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The Statement Of Cash Flows

The fact is that one of the earliest lessons I


learned in business was that balance sheets and
Income Statements are fiction. Cash flow is
reality.
-Mr. Chris Chocola
Income
Statement

Statement
Statement Financial of
Of Balance Retained
Sheet Statements Earnings

Cash flow
Statement
Introduction
Summarizes a companys cash inflows and
outflows.
Summarizes the operating, investing and
financing activities of the business.
Provides complementary information to
accrual based income statement.
Why is Cash Flow Statement
prepared?
Income Statement only deals with operating
activities and is based on accrual basis.
It is not the change in cash that is emphasized
but the explanation for change in cash.
It helps to evaluate managements decision.
Determines the ability to pay dividends to
stockholders and payment to creditors
The Definition Of Cash
Cash in hand
Cash in bank
Cash equivalent
Classification Of Cash Flows

Financing activities

Investing activities

Operating activities
Financing activities
Concerned with raising and repaying of funds
in the form of debt and equity.
Examples:-
i. Cash proceeds from issuing shares and other
similar instruments
ii. Cash proceeds from issuing debentures,
loans, notes, bonds and other short or long
term borrowings
i. Cash repayment of amounts borrowed
ii. Dividends paid
Investing activities
Activities concerned with acquisition and disposal
of long term assets.
Examples:-
i. Cash payments to acquire fixed assets
ii. Cash receipts from disposal of fixed assets
iii. Cash payments to acquire shares, warrants or
debt instruments of other enterprises
iv. Cash receipts from disposal of shares, warrants
and debt instruments
Operating activities
It is the principal revenue producing activities
of the enterprise.
It is a key indicator of the extent to which
operations of the enterprise have generated
sufficient cash flows.
Examples:-
i. Cash receipts from the sale of goods and the
rendering of services.
ii. Cash receipts from royalties, fees , commissions and
other revenues.
iii. Cash payments to suppliers for goods and services.
iv. Cash receipts and payments to insurance enterprise
for premiums and claims, annuities and other
benefits.
v. Cash payments and refund of income taxes.
Non cash investing and financing
activities
Companies sometimes engage in important
investing and financing activities that do not
affect cash and are required to disclose it.

Exchange stocks for assets

Buy assets through debt financing


from supplier
Foreign Currency Cash flows
Cash flows arising in foreign currency shall be
recorded in entitys functional value by
applying exchange rate.
Cash flows from foreign subsidiary shall be
translated into functional currency.
Interest and dividends
Cash flows from interest and dividends
received and paid shall be disclosed in a
consistent manner from period to period as
either operating, investing or financing
activities.
Taxes on income
Cash flows arising from taxes on income shall
be separately disclosed and shall be classified
as cash flows from operating activities unless
they can be specifically identified with
financing and investing activities.
Acquisitions and disposal of
subsidiaries
The aggregate cash flows arising from
acquisitions and disposal of subsidiary or
other business units shall be presented
separately and classified as investing activities.
Methods to Report Cash from Operating
Activities
1. Direct Method The amount of
Reports major classes of cash provided by
gross cash receipts and operating
cash payments activities is the
same under both
2. Indirect Method methods
Adjusts net income to
remove the effect of all
accruals and deferrals
(The two methods are simply different computational approaches to arrive at the
cash generated from operational activities.)
Statement of Cash Flows Format
Cash flows from operating activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by operating activities $xxx
Cash flows from investing activities:
Inflows $ xxx
Outflows (xxx)
Net cash provided (used) by investing activities xxx
Cash flows from financing activities:Only section of
Inflows statement that differs $ xxx
Outflows in form between direct (xxx)
Net cash provided (used) by financing activities xxx
and indirect method
Net increase (decrease) in cash and cash equivalents $xxx
(net cash
Cash and cash equivalents at beginning flow total is
of year xxx
Cash and cash equivalents at end of yearthe same) $xxx
Indirect Method:
Operating Activities
Income Statement

Conversion
of accrual
to cash
basis

Cash Flows from Operating Activities


Indirect Method: Operating Activities
Net cash flows from operating activities:
Net income xxxx
Adjustments to reconcile net income to net cash:
Increase in accounts receivable (xxxx)
Decrease in inventory xxxx
Increase in accounts payable xxxx
Decrease in salaries and wages payable (xxxx)
Decrease in prepaid insurance xxxx
Increase in income taxes payable xxxx
Gain on sale of machine (xxxx)
Depreciation expense xxxx
Loss on retirement of bonds xxxx
Report entire
Add back
Gain is not part of outflow as a
noncash expense
operating activities financing activity
Cash Flow Adequacy
Measures companys ability to meet
principal and interest obligations
Creditors concerned with cash available to
repay debts after company has replaced
and updated its existing base of long-term
assets
Cash Flow from Operating Activities Capital Expenditures
Average Amount of Debt Maturing over Next Five Years
Julian Corp.
Income Statement
For the Year Ended December 31, 2008

