“How Well Am I Doing?” Statement of Cash Flows 1/10/04 Chapter 16.
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“How Well Am I Doing?” Statement of Cash Flows 1/10/04 Chapter 16
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Transcript of “How Well Am I Doing?” Statement of Cash Flows 1/10/04 Chapter 16.
“How Well Am I Doing?”Statement of Cash Flows
1/10/04
Chapter 16
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Purpose of the Statement of Cash Flows
Are cash flows sufficient to
support ongoing operations?
Are cash flows sufficient to
support ongoing operations?
Can we meet our obligations
to creditors?
Can we meet our obligations
to creditors?
Can we pay dividends?
Can we pay dividends?
Why is there a difference
between net income and net
cash flow?
Why is there a difference
between net income and net
cash flow?Will the company have to borrow money to make
needed investments?
Will the company have to borrow money to make
needed investments?
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Cash
The term cash on the statement of cash flows refers broadly to both currency and
cash equivalents.
Cash
T-bills
Money Market Funds
Commercial Paper
Currency and Bank Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
Net Cash Flows for a
Period
Net Cash Flows for a
Period
Net IncomeNet Income
Dividends Paid to
Stockholders
Dividends Paid to
Stockholders
Changes in Non-cash
Assets
Changes in Non-cash
Assets
Changes in Liabilities
Changes in Liabilities
Changes in Capital StockChanges in
Capital Stock
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
Exh.16-2
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example:Inventory is purchased on credit from
a supplier.
It is implied that cash was used to acquire the
inventory.
Increases in non-cash asset accounts imply uses of cash.
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example: Inventory is purchased on credit from
a supplier.
It is implied that an increase in a payable has the effect
of increasing cash available for other uses; or you
borrowed money to pay for the inventory.
Increases in liability accounts imply sources of cash.
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Decreases in non-cash assets accounts imply sources of cash.
Example: Accounts receivable decreases when a customer
pays their bill.
When the customer pays his bill, the company’s cash
increases.
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Decreases in liability accounts imply uses of cash.
When the company makes the payment, cash decreases.
I.O.U.
Example: The company made a payment on a note payable held
by a creditor.
Constructing the Statement of Cash Flows Using Changes in
Non-cash Balance Sheet Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Constructing a Simplified Statement of Cash Flows
Cash flows are divided into three
categories.
Cash flows are divided into three
categories.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Operating Activities
Includes those activities that enter into the determination of net income
Includes those activities that enter into the determination of net income
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Depreciation and Amortization charges are added back to net income because they are non-cash
expenses (cash was disbursed when the asset was originally purchased)
Depreciation and Amortization charges are added back to net income because they are non-cash
expenses (cash was disbursed when the asset was originally purchased)
Operating Activities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Losses are not cash and are added back
to net income.
Losses are not cash and are added back
to net income.
Operating Activities
Gains are not cash and are subtracted from net income.
Gains are not cash and are subtracted from net income.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets $ XXX Receipt of principal from investments/securities XXX
Less: Payments to acquire land, buildings, equipment, or other noncurrent assets (XXX)Payments to acquire investments/securities (XXX)
Net Cash Flows from Investment Activities $ XXX
Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets $ XXX Receipt of principal from investments/securities XXX
Less: Payments to acquire land, buildings, equipment, or other noncurrent assets (XXX)Payments to acquire investments/securities (XXX)
Net Cash Flows from Investment Activities $ XXX
Includes transactions that involve the acquisition or disposal of non-current assets.
Includes transactions that involve the acquisition or disposal of non-current assets.
Investing Activities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Add: Proceeds from borrowings $ XXX Proceeds from issuing capital stock XXX Proceeds from sale of bonds XXX
Less: Principal payments on borrowed funds (XXX)Payments related to bonds (XXX)Repurchase of stock (XXX)Dividend payments (XXX)
Net Cash Flows from Investment Activities $ XXX
Add: Proceeds from borrowings $ XXX Proceeds from issuing capital stock XXX Proceeds from sale of bonds XXX
Less: Principal payments on borrowed funds (XXX)Payments related to bonds (XXX)Repurchase of stock (XXX)Dividend payments (XXX)
Net Cash Flows from Investment Activities $ XXX
Includes transactions involving receipts from or payments to creditors and owners.
Includes transactions involving receipts from or payments to creditors and owners.
