You are on page 1of 89

Chapter 13

The Statement of Cash Flows

Objectives

State the Cash Flows primary purpose, its


usefulness

Discuss & understand operating, investing, and


financing activities, and noncash.

Analyze a companys cash flow statement.

Prepare one using: the indirect method

Note: you are not responsible to know the worksheet or direct


method. (appendix 13A and 13B)
NOTE: SUPPLEMENTARY MATERIAL Product Life Cycle
and Cash Flow.
Warning: Not in book!!!

The Primary Purpose of the


Statement of Cash Flows Is...

To provide information about:


cash receipts,
cash payments, and
the net change in cash resulting from:
operating,
investing, and
financing activities of a company
during a period.

Categories of Cash Flows


Cash Flows are subdivided into three categories:
Operating Cash Receipts and Cash Disbursements
from day to day transactions. These transactions are
generally from the Income Statement and affect Current
Assets and Current Liabilities

Investing Cash Receipts and Cash Disbursements


from the purchase and sale of Long-Term Assets

Financing Cash Receipts and Cash Disbursements


from Long-term Debt and Equity

Questions the Statement of Cash


Flow Answers

Operating Activities...
Include:
The cash effects of transactions that create
revenues and expenses and
Enter into determination of net income.

Involve Income Statement Items

Investing Activities...
Include:
Purchasing and disposing of
investments and productive long-lived
assets using cash and
Lending money and collecting the loans.

Involve Investments and LongTerm Asset Items

Financing Activities...
Include:
Obtaining cash from issuing debt and
repaying the amounts borrowed and
Obtaining cash from stockholders and
paying them dividends.

Involve Long-Term Liability and


Stockholders Equity Items

Types of Cash Flows Operating Activities

Cash inflows:
From sale of goods or services
From interest received and dividends
received
To receive cash on account
Cash outflows:
To suppliers for inventory
To pay down accounts payable
To employees for services
To government for taxes
To lenders for interest
To others for expenses

Types of Cash Flows Investing Activities

Cash inflows:
From sale of property, plant, and equipment
From sale of debt or equity securities of other entities
From collection of principal on loans to other entities
Cash outflows:
To purchase property, plant, and equipment
To purchase debt or equity securities of other entities
To make loans to other entities

Types of Cash Flows Financing Activities

Cash inflows:
From issuance of equity securities (company's
own stock)
From issuance of debt (bonds and notes)
Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital
stock (treasury stock).

Operating Activities - ALERT

Some cash flows relating to investing or


financing activities are classified as operating
activities. For example...
Receipts of investment revenue (interest
and dividends) and
Payments of interest to lenders
Sale or Purchase of Trading Securities

Significant
Noncash Activities...

That do not affect cash are NOT reported in the


body of the statement of cash flows.
Are reported:
Separately--bottom of CF statement or
Separately--note to the financial
statements.

Significant
Noncash Activities...
1. Issuance of common stock to purchase
assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
For IFRS, non
cash items must
be reported in
notes.

Classification of Cash Flows

Accrual Basis versus Cash Basis of


Accounting
Accrual Basis Recognizes Revenues at
the time the earnings process is complete,
and expenses at the time they are
incurred, regardless of cash flow.
Cash Basis Recognizes Revenues when
the Cash is Received, and Expenses at
the time the Cash is Paid.

Financial Statements are prepared using


the Accrual Basis of Accounting
The Statement of Cash Flows Requires
that the Accrual Basis be converted to the
Cash Basis of Accounting.
This Can be Done either:

Directly by examining each item on the Income


Statement, or

Indirectly By Adjusting Net Income for the changes


in the Non-Cash Balance Sheet Accounts.

Why Report the Causes of Changes in


Cash?

Because investors, creditors, and


other interested parties want to know
what is happening to a companys
most liquid asset,

CASH

Statement of Cash Flows Helps


Users Evaluate
1. Future cash flows?

