final cash flow statement

8/7/2019 Final Cash Flow Statement

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A Cash Flow Statement IsImportant

Because

It can be used to assess the timing,Amount and predictability of future cash flow

It can be the basis for budgeting.

A cash flow statement can answer the questionwhere did the money come from?"

"Where did it go?"


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What You Should Know Before GettingStarted

What is a Cash Flow StatementHow to Prepare a Cash Flow Statement

Operating Activities

Investing ActivitiesFinancing Activities

Cash Flow from Operating Activities Indirect

Method

Sources and Uses of Funds

How to Analyze a Cash Flow Statement

Checklist

Resources


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What to Expect

This Business Builder will introduce you to the casflowstatement and its importance for financial

management.Through the use of a worksheet, the Business Builwillguide you through the construction of a cash flostatementfor your business.

The cash flow statement is a complex financialstatement and by necessity,Business Builder contains


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What Is A Cash Flow Statement?

For any business, the cash flow statementmay be the most important financialstatement.

It traces the flow of funds (or workingcapital) into

and out of your business during anaccounting period.

For a small business, a cash flow statementshould probably be prepared as frequentlypossible. This means either monthly orquarterly. An annual

statement is a must for any business.


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A cash flow statement is also a key tounderstanding the investment and financingphilosophy of a borrower. It will be used byyour banker to answer the question, "Does thiscompany have enough cash to make paymentsa loan?

a cash flow statement is important to measureand track the flow of cash into and out ofyour business.


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Accounting experts recommend usingthree categories to organize cash flow

dataOperating Activities,Investing Activities,

And Financing Activities.

However, there are two possible approaches toreporting

cash flow from operating activities:The Direct MethodThe Indirect Method.

Since 1987, the Financial Accounting Standards Boardrule makers of the accounting community have

encouragedthe use of the direct method. However, most compa

continue to report operating cash flow by the indire


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This Business Builder will introduce you to both.You will need to make a decision as to which

method you will use.

However, under the direct method, it isnecessary to reconcile net income reported onthe P & L statement to net cash flow fromoperations on the cash flow statement. (Thisis the same as using the indirect method tocompute cash flow from operating activities.)

It may seem like a Catch 22 situation you canchoose either method, but if you choose thedirect method, you must also compile operatingactivities according to the indirect

method. (but, If you choose the indirect method,ou do not have to also com ile cash flows


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The method of least work, would be to just use theindirect method. However, it's suggested that youwork through both methods and choose the one thatgives you the best information on which to basemanagement decisions.

Also, you may want to consider that the directmethod of reporting cash flow fromoperations is the method recommendedby small business loan officers. It is considered

to be a more useful rendering of a company's useof cash. Cash, of course, is what will repay a loan.


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You may want to consider thefollowing questions before you start

Do I have a record of what was paid to suppliers and emploduring the time period being examined?YESNO

Do I have a system to record sales or other revenues thatinto the business?YESNO

Do I have an income statement and a balance sheet for thesame period for which I am constructing the cash flowstatement?YES

NO


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There are three sections to a cash flowstatement,Operating Activities,Investing Activities,

Financing Activities.

Together, the three sections of the cashflow statement work together to showthe net change in cash for the period.

Here is what a completed cash flowstatement looks like. It is compiled

according to the INDIRECT METHOD .


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Cash Flow From Operations

Net Income* $ 200

Additions(Sources of cash)

Depreciation $ 100

Increase in accounts payable $ 30

Increases in accrued income taxes $ 10

Subtractions (Uses of cash)

Increase in Accounts Receivable $ (150)

Increase in Inventory $ (25)

Net cash flow from operations $ 165

Cash Flows from Investing Activities

Equipment $ (400)

Cash Flows Associated with Financing

Activities Notes payable $ 30

Net change in Cash $ (205)

Cash Flow StatementABC Company

For the year ended 200X

*Net income is taken from the income statement.


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The cash flow statement for the ABCCompany shows that there was a $205 cashshortfall in 200X. As can be seen from thecash flow statement, the cash drain isprimarily from the investment of $400 inequipment. The statement also shows thatthe cash flow from operations activity was

a positive $165.


