There are some rules to follow about cash flow calculation.
You start your first line with NI then add back D&A. Next, following the rules below
Activities
CA up (down) ; except cash
Effect on cash
down (up)
CL up (down)
up (down)
Gross PPE up (down)
down (up)
Debt and Equity up (down)
up (down)
Dividend payment
down
Note
CA and cash have opposite
direction. CA is up, cash will
go down and vice versa
CL and cash go in the same
direction
PPE up means the company
pay for more PPE, so cash is
down. PPE down means the
company sell PPE, so cash is
up.
Get more cash when borrow
more or issue more equity,
and vice versa.
Note: For balance sheet items, you need to use the difference between two periods. For income
statement items, you need to use the current year in question.
Let’s try to use the rules above to solve the in-class practice below
2020
2021
Account Receivable
100
80
Account Payable
180
200
Net Income
2,000
3,000
Depreciation
300
450
Gross PPE
200
500
Note payable
200
300
Dividend payment
100
120
Start with NI = 3,000 then add back D&A 450. Both of these items are Income Statement Items so you
use 2021 number, not the difference between two years.
A/R goes down by 20, so your cash is up by 20 based on the rule above
A/P goes up by 20, so your cash is up by 20 based on the rule above
Gross PPE goes up by 300, so cash is down by 300
NP is up by 100, so cash is up by 100. NP is considered debt.
Dividend payment is 120, so cash is down by 120.
Cash flow change for 2021 = 3,000+450+20+20-300+100-120=3,170