Financing Activities
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Other Cash Flow Issues
For investing activities and
financing activities, like-kind
inflows and outflows of cash must be shown
separately on the statement of cash
flows.
Example: XYZ sells an old
building for $700,000 and purchases a new building for $1,000,000.
The $700,000 inflow of cash and the $1,000,000 outflow of cash must be shown separately.
Example: XYZ sells an old
building for $700,000 and purchases a new building for $1,000,000.
The $700,000 inflow of cash and the $1,000,000 outflow of cash must be shown separately.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Indirect MethodNet income is reconciled to cash flow from operating activities.No supplemental schedule is required.
Used by 99% of companies.We will focus on this method
Direct Method or Indirect Method?
Direct MethodNet income is reconstructed on a cash basis.
Requires a supplemental reconciliation of net income to cash flow from operating activities.Used by 1% of companies.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example: Bobo, Inc. acquires a
building in exchange for 2,000 shares of common stock.
This is reported in a separate supplemental schedule attached to the statement of cash flows, per current rules
I would include this in the cash flow statement for information purposes
Example: Bobo, Inc. acquires a
building in exchange for 2,000 shares of common stock.
This is reported in a separate supplemental schedule attached to the statement of cash flows, per current rules
I would include this in the cash flow statement for information purposes
Direct exchange transactions occur when noncurrent
balance sheet items are swapped.
Such exchanges must be disclosed.
Other Cash Flow Issues
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Interpretation of the Statement of Cash Flows
Examine the operating activities section carefully.
Negative cash flow is usually a sign of fundamental difficulties.
Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.
Examine the operating activities section carefully.
Negative cash flow is usually a sign of fundamental difficulties.
Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
Ed’s Hut is a local pizza restaurant. Ed has prepared an adjusted trial balance as of
March 31, 2003. Ed needs help preparing the Statement of Cash Flows.
Examine the information provided and prepare a Statement of Cash Flows using
the indirect method.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Additional Information: There was a net loss for the year of $27,000. Depreciation charges for the year were $6,000. During the year, Ed sold land originally costing
$32,000 for $32,000. During the year, Ed paid dividends of $3,000 to
the stockholders. Ed issued $50,000 of common stock to settle
the note due to Joe Doe.
Additional Information: There was a net loss for the year of $27,000. Depreciation charges for the year were $6,000. During the year, Ed sold land originally costing
$32,000 for $32,000. During the year, Ed paid dividends of $3,000 to
the stockholders. Ed issued $50,000 of common stock to settle
the note due to Joe Doe.
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
Always start with the net income or net loss for the
period.
Always start with the net income or net loss for the
period.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Ed's HutOperating Activities
Net Loss (27,000)$ Add: Decrease in A/R 17,000
Increase in A/P 11,000
Change in Account Balance during PeriodIncrease Decrease
Current Subtract from Add toNoncash Assets net income net income
Current Add to Subtract fromLiabilities net income net income
Change in Account Balance during PeriodIncrease Decrease
Current Subtract from Add toNoncash Assets net income net income
Current Add to Subtract fromLiabilities net income net income
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Ed's HutOperating Activities
Net Loss (27,000)$ Add: Decrease in A/R 17,000
Increase in A/P 11,000 Increase in Depr. Charges 6,000
Depreciation charges represent a non-cash expense that must be added
back to net income.
Depreciation charges represent a non-cash expense that must be added
back to net income.
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Ed's HutOperating Activities
Net Loss (27,000)$ Add: Decrease in A/R 17,000
Increase in A/P 11,000 Increase in Depr. Charges 6,000
Less: Increase in Inventory (50,000) Decrease in Salaries Payable (5,000)
Net Cash Flow from Operations (48,000)
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
Ed's HutOperating Activities
Net Loss (27,000)$ Add: Decrease in A/R 17,000
Increase in A/P 11,000 Increase in Depr. Charges 6,000
Less: Increase in Inventory (50,000) Decrease in Salaries Payable (5,000)
Net Cash Flow from Operations (48,000)
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method
In addition, on the face of the statement or in a supplemental
schedule, disclose the issuance of $50,000 of stock to
a creditor, a non-cash financing activity.
In addition, on the face of the statement or in a supplemental
schedule, disclose the issuance of $50,000 of stock to
a creditor, a non-cash financing activity.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Example - Indirect Method(Alt. Treatment of non-cash items)
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Demonstration Case
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
End of Chapter 16
Now, this is what I call
CA$H FLOW!