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How To Prepare A Cash FlowStatement

This Business Builder will concentrate on each ofthree sections of a cash flow statementindividually.

Operating ActivitiesInvesting ActivitiesFinancing Activities


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Cash flow from operating activities is probablythe most complex section because there are twmethods of computing it.The direct method will be introduced first

However, the direct method is NOT the mostwidely used method to calculate the cash flowfrom operating activities.Many companies use the Indirect Method. The

choice of method does not change the amount ocash flow reported from operating activities.The direct and indirect methods are just tworoutes to the same destination.No matter which method you select, thephilosophy behind what constitutes cash flow


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Cash flow from operating activities is any cashtransaction related to the company's ongoingbusiness, that is the business activities that ar

responsible for most of the profits.Operating activities usually involve producingand delivering goods and providing services.Cash flow from operations is the healthiest

means of generating cash.Over time, cash from operations will show theextent to which day to day operating activitiehave generated more cash than has been used.


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Cash Flow From OperatingActivities

The direct method following is the underlyingformula for the direct method of computing theoperating activities section of a cash flowstatement:

Cash Received From Sales Of Goods And ServicesCash Paid For Operating Goods And Services


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Cash Flow From Operating Activities.The operating activities section of a cash flow statement

reports the information listed below. These are the line

items that you will need to fill in to complete a cashflow statement.

Cash Flow From Operating Activities:(+) Cash Received From Customers

(+) Other Operating Cash Receipts (if Any)( ) Cash Paid To Suppliers (including Suppliers Of InventorInsurance, Advertising, Etc.)( ) Cash Paid To Employees( ) Interest Paid( ) Income Taxes Paid( ) Other Operating Payments, If Any(=) Total Net Cash Provided (used) By Operating Activities

As you can see, any use of cash (such as payments to supplieor employees) is subtracted and any source of cash (suc


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Sources Of Cash (additions):

Cash received from customers $ 10,000

Dividends received $ 700

Cash provided by operating activities $ 10,700

Uses Of Cash (subtractions):

Cash paid for inventory $ 3,000

Cash paid for insurance $ 1,500

Cash paid for selling expenses $ 1,500

Interest paid $ 300Taxes paid $ 1,450

Net Cash from Operating Activities $ 2,950

XYZ CompanyCash Flow from Operating Activities:

Direct Method


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As noted earlier, even if the direct method isused, net income is such an important accountingconcept that an additional statement reconcilingthe net income shown on the profit and lossstatement with cash flow from operatingactivities must be prepared.

What this means is that according to generallyaccepted accounting principles, if you preparecash flow from operating activities using thedirect method, you must also prepare it by the

indirect method on a supplemental statement.

This Business Builder assumes that you will beworking through both methods in order to choosewhich method will work best for you.Information on financing and investing activities


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Investing Activities

Cash flow from investing activities is the secondpart of both types of cash flow statements.Investing activities are the changes to your cashposition owing to the buying or selling ofnoncurrent assets. This includes selling andreplacing equipment that wears out or acquiringa new building or land so that your company cangrow.

Investing activities can also include the purchaseor sale of stock, bonds, and securities. Lendingmoney and receiving loan payments are alsoconsidered investing activities.


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For a small business, the investing activitiessection of a cash flow statement usually reportsthe following information:

Cash Flows From Investing Activities:(+) Proceeds From Sale Of Assets( ) Purchases Of Property And Equipment(=) Total Net Cash Provided (used) By


For a given period, you may not have much inthe way of investing activities. But over time, itis an important consideration for assessinghow you have chosen to use the cash generatedby your business.