2. Pay Dividends and meet obligations?


3. Reasons for differences between net income
and net cash provided (used) by operating
activities
4. What happened in investing and financing?

Usefulness and Format


Format of the Statement of Cash Flows

Order of Presentation:
1.

Operating activities.

2.

Investing activities.

3.

Financing activities.

The cash flows from operating activities section always


appears first, followed by the investing and financing
sections.

Example: Cash Flow Stmt


Joe's Manufacturing COMPANY
CASH FLOW STATEMENT
DEC. 31, 2001

CASH FLOW FROM OPERATING ACTIVITIES


NET INCOME
$
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH:
(Increase)/Decrease in Accounts Receivable
(30,000)
Increase/(Decrease) in Accounts Payable
4,000
NET CASH PROVIDED BY OPERATING ACTIVITIES

(26,000)
9,000

CASH FLOW FROM INVESTING ACTIVITIES


Purchase of Equipment
NET CASH USED BY INVESTING ACTIVITIES

(10,000)
(10,000)

CASH FLOW FROM FINANCING ACTIVITIES


Issuance of Common Stock
Payment of cash Dividends
NET CASH USED BY FINANCING ACTIVITIES

50,000
(15,000)

35,000

35,000

NET INCREASE IN CASH

34,000

CASH AT THE BEGINNING OF THE PERIOD

CASH AT THE END OF THE PERIOD

34,000

NONCASH INVESTING AND FINANCING ACTIVITIES


Issuance of Bonds Payable to purchase land.

130,000

Format of the Statement of Cash Flows


During its first week, Duffy & Stevenson Company
had these transactions.
1.

Issued 100,000 shares of $5 par value common


stock for $800,000 cash.

2.

Borrowed $200,000 from Castle Bank, signing a


5-year note bearing 8% interest.

3.

Purchased two semi-trailer trucks for $170,000


cash.

4.

Paid employees $12,000 for salaries and wages.

5.

Collected $20,000 cash for services provided.

Classification

SO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows


During its first week, Duffy & Stevenson Company
had these transactions.

Classification

1.

Issued 100,000 shares of $5 par value common


stock for $800,000 cash.

2.

Borrowed $200,000 from Castle Bank, signing a


5-year note bearing 8% interest.

Financing

3.

Purchased two semi-trailer trucks for $170,000


cash.

Investing

4.

Paid employees $12,000 for salaries and wages.

Operating

5.

Collected $20,000 cash for services provided.

Operating

Financing

SO 2 Distinguish among operating, investing, and financing activities.

Sources of Information for the


Statement of Cash Flows

Comparative balance sheet


Current income statement
Additional information

Small EXAMPLE.

Statement Of Cash Flows Indirect Method


The transactions of Joes Repair Company for the
year ended 2000 are used to illustrate the
preparation of a statement of cash flows .
Joes Repair Company started in January 1, 2000,
when it issued 50,000 shares of $1 par value
common stock for $50,000 cash.
The company rented its office space and furniture
and performed consulting services throughout the
first year.

Steps in Preparing
Statement of Cash Flows

STEP #1
Determine the NET CHANGE in CASH
Increase?
Decrease?

$34,000 - 0 = $34,000 INCREASE

JOES Repair COMPANY


Comparative Balance Sheet
December 31, 2000

Assets
Cash
Accounts
receivable
Equipment
Total
Liabilities and
stockholders
equity
Accounts payable
Common stock
Retained
earnings
Total

Dec. 31, 2000

Change
Increase/Decrease

$34,000
30,000

Jan. 1,
2000
$0
0

10,000
$74,000

0
$0

10,000 increase

$4,000
50,000
20,000

$0
0
0

$4,000 increase
50,000 increase
20,000 increase

$74,000

$0

$34,000 increase
30,000 increase

Income Statement and


Additional Information
COMPUTER SERVICES COMPANY
Income Statement
For the Year Ended December 31, 2000

Revenues
Operating expenses
Income before income taxes
Income tax expense
Net income

$85,000
40,000
45,000
10,000
$35,000

Additional Information:
(a) Examination of selected data indicates that a
dividend of $15,000 was declared and paid during
the year.
(b) The equipment was purchased at the end of 2000.
No depreciation was taken in 2000.

