stock
Increase (decrease) in Paid-in Capital
Increase (decrease) in Bonds Payable
10
(75)
10
40
(2)
Increase (decrease) in Cash
($10)
Sources and Uses of Cash
• The Cash Flow Statement shows:
– Sources of cash (funds) over the accounting period
– Uses of cash (funds) over the accounting period
– The change in cash due to cash infusions (sources) and
expenditures (uses).
• There are only four possible Sources and Uses of
cash:
•
•
•
•
Assets
Liabilities
Owners’ Equity
Operations (profit generating activities)
Sources of Cash
• Assets
– The Sales of an asset resulting in cash
• Liabilities
– An increase in borrowed money results in new cash.
• Owners’ Equity
– Investment of cash by owners or
– The sale of stock results in new cash.
• Operations
–
–
–
–
Selling goods or services for a Profit resulting in cash
A decrease in Inventory resulting in cash
A decrease in Accounts Receivable provides cash.
Depreciation of assets (a non-cash transaction) must be added back to reverse the
reduction of Net Income.
Uses of Cash
• Assets
– Purchase of equipment, property or other assets.
• Liabilities
– Payment of loans and Accounts Payable
• Owners’ Equity
– Repurchase of stock
– Payment of dividends
– Withdrawal of cash or other assets by owners
• Operations
– Purchase of inventory, supplies and other operating expenses will decrease cash.
– An increase in Accounts Receivable consumes additional cash.
– Business losses consume cash.
Direct vs. Indirect Method
• Direct Method:
– Cash receipts and cash payments are used directly for
determining Cash Flows from Operations
• Indirect Method:
– Changes in Current Assets, Current Liabilities and Net
Income converts from Accrual accounting to Cash-basis
accounting.
• Cash Flows from Investing and Financing
Activities are the same for both methods.
Creating a Cash Flow Statement
(Indirect Method)
• Cash Flows from Operations are transactions
affecting:
– Net Income
– Working Capital (WC = CA – CL)
• Cash Flows from Investing Activities are
transactions affecting:
– Non-Current Assets
• Cash Flows from Financing Activities are
transactions affecting:
– Non-current debt
– Owners’ Equity
Cash Flow from Operating
Activities
Cash flows from Operations
Net Income
Depreciation and Amortization
Accounts Receivable
Inventory
Accounts Payable
Other Current Liabilities
Data Source
Increase Decrease
Income Statement
Income Statement
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Source
Source
(Use)
(Use)
Source
Source
(Use)
Source
Source
(Use)
(Use)
Cash Flows from Investing
Activities
Cash flows from Investing
Investment in fixed assets
Purchase of Marketable Securities
Data Source
Increase Decrease
Balance Sheet
Balance Sheet
(Use)
(Use)
Source
Source
Cash Flows from Financing
Activities
Cash flows from Financing
Data Source
Long-term debt
Payment of Dividends
Invested Capital
Increase Decrease
Balance Sheet
Source
Statement of Retained (Use)
Earnings or footnotes
Balance Sheet
Source
(Use)
(Use)
Statement of Retained Earnings
Retained Earnings, November 30, 2006
Add: net income
Subtract: dividends paid
$284.4
32.0
(30.5)
Retained Earnings, December 31, 2006
$285.9
Metcalf Example Handout
Assessment
• The Cash Flow Statement shows _______ of cash
and ________ of cash.
• The format for the Cash Flow Statement
categorizes cash flows into what three areas?
• Which financial statement provides most of the
data for the Cash Flow Statement?
• What two items found on the Income Statement
are typically used for the Cash Flow Statement?