income statement and flow of cash

Income Statement and Flow of Cash

Dr Nayyar R. Kazmi

Income Statement

Sales – Expenses = Income

Income is the value of goods and services earned from the operation of the business. It includes both cash & credit. For example, if a business entity deals in garments. What it earns from the sale of garments, is its income. If somebody is rendering services, what he earned from rendering services is his income.

Expenses are the resources and the efforts made to earn the income, translated in monetary terms. It includes both expenses, i.e., paid and to be paid (payable). Consider the above mentioned example, if any sum is spent in running the garments business effectively or in provision of services, is termed as expense.

Profit is the excess of income over expenses in a specified accounting period.

Profit= Income-expenses

? Is King

Cash flow helps you better understand the Balance Sheet and the Income Statement

Cash Flow is calculated from account values on those statements

Cash is King A company must generate actual cash and it must

generate it from its operations rather than through borrowing or by selling pieces of itself

Easy Come, Easy Go: Cash Flow

Cash flow shows from where the company’s cash came from and where it was spent during the Accounting Period.

Cash Flow Statement shows the increases and decreases in various accounts and the effects on the cash floor.

Increase in Asset = Use of Cash Decrease in Asset = Source of Cash

Conversely Increase in Liability or Owners Equity=Source Decrease in Liability or Equity= Use of Cash

Accounts for Non Cash Charges such as Depreciation, which is shown as an expense on the Income Statement, but since no actual expense is made it is taken as a “Source” of Cash.

Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities

Three different activities:

Operating,

Content and Format

The Statement of Cash FlowsThe Statement of Cash Flows

Investing, Financing

Content and Format

The Statement of Cash FlowsThe Statement of Cash Flows

OperatingOperatingOperatingOperating

Cash inflows and outflows from operations.

InvestingInvestingInvestingInvesting

Cash inflows and outflows from non-current assets.

FinancingFinancingFinancingFinancing

Cash inflows and outflows from non-current liabilities and equity.

The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility.

The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility.

Preparation

The Statement of Cash FlowsThe Statement of Cash Flows

BE 5-12 Midwest Beverage Company reported the following items in the most recent year.

Activity

OperatingFinancingOperatingOperatingInvesting

OperatingFinancing

Required: Prepare a Statement of Cash Flows

PreparationStatement of Cash Flow (in thousands)

Operating activities

Net income 40,000$ I ncrease in accounts receivable (10,000) I ncrease in accounts payable 5,000 Depreciation expense 40,000

Cash flow f rom operations 75,000 I nvesting activities

Purchase of equipment (8,000) Financing activities

Proceeds f rom notes payable 20,000 Dividends paid (5,000)

Cash flow f rom financing 15,000 I ncrease in cash 82,000$

The Statement of Cash FlowsThe Statement of Cash Flows

Noncash credit to revenues.

Noncash charge to expenses.