Steps in Preparing
Statement of Cash Flows

STEP #2
Determine the NET CHANGE PROVIDED by
Operating Activities
You must analyze the Income Statement and
some of the Balance Sheet net changes (current
assets and liabilities) to convert Net Income
(accrual) to a cash basis. (You might need
additional information also).

Determine Net Cash Provided/Used


Operating Activities

By

Adjust net income for items that did not affect


cash.

Net income must be converted because earned


revenues may include credit sales that have
not been collected in cash and expenses
incurred that may not have been paid in

cash.

Determine Net Cash Provided/Used


By Operating Activities

Receivables, payables, prepayments,


and inventories must be analyzed for
their effects on cash.

Determine Net Cash Provided/Used


By Operating Activities
Joes Repair Company (JRC) had revenues of
$85,000 in its first year of operations.
However, JRP collected only $55,000 in cash.
Accrual basis revenue was $85,000, cash basis
revenue would be $55,000.
The increase in accounts receivable of $30,000
must be deducted from net income.
(If accounts receivable decrease, the decrease
must be added to net income).

Determine Net Cash Provided/Used


Operating Activities (cont)

By

Accounts payable - When accounts payable increase


during a year, operating expenses are higher (accrual)
than they are on a cash basis.
For JRP, operating expenses reported in the income
statement were $40,000.
Since Accounts Payable increased $4,000, $36,000
($40,000 $4,000) of the expenses were paid in cash.
So. . . . an increase in accounts payable must be added
to net income, (a decrease subtracted).

JOES REPAIR COMPANY


Statement of Cash Flows--Indirect Method (Partial)
For the Year Ended December 31, 2000

Cash flows from operating activities


Net income
$35,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable
$(30,000)
Increase in accounts payable
4,000 (26,000)
Net cash provided by operating activities
$ 9,000

Steps in Preparing
Statement of Cash Flows

STEP #3
Determine the NET CHANGE PROVIDED by
Investing and Financing Activities
You must analyze the some of the Balance
Sheet net changes (long term assets and long
term liabilities and equity) to see their effects
on cash.

Determine Net Cash Provided/Used


Investing and Financing Activities

By

No data are given for the increases in Equipment of


$10,000 and Common Stock of $50,000. Assume any
differences involve cash.
The increase in equipment is from a purchase of
equipment for $10,000 cash. This purchase is
reported as a cash outflow in the investing activities
section.
The increase of common stock results from the
issuance of common stock for $50,000 cash. It is
reported as an inflow of cash in the financing
activities section of the statement of cash flows.

Determine Net Cash Provided/Used


Investing and Financing Activities

Reasons for the increase of $20,000 in the Retained


Earnings.
Net income increased retained earnings by
$35,000. REPORTED IN THE OPERATING
ACTIVITIES SECTION.
The additional information indicates that a
cash dividend of $15,000 was declared and
paid. REPORTED IN THE FINANCING
ACTIVITIES SECTION.

By

Joes Repair COMPANY


Statement of Cash Flows--Indirect Method (Partial)
For the Year Ended December 31, 2000

Cash flows from operating activities


Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable $(30,000)
Increase in accounts payable
4,000
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
Cash flows from financing activities
Issuance of Common Stock
$50,000
Payment of cash dividends
(15,000)
Net cash provided by financing activities

$35,000

(26,000)
$ 9,000
(10,000)

35,000

BIGGER EXAMPLE.