Revenues and gains:


Sales revenue (1) $670,000
Interest revenue (2) $15,000
Gain on sale of machine (a) $5,000

Total revenues and gains $690,000

Expenses and losses:


Cost of goods sold (3) $390,000
Salaries and wages (4) $60,000
Depreciation (c.) $40,000
Insurance (5) $12,000
Interest (6) $15,000
Income taxes (7) $50,000
Loss on retirement of bonds (b) $3,000

Total expenses and losses $570,000

Net income (13) harigopal@kusom.edu.np


$120,000
Julian Corp.
Comparative Balance Sheets
December 31 December 31
Assets 2008 2007 Liabilities + Equity 2008 2007
Cash $35,000 $46,000 Accounts payable (3) $38,000 $31,000
Salaries and wages
Accounts receivable (1) $63,000 $57,000 payable (4) $7,000 $9,000
Income taxes payable
Inventory (3) $84,000 $92,000 (7) $8,000 $5,000
Prepaid insurance (5) $12,000 $18,000
Total current liabilities $53,000 $45,000
Total Current assets $194,000 $213,000
Notes payable (9) $85,000 $35,000
Long-term investments (8) $120,000 $90,000 Bonds payable (11) $200,000 $260,000
Land (9) $150,000 $100,000
Property and equipment Total long-term
(10) $320,000 $280,000 liabilities $285,000 $295,000
Accumulated Depreciation ($100,000) ($75,000)
Capital stock (12) $100,000 $75,000
Total long-term assets $490,000 $395,000 Retained earnings (13) $246,000 $193,000

Total stockholder's
equity $346,000 $268,000

Total assets $684,000 $608,000 Total liabilities and $684,000 $608,000


stockholder's equity
Additional Information
(8) Long-term investments were purchased for $30,000. The securities
are classified as available for sale.

(9) Land was purchased by issuing a $50,000 note payable.


(10) Equipment was purchased for $75,000.
(a) A machine with an original cost of $35,000 and a book value of
$20,000 was sold for $25,000.
(11) Bonds with a face value of $60,000 were retired by paying $63,000
in cash.
(12) Capital stock was issued in exchange for $25,000 in cash.

harigopal@kusom.edu.np
Julian Corp.
Partial Statement of Cash Flows
For the year Ended December 31, 2007

Direct Method Indirect Method


Cash flows from operating activities Cash flows from operating activities

Cash receipts from: Net cash flows from operating activities


Sales on account (1) $664,000 Net income $120,000
Interest (2) $15,000 Adjustments to reconcile net income
to net cash provided by operating
Total cash receipts $679,000 activities:
Increase in accounts receivable ($6,000)
Cash payments for: Gain on sale of machine (a) ($5,000)
Inventory purchases (3) ($375,000) Decrease in inventory $8,000
Salaries and wages (4) ($62,000) Increase in accounts payable $7,000
Decrease in salaries and wages
Insurance (5) ($6,000) payable ($2,000)
Interest (6) ($15,000) Depreciation expense $40,000
Taxes (7) ($47,000) Decrease in prepaid insurance $6,000
Total cash Payments ($505,000) Increase in income taxes payable $3,000
Loss on retirement of bonds (b) $3,000
Net cash provided by operating $174,000 Net cash provided by operating $174,000
activities activities
harigopal@kusom.edu.np
Julian Corp.
Statement of Cash flows
For the Year Ended December 31, 2007

Cash flows from Operating activities $174,000

Cash flows from investing activities

Purchas of investments (8) ($30,000)


Purchase of property and equipment (10) ($75,000)
Sale of machine (a) $25,000
Net cash used by investing activities ($80,000)

Cash flows from financing activities

Retirement of bonds (11) ($63,000)


Issuance of stock (12) $25,000
Payment of cash dividends (13) ($67,000)
Net cash used by financing activities ($105,000)

Net decrease in cash ($11,000)


Cash Balance, December 31, 2006 $46,000
Cash Balance, December 31, 2007 $35,000

Supplemental Schedule of noncash investing and financing activities


harigopal@kusom.edu.np
Acquisition of land in exchange for note payable (9) $50,000
Any Questions???

harigopal@kusom.edu.np
harigopal@kusom.edu.np