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Financing Activities

Financing activities on a cash flow statementreflect borrowing money and repaying money,issuing stock, and paying dividends. Thefinancing activities section of the cash flow

statement can be reduced to the followingformula:

Cash received from issues of debt and capital

stockCash pd for divid. & re acqu. of debt & cap. stock


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Cash Flow From Financing Activities

For a small business, the financing activities section of a

cash flow statement usually reports the followinginformation:

(+) Net Borrowing Under Line Of Credit Agreement(+) Proceeds From New Borrowings( ) Repayment Of Loans( ) Principal Payments Under Capital Lease Obligations( ) Dividends/distributions/withdrawals Paid(+) Proceeds From Issuance Of Stock

(+) Partner/owner Capital Contributions(=) Total Net Cash Provided (used) By Financing Activities

As you can see, this section of the cash flow statement isregistering inflows of cash from loans received and loans

repaid, and other cash inflows from outsiders and owners.If you have paid dividends or taken money from the


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Net income $3,000 Adjustments:

Depreciation and amortization $1,500

Deferred taxes $150Decrease in accounts receivable $2,000

Increase in inventories ($4,000)Increase in accounts payable $1,150

Increase in accrued interest receivable ($350)

Increase in accrued interest payable $100

Gain on sale of property ($600)

Net cash flow from operating activities $2,950

XYZ CompanyCash Flow from Operating Activities

Indirect Method


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Sources And Uses Of Funds

To identify what adjustments are necessary, aSources and Uses of Funds statement isconstructed based on the company's ledgeraccounts. Changes in the accounts (that is,increases or decreases) are organized as towhether cash came into the firm (a SOURCE o

cash) or cash left the firm (a USE of cash).


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H ere is what a typical Sources and Uses of Funds statement mightlook like for a small business:

Account 12/31/xx 12/31/xx Source Use Type Of Activity

Cash 50 55 5 Oper.

AccountsReceivable

350 200 150 Oper.

Inventories 300 275 25 Oper.

Equipment 1400 1000 400 Invest.

Depreciation 500 400 100 Oper.

AccountsPayable

60 30 30 Oper.

Notes payable 100 70 30 Financ.

AccruedWages

10 10 Oper.

Accrued Taxes 50 40 10 Oper.

Totals 2820 2080 170 580

ABC CompanySources and Uses of Funds during 200X


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Activities are classified as operating,investing, or financing activities. Each ledgeraccount is analyzed to see if a change affectingcash occurred.

If it did, then the amount of the change isnoted. Once a Sources and Uses of Funds table iscompleted, each balance sheet change shouldbe classified as to whether it is an operating,financing, or investing activity. Then theinformation can be recorded to the cash

flow statement.

For most small businesses, changes todepreciation, accounts receivable, inventory,and income taxes will be analyzed and reflectedon the cash flow statement. Here are the


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Depreciation And Amortization

Any depreciation and amortization amountsshown on the P & L statement are added to netincome. This is because a depreciation oramortization allowance has no cash component.It is simply an allocation of the cost of an asset(a real asset in the case of depreciation or anintangible asset in the case of amortization) toan expense account. The only time cash willenter into the transaction is when the asset issold.

When using the indirect method to compute thecash flows from operating activities, anydepreciation or amortization expense must beadded back to income because it was deducted asan expense when net income was computed.(Amortization, as used here, is the write off asan expense of the costs incurred to acquire anintangible asset, such as a patent or copyright.)


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Accounts Receivable

If accounts receivable decreased during the timeperiod, this means that customers have paid offsome accounts, (that is, the company receivedcash payments) and so, net income should beincreased by the amount accounts receivabledecreased during the period. Conversely, ifaccounts receivables increased during the period,net income will be reduced. This adjustmentshows that net income overstates cash becauseit includes both cash sales and sales on account.


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Inventory

If inventory increased during the period, thismeans the company either used cash to purchase

the inventory, in which case net income would bedecreased or, if the inventory was purchased onaccount, then accounts payable will haveincreased. As such positive changes in inventorywill be deducted from net income.


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Income Tax

Adjustments for increases in income taxexpense are subtracted from net incomebecause, most often, income taxes will notbe paid until a few months after thebeginning of the next year. While incometaxes have been deducted from net incomeon the P & L statement, they actually are afuture expense and do not reflect areduction in cash. So, they are added backto net income.

On the worksheet you will use to constructcash flow from operating activities usingthe indirect method, cash activities areorganized as to whether they represent

additions or subtraction's to cash. At thissta e it is more im ortant that ou


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Shortcuts For Entering Changes InAssets And Liabilities Accounts On

The Cash Flow Statement


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Accounts ReceivableIf there is an increase in accounts receivable, the

amount of the change should be deducted from netincome. If there is a decrease in accounts receivable, theamount of the change is added to net income.

InventoryIf there is an increase in inventory, the amount of the

change is deducted from net income. If there is adecrease in inventory, the amount of the change isadded to net income.

Accounts PayableIf there is an increase in accounts payable, the amount

of the change is added to net income. If there is adecrease in accounts payable, the amount of the changeis subtracted from net income.

Accrued Wages PayableIf there is a decrease in accrued wages payable, the

amount of the change is deducted from net income. If

there is an increase in accrued wages payable, theamount of the change is added to net income.


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Prepaid InsuranceIf there is a decrease in prepaid insurance, theamount of the change is added to net income. Ifthere is an increase in prepaid insurance, theamount of the change is subtracted from netincome.

Income Taxes PayableIf there is an increase in income taxes payable,the amount of the change is added to net

income. If there is a decrease in income taxespayable, the amount of the change is subtractedfrom net income.Once these adjustments are made, you cancompute the cash flow from operating activitiesusing the indirect method.


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How To Analyze A Cash FlowStatement

Use the Sources and Uses of Funds Worksheet tcomplete the indirect method cash flowworksheet for your business. Group transactioaccording to operating, investing, and financinactivities.

Once you have constructed a cash flowstatement, you will be much closer tounderstanding the financial position of yourcompany. While a balance sheet and incomestatement are tools for management, withoutcash flow statement they are limitedbarometers and may even be misleading.


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Operating ActivitiesThe cash flow statement will tell you where moneycame from and how it was used. When analyzingcash flow, the first place to look is the cash flowfrom operating activities. It tells you whether thefirm generated cash or whether it needs a cashinfusion.

A few periods of negative cash from operatingactivities is not by itself a reason for alarm if it isbased on plans for company growth or due to aplanned increase in receivables or inventories.However, if a negative cash flow from operatingactivities is a surprise to managers and owners, itmay be undesirable. Over time, if uncorrected, itcan foretell business failure. Managers and ownersshould pay particular attention to increases inaccounts receivable. The cash flow statement givesthe true picture of the account. A large increase inaccounts receivables may warrant new billing orcollection procedures.


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The cash flow statement puts investingactivities into perspective. At one glance,you can see whether or not a surplus in

operations is being used to "grow" thecompany. A lack of investing activities, thatis few purchases of new equipment or otherassets, may indicate stagnant growth or adiversion of funds away from the company.


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Financing Activities

The financing activities section of the cash flowstatement will show repayments of debt, borrowing offunds, as well as injections of capital and the paymentof dividends. As a company expands, this area of thecash flow statement will become increasinglyimportant. It will tell outsiders how the company has

grown and the financial strategies of management.

Together, the three sections of the cash flowstatement show the net change in cash during theperiod being examined. A comparison between pastperiods will give owners and managers a good idea of

the trend of their business. Positive trends in cash flowmay encourage owners to consider long term financingas an aid to growth and increase their comfort levelconcerning the company's ability to generate cash forrepayment. Strong cash flow will also make it easier toacquire financing and to negotiate with lenders from aposition of strength. Preparation of a cash flowstatement is the first step toward financial


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Checklist

Operating ActivitiesWhen you prepared the operating activities

portion of the cash flow statement by the diremethod, did you also prepare it by the indirecmethod to reconcile net income to cash flow

from operating activities?Has net income been adjusted for changes inaccounts receivable, inventory, accountspayable, wages payable, and income taxes?

Investing ActivitiesIs every cash transaction to purchase equipmentother assets represented?

If any loans were made by the company, are thereflected here?


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Financing ActivitiesAre all loan payments reported?

Have all cash dividends been reported?Are there any unreported cash inflows from

owners or investors?

Cash Flow AnalysisWhat is the trend in cash flow from operating

activities for your company?Is there a reason for any large increase in accoun

receivable?How do you expect the financing activities of yo

company to change in the next year and thenext two years?

final cash flow statement

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