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total

2011
$55,000
20,000
15,000
5,000
130,000
160,000

2010
$33,000
30,000
10,000
1,000
20,000
40,000

Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase

(11,000)
27,000

(5,000)
10,000

6,000 increase
17,000 increase

(3,000)
$398,000

(1,000)
$138,000

2,000 increase

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31

Liabilities and
Stockholders equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total

2011

2010

$28,000
6,000
130,000
70,000
164,000
$398,000

$12,000
8.000
20,000
50,000
48,000
$138,000

Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase
116,000 increase

COMPUTER SERVICES COMPANY


Income Statement
For the Year Ended December 31, 2001

Revenues

Cost of goods sold


Operating expenses

$507,000

$150,000
111,000

Depreciation expense

9,000

Loss on sale of equipment

3,000

Interest expense

42,000 315,000

Income from operations


Income tax expense
Net income

192,000
47,000
$145,000

Illustration 13-14

Second-Year Operations
Additional Information:
(1) The company declared and paid a $29,000 cash dividend.
(2) The company obtained land through the issuance of $110,000 of long-term
bonds.
(3) An office building costing $120,000 was purchased for cash; equipment
costing $25,000 was also purchased for cash.
(4) The company sold equipment with a book value of $7,000 (cost $8,000 less
accumulated depreciation $1,000) for $4,000 cash.
(5) The company issued common stock for $20,000 cash.
(6) Depreciation expense was $6,000 for the building and $3,000 for the
equipment.

Determine the Net Increase or


Decrease in Cash
Cash increased $22,000
($55,000-$33,000)

Determine Net Cash Provided/Used


Operating Activities

By

Adjust net income for items that did


not affect cash.
For example:

Add back non-cash expenses (depreciation, amortization,


depletion
Deduct Gains
Add back Losses
Changes in Current assets
Changes in Current liabilities

Determine Net Cash Provided/Used


Operating Activities

By

Depreciation expense The company reported


depreciation expense of $9,000.
Depreciation and other charges that do not
require the use of cash, such as amortization of
intangible assets are added to net income.

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000

INDIRECT METHOD

Determine Net Cash Provided/Used


Operating Activities

By

Loss on Sale of Equipment The company


reported a $3,000 loss on the sale of equipment
(book value $7,000 less cash proceeds $4,000).
The loss reduced net income but did not reduce
cash.
The $3,000 loss is added to net income in
determining net cash provided by operating
activities.

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000

INDIRECT METHOD

Determine Net Cash Provided/Used


By Operating Activities

Current Assets
Accounts Receivable - Accounts
receivable decreases during the period
because cash receipts are higher than
revenues reported on an accrual basis. The
decrease of $10,000 must be added to net
income, as a cash inflow. Why? You collected
the cash!

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total

2011
$55,000
20,000
15,000
5,000
130,000
160,000

2010
$33,000
30,000
10,000
1,000
20,000
40,000

Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase

(11,000)
27,000

(5,000)
10,000

6,000 increase
17,000 increase

(3,000)
$398,000

(1,000)
$138,000

2,000 increase

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000

INDIRECT METHOD

Determine Net Cash Provided/Used


Operating Activities

By

Inventory-

Inventory increases during a


period when merchandise purchases
exceed the cost of goods sold. Or, you spent
cash on inventory that you havent expensed
yet through cost of goods sold. The increase of

$5,000 in inventory must be deducted from


net income as it is a cash outflow.

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)

INDIRECT METHOD

Determine Net Cash Provided/Used


By Operating Activities
Prepaid

Expenses - Prepaid expenses


increase during a period because cash paid
for expenses is greater than expenses
reported on an accrual basis.
The increase of $4,000 in prepaid expenses
must be deducted from net income.

