Module 2: Statement of Cash
Flows
ACG 2071
Created by M. Mari
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.
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.
Three types of Activities
Cash flows from OPERATING ACTIVITIES
Cash flows from INVESTING ACTIVITIES
Cash flows from FINANCING ACTIVITIES
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
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
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
Note
The sum of the three sections should equal the
change in cash from the prior to the current year.
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
$$$$
$$$$
$$$$
$$$
$$$
Cash balance at end of period
$$$
Two methods
Direct method
– Requires analysis of the cash account
Indirect method
– Requires analysis of the financial statements
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
Example
Suppose that net income is $34,000
Compute the differences
Account
Cash
Accts rec
Inventory
Investments
2005
$10,000
$4,500
$20,000
$50,000
2006
Difference
$15,000
5,000
$6,000
1,500
$18,000
(2,000)
0 ($50,000)
Accts pay
Div Pay
Taxes pay
$7,000
$12,000
$5,000
$8,000
$13,000
$3,500
$1,000
1,000
(1,500)
Example 1:
Net income
$34,000
ADD: depreciation
1,000
Accts payable
1,000
Inventory
2,000
38,000
Deduct: accts rec
1,500
Taxes pay
1.500
Gain on sale of investments
15.000
18.000
Net cash flows from operations
$20,000
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
Example 3
Cash from sale of
investments
Construction of building
$45,000
Machine purchased
( $30,000)
Net cash flow from
investing
($150,000)
$(135,000)
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
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.
Example 5
Cash received for sale of stock $35,000
Cash received from mortgage
$100,000
Total
135000
Payment on bonds
$75,000
Paid dividends
$45,000
Total
Net cash flow from financing
120000
15000