1 Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions in the normal operations of the firm. Investing Activities: Cash flows resulting from purchases and sales of property, plant and equipment, or securities. Financing Activities: Cash flows resulting from transactions with lenders and owners. Funds received from lenders Payments to lenders (not interest) Contributions of capital from owners (sales of stock) Dividend payments
2 The Direct Method The direct method lists the individual sources and uses of cash. Typical line items include cash received from customers, cash paid to suppliers, cash paid for wages, etc. Consider E3-18 Popovich Co. had the following transactions during June. a. $20,000 of supplies were purchased with cash b. $6,000 of supplies were consumed. c. $60,000 of merchandise was sold. 40% of the sales were on credit. The merchandise cost Popovich $28,000. d. $200,000 was borrowed from a bank e. Interest of $2,000 was incurred and paid f. $100,000 of equipment was purchased by issuing a note payable. g. $4,000 of equipment value was consumed.
3 We could construct the following statement of cash flow: Cash Flow from Operations: Cash received from customers $36,000 Cash paid for supplies (20,000) Cash paid for interest (2,000) Cash provided by operations 14,000 Cash flow for investments 0 Cash flow from financing activities: New bank borrowings $200,000 Net cash flow $214,000 The problem is that these items do not come from the general ledger. There is no account for cash received from customers, or cash paid for supplies. Instead, you would have to infer the amount from the firm s accounting system.
4 For example, assume the following data from the firm s accrual based accounting system (all sales are credit sales); Accounts Receivable 1/1/00 $400,000 Accounts Receivable 12/31/00 $450, Sales $3,000,000 How much cash did the firm receive from customers? First, consider the entries used to record credit sales and the collection of cash. Dr. Accounts Receivable Cr. Sales Dr. Cash Cr. Accounts Receivable Debits to accounts receivable result from sales transactions, and the credits result from cash collections.
5 Therefore: Beginning Accounts Receivable + Credit Sales - Cash Received = Ending Accounts Receivable OR Cash Received = Beg. AR + Credit Sales Ending AR. Define AR = Ending AR Beginning AR, where means the change in the account balance, then: Cash Collections = Credit Sales AR. In our example, Cash collections = $3,000,000 - $50,000 = $2,950,000. There was a total of $3,000,000 in sales, but not all of it was collected in cash. Because there was an increase in AR, the cash received was less than total sales.
6 We can use a similar approach to go from cost of goods sold to cash payments. The balance sheet account affected by cost of goods sold is inventory. Because inventory is usually purchased on account, we also need to consider accounts payable. Beginning Inventory Beginning Accounts Payable + Purchases + Purchases - Cost of Goods Sold - Payments = Ending Inventory = Ending Accounts Payable Inventory = Ending Inventory Beginning Inventory Accounts Payable = Ending AP Beginning AP COGS = Purchases Inventory Payments = