STATEMENT OF

CASH FLOWS

Chapter 12

Compare Companies

INCOME Company A Company BSales $500 $500Expenses 425 425Net Income $ 75 $ 75CASHBeginning of Year $25 $25End of Year 25 25Change in CASH -0- -0-

Cash Activities Company A BCash Rec’d

Customers $450 $350 Sale of PA 5 60 Total $455 $410

Cash Paid To suppliers $380 $400 Purch of PA 70 10 Purch Invest 5 0

Cash Paid $455 $410Change in Cash -0- -0-

Why Are Cash Flows Important?

Cash is what pays the bills.You must sell your product and collect cash

from your customers in time to:1. Pay suppliers for merchandise

purchases2. Pay the bank on any loans (debt)3. Pay employees their wages4. Pay taxes5. Purchase new equipment as needed.

Analyzing where a company’s cash is coming from & where it is being spent may assist in detecting future profit potential and/or future financial problems.

NET CASH FLOWS

Cash Inflows--Cash Outflows = Net Cash

Flows

Two parts of Cash Flow Statement

Activities Operating Investing Financing

Cash Balance verification Increase (Decrease) in cash Cash at Beginning of Year Cash at End of Year (Balance Sheet)

Cash Flows from Operating

Current accounts: current assets, current liabilities1. Cash received from customer

Cash A/R

2. Cash paid to suppliersA/P Cash

Investing Activities

Invest in Yourself Purchase of plant assets ( minus cash) Building

Cash-- Sale of plant assets ( plus cash)

CashBuilding

Investing Activities (2)

Investments in Others Purchase of other company’s stock or bonds Sale of other company’s stock or bonds Loaning money to other company (N/R) Collection of principle payments on loan

Financing

1. Equity ( Your own company) Issuing shares of stock Retiring shares of stock Purchasing shares of treasury stock Selling shares of treasury stock PAYING CASH DIVIDENDS ON STOCK

Financing 2

2. DEBT Borrowing cash Cash M/P

Repaying Principle on a loan M/P Interest Expense

Cash

“Foolers”

Interest Paid Decision to go into debt is Financing activity Paying interest on the debt is operating or current

Interest Received Decision to loan money is an investing activity Receiving interest on loan is operating or current

Dividends Received Decision to purchase other company’s stock-investing Receiving dividends is operating or current

Dividends paid - different Decision to sell stock is Financing activity Paying dividend to stockholders is also financing activity

Schedule of Non Cash Activities

Need to be reported if will affect cash flows in the future.

Activities:1.Purchasing plant assets by signing a note

payable2.Purchasing a building through a mortgage

loan3.Exchanging stock for plant assets4.Issuing stock to retire debt5.Converting preferred stock to common stock

Operating (O), Investing (I), Financing (F)

Source (+), Use (-)

1. Earned a net income O +2. Paid Cash Dividend F-3.Issued stock for cash F+4.Retired Long Term Debt by issuing stock

Non Cash

5. Paid A/PO-

6. Purchased inventory with cashO-

Review Sheet.Homework

Read Chapter 12 or whatever book with cash flow OR Watch the narrated power slides on book website DO 12-1, 12-10 – Activities DO 12-2 Cash Flow from Operations DO 12-3 Free Cash Flow DO 12-8 Statement of Cash Flow 12-14 -- Analysis

BASIC STRUCTURE OF A STATEMENT OF CASH FLOWS

Cash provided (used) by: Operating activities

Investing activitiesFinancing Activities

Net Incr (decr) in cash and cash equiv Cash and Cash Equiv at beginning of

year(last year) Cash and Cash Equiv at end of year

Cash Flow Statement- operating

Start with Income on an Accrual Basis, (Net Income)

Accrual transactions(No cash in transaction):

Dr. A/R Cr. Sales Dr. Advertising X Cr. A/P

Then make adjustments (incr or decr) net income to show income on a Cash Basis.

Indirect method

Income from continuing operations (accrual income)Add: Depreciation, depletion, and amoritization XAdd/decr changes in Current AssetsAdd/Decr changes in Current LiabilitiesAdd back any non cash losses or decr any non cash

gains

= Net cash flow from operating activities

This number should always be positive See Page 555

Changes in Current Assets

Current assets increase ---decrease in cash flow

A/RSale I ReceiveOn Acct I Cash OPPOSITE InventoryBuy I SaleInventory I Inventory

Changes in Current Liabilities

Current liabilities increase ---increase in cash flow

A/PPay I PurchaseCash I on acct SAME

Steps for CFO (Cash flow from Operations)

1. Write down Net Income from Income Statement

2. Add in Depreciation and Amortization3. Record changes to Current Assets and

Current Liabilities4. Add in any non cash losses/subtract any

non cash gains (sale of plant assets)

Basic Concepts for Investing and Financing Section

Paying back decreases cash flowBuying decreases cash flowSelling increases cash flowSell stock for cash = issue stock increase

cash flow

If you sell more plant assets than you buy your company is contracting

If you buy more than you sell your company is expanding

Investing Basics-Review Problem

PPE A.DBeginning Balance 309 194PPE Sold (12)

(5)Subtotal 297 189Less Ending Balance 430 218Purchased/DeprX 133 29

Financing Basics

RETAINED EARNINGSBeginning 92Plus Net Income 66Subtotal 158Ending Bal 110Dividends 48

Which one would you want to work for??????

Last Section (Cash reconciliation)

Change in cash for the periodAdd last year cash (beginning cash) from

balance sheetShould equal cash on balance sheet for

current year (Check figure)

Create a Cash Flow for Shubert