CashFlow With Solutions
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The Statement of Cash Flows (complete with solutions)
Acct 592 Spring 2005
The Statement of Cash Flows
Purpose of a statement of cash flows:To provide information about the cash inflows and outflows of an entity during a period.
To summarize the operating, investing, and financing activities of the business.
The cash flow statement helps users to assess a companys liquidity, financial flexibility, operating capabilities, and risk.
The statement of cash flows is useful because it provides answers to the following important questions:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?
Specifically, the information in a statement of cash flows, if used with information in the other financial statements, helps external users to assess:
1.A companys ability to generate positive future net cash flows,
2.A companys ability to meet its obligations and pay dividends,
3.A companys need for external financing,
4.The reasons for differences between a companys net income and associated cash receipts and payments, and
5.Both the cash and noncash aspects of a companys financing and investing transactions.
What can we learn from SCF that is not already available in the other financial statements?
It provides answers to important questions like:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?Couldnt we just look the balance sheet?
The change in cash could be determined, but the statement of cash flows provides detailed information about a companys cash receipts and cash payments during the period.
Many things you want to know about a company is summarized in this one statement
Operating, financing and investing cash flows
Net income does not always tell the whole story about operating performance.
A statement of cash flows is an excellent forecasting tool.Review of terms
Cash and cash equivalents
It is a short-term, highly liquid investment.It must be readily convertible to cash and it must be so near to maturity that there is insignificant risks of changes in value due to changes in interest rate.Noncash revenues and expenses
Net income includes items that were neither cash inflow nor cash outflows:
Accretion expense on asset retirement obligation
Amortization of intangibles
Impairment loss on goodwill and intangibles
Earnings of affiliated companies accounted for using the equity method
Impairment losses on other noncurrent assets
Compensation expense related to stock options
Net income also includes gains and losses from investing and financing activitiesGain cash received (unless carrying value was zero)Even when there is a loss, cash might have been receivedNet income must be adjusted for these items to get the cash provided by operations part of the reconciling schedule or indirect method
For other items, there are revenues/expenses as well as cash flows but the amounts are different:
Bond interest expense bond interest paid (if bonds were sold at premium or discount)
Sales were not all collected in cash (bad debts, other changes in Accounts Receivable)Purchases were not necessarily paid for during period (change in Accounts Payable)
Income tax expense income taxes paid due to deferred tax assets/liabilities as well as income taxes refunds receivable or unpaid taxes owed
Company, Inc.Statement of Cash Flows
For the year ended December 31, 199X
Cash Flows from Operating Activities
Cash received from customers(Cash received as interest income *
(Cash received as dividend income
(Cash paid for cost of goods sold *
(Cash paid for selling expenses
(Cash paid for general & administrative expenses
Cash paid for interest (including interest on capital leases)
Cash paid for income taxes
Cash that would have been paid for taxes except for excess tax deduction related to stock based compensation
Net cash provided by (or used by) operating activities
Cash Flows from Investing Activities
Cash received from sale of property, plant, & equipment
Cash received from sale of investments
Cash received from repayment of note receivables
Cash paid to acquire property, plant, and equipment
Cash paid to acquire investments
Cash paid out as a loan
Net cash provided by (or used by) investing activities
Cash Flows from Financing Activities
Cash received as proceeds from issuance of debt
Cash received as proceeds from issuance of stock
Cash received as proceeds from reissuance of treasury stock
Cash paid to repay debt (principal payment)
Cash paid on principal related to capital leases
Cash paid to reacquire stock (purchase treasury stock)
Cash paid as dividends
Cash retained due to excess tax deduction related to stock options
Net cash provided by (or used by) financing activities
Net increase (decrease) in cash
Beginning cash and cash equivalents balance
=Ending cash and cash equivalents balance
Schedule of Noncash Investing and Financing ActivitiesAssets for Liabilities &/or EquityLiabilities &/or Equity for AssetsLiabilities for Equity and Equity for LiabilitiesCapital lease (acquisition of asset and obligation for lessee)
A reconciliation of net income to cash provided by operations
*Brackets indicate items that are normally combined
(Usually associated with working capital accounts like Accounts receivable, inventory, salaries payable, etc.)
From sale of goods and services
From receiving dividends investments
From receiving interest from investments or loans
From sale of trading securities
From reduced income taxes due to excess tax deduction related to stock options
To suppliers for inventory and other materials
To employees for services
To other entities for services (insurance, etc.)
To government for taxes
To lenders for interest
To purchase trading securities
Interest expense is an operating item! Investment earnings (dividends & interest) is an operating item! Buying and selling trading securities are operating activities! These things may not make sense to you so memorize.
(Usually associated with long-term assets)
From sale of property, plant and equipment
From sale of debt or equity investments of other entities*
From collections of principal on loans to other entities
To purchase property, plant and equipment
To purchase debt or equity securities of other entities
To make loans to other entities
*except investments classified as trading securities which are included in operating activities
(Usually associated with long-term liability and equity items)
From issuance of debt (bonds and notes)
From issuance of equity securities
Common stockPreferred stockRe-issuance of treasury stock
To stockholders as dividends
To repay or retire long-term debt, including capital leases for lessee (interest on leases is classified as operating)
To reacquire capital stock (treasury stock)
An anomaly on SCF
Dividends are paid to stockholders and interest is paid to bondholders.
Dividends paid are shown as outflows under financing activities
However, FASB defined interest expense to be an operating activity
Interest & dividend revenue are defined to be operating activities, too.
Direct versus Indirect PresentationsFASB Statement No. 95 allows two ways to calculate and report a companys net cash flow from operating activities on its statement of cash flows.
The Direct Method
Under the direct method, operating cash outflows are deducted from operating cash inflows to determine the net cash flow from operating activities.
If you choose the direct method, a reconciliation of cash provided by operations to net income is a required disclosure.
This is the same schedule that appears in a statement prepared using the indirect method
The required information items on a direct method statement of cash flow (per FASB)
Cash collected from customers (including lessees, tenants, licensees, and the like)
Interest and dividends received
Other operating cash receipts, if any
Cash paid to employees and other suppliers of goods or services (including insurance, advertising and the like)
Income taxes paid
Other operating cash payments, if any
The Indirect Method
Under the indirect method, net income is adjusted for noncash items related to operations to compute the net cash flow from operating activities.
If you choose to use the indirect method, you must also disclose interest paid and income taxes paid during the year.
Under both methods (direct & indirect), you must disclose noncash financing and investing activities
This can be on face of the statement or in the notes to the financial statements.
Trade common stock for land
Convertible bonds converted to common stock