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
Increase in prepaid expenses
(4,000)

INDIRECT METHOD

Determine Net Cash Provided/Used


By Operating Activities
Accounts

Payable - The increase of


$55,000 in accounts payable must be
added to net income. Why? This means
the company received more inventory (and
other items) than it actually paid for). Cash
inflow

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31

Liabilities and
Stockholders equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total

2011

2010

$28,000
6,000
130,000
70,000
164,000
$398,000

$12,000
8.000
20,000
50,000
48,000
$138,000

Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase0
116,000 increase

Determine Net Cash Provided/Used


By Operating Activities

Taxes Payable The decrease


of $2,000 in accounts payable must be
subtracted from net income. Why? This

Income

means the company owed money, but then


paid some of it Cash outflow

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
Loss on sale of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net Cash provided by operating activities

INDIRECT METHOD

$145,000

$9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
$172,000

Determine Net Cash Provided/Used


By Investing Activities

Study the balance sheet to determine changes in


noncurrent assets.
Changes in each noncurrent account are analyzed
using selected transaction data to determine the
effect, if any, the changes had on cash.

Determine Net Cash Provided/Used


By Investing Activities
Land

- Land of $110,000 was purchased


through the issuance of long-term bonds.
Although the exchange of bonds payable
for land has no effect on cash, it is a
significant noncash investing and
financing activity that must be disclosed.

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total

2011
$55,000
20,000
15,000
5,000
130,000
160,000

2010
$33,000
30,000
10,000
1,000
20,000
40,000

Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase

(11,000)
27,000

(5,000)
10,000

6,000 increase
17,000 increase

(3,000)
$398,000

(1,000)
$138,000

2,000 increase

Determine Net Cash Provided/Used


By Investing Activities
Building

- An office
building was acquired
using cash of $120,000.
This transaction is a
cash outflow reported
in the investing
activities section.

Determine Net Cash Provided/Used


By Investing Activities

Equipment - The equipment account increased


$17,000.
The additional information provided, reveals that
this was a net increase resulting from two
transactions
(1) a purchase of equipment for $25,000
(2) sale of equipment costing $8,000 for $4,000.
The purchase of equipment should be shown as a
$25,000 outflow of cash and the sale of equipment
should be shown as a cash inflow of $4,000.

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total

2011
$55,000
20,000
15,000
5,000
130,000
160,000

2010
$33,000
30,000
10,000
1,000
20,000
40,000

Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase

(11,000)
27,000

(5,000)
10,000

6,000 increase
17,000 increase

(3,000)
$398,000

(1,000)
$138,000

2,000 increase

Reminder sale of Long Term


Asset
Cash
Accumulated Depreciation
Loss on Sale of Equipment
Equipment

4,000
1,000
3,000
8,000

Equipment
Beg. Balance

10,000

Purchase

25,000

End Balance

27,000

Equipment sold

8,000

Computer Services Company


Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
Loss on sale of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net Cash provided by operating activities

Cash flows from Investing activities


Purchase of building
Purchase of equipment
Sale of equipment
Net Cash Flow from Investing

INDIRECT METHOD

$145,000

$9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
$172,000
(120,000)
(25,000)
4,000
(141,000)

Determine Net Cash Provided/Used


By Financing Activities
Bonds

Payable - The bonds payable


account increased by $110,000. The
issuance of bonds for land is a noncash
transaction reported in a separate
schedule at the bottom of the statement
of cash flows.

COMPUTER SERVICES COMPANY


Comparative Balance Sheet
December 31

Liabilities and
Stockholders equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total

2011

2010

$28,000
6,000
130,000
70,000
164,000
$398,000

$12,000
8.000
20,000
50,000
48,000
$138,000

Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase0
116,000 increase

Determine Net Cash Provided/Used


By Financing Activities
Common

Stock- increased by $20,000.


The additional information notes that this
was for cash.

Determine Net Cash Provided/Used


By Financing Activities

Retained Earnings - Retained Earnings increased


by $116,000.
The increase is a net of
(1) Net income of $145,000 that increased
Retained Earnings and
(2) dividends of $29,000 that decreased
Retained earnings.
Net income is converted to net cash provided by
operations.
Payment of the dividend is a cash outflow that is
reported as a financing activity.

Free Cash Flow


Free Cash Flow =
+ Cash from Operating Activities
- Capital Expenditures
- Cash Dividends
Free Cash Flow means the cash left over from
operations after adjustment for capital expenditures
and dividends.

COMPUTER SERVICES COMPANY


CASH FLOW STATEMENT
DEC. 31, 2011

CASH FLOW FROM OPERATING ACTIVITIES


NET INCOME
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH:
Depreciation Expense
Loss on sale of equipment
(Increase)/Decrease in Accounts Receivable

$
$

9,000
3,000
10,000

(Increase)/Decrease in Inventory

(5,000)

(Increase)/Decrease in Prepaid Expenses


Increase/(Decrease) in Accounts Payable

(4,000)
16,000

Increase/(Decrease) in Income Tax Payable


NET CASH PROVIDED BY OPERATING ACTIVITIES

145,000

(2,000)

27,000
172,000

CASH FLOW FROM INVESTING ACTIVITIES


Purchase of Land
Purchase of Building

(120,000)

Purchase of Equipment
Sale of Equipment

(25,000)
4,000

NET CASH USED BY INVESTING ACTIVITIES


CASH FLOW FROM FINANCING ACTIVITIES
Issuance of common stock
Payment of cash Dividends

(141,000)

20,000
(29,000)

NET CASH USED BY FINANCING ACTIVITIES

(9,000)

NET INCREASE IN CASH

22,000

CASH AT THE BEGINNING OF THE PERIOD

33,000

CASH AT THE END OF THE PERIOD

55,000

NONCASH INVESTING AND FINANCING ACTIVITIES


Issuance of Bonds Payable to purchase land.

110,000

Supplementary Material

Cash Flow and the Product Life Cycle

For Computer Services


Free Cash Flow:
$172,000
-141,000*
-29,000
$ 2,000
*this calculation subtracts the proceeds from the Sale of Equipment
from Capital Expenditure

Supplementary Material

Cash Flow and the Product Life Cycle

The Product Life Cycle


A series of phases all products go
through
The phases are often referred to as the:
introductory phase
growth phase
maturity phase
decline phase.
The phase a company is in affects its
cash flows.

Introductory Phase
To support asset purchases the
company may issue stock or debt.
Expect:
cash from operations to be negative
cash from investing
to be
negative.
cash from financing
to be
positive.

Growth Phase
The company is striving to expand its
production and sales.
Expect:
small amounts of cash to be
generated from operations.
cash from investing to be negative.
cash from financing to be positive

Maturity Phase
Sales and production level-off
Expect:
cash from operations to exceed
investing needs
cash from investing
to be
neutral
cash from financing
to be
negative

Decline Phase
Sales and production decline
Expect:
cash from operations to decline
cash from investing to
possibly become
positive
cash from financing
to possibly become
negative

Be prepared to.
Review a Cash Flow Statement
Discuss WHERE a company appears to
be in the Product Life Cycle, based on
evidence in its Cash Flow Statement

Mystery Company.
Period Ending

Dec 26, 2009

Dec 27, 2008

Dec 29, 2007

6,796,000

6,999,000

6,934,000

Total Cash Flow From Operating


Activities

Investing Activities, Cash Flows Provided By or Used In

Total Cash Flows From


(2,401,000)

(2,667,000)

(3,744,000)

Investing Activities

Financing Activities, Cash Flows Provided By or Used In

Total Cash Flows From


(2,497,000)

(3,025,000)

(19,000)

(153,000)

(4,006,000)

Financing Activities
Effect Of Exchange Rate Changes

75,000

Change In Cash and Cash


1,879,000

1,154,000

Equivalents

To the best of your ability.what stage in


the Product Life Cycle is this company?

(741,000)

Possible answer

Cash from Ops is positive


Cash from Investing is negative
This is strong evidence the company is growing,
investing in new stores, manufacturing plants, new
equipment or buildings
That cash from financing is negative is confusing,
however, it could mean that this is an established
company that is paying back creditors and also paying
dividends, but still expanding. And its strong positive
cash flow from operations is a sign of growth and
overall financial strength

And the company is..

End of Chapter 13
Good Bye and Good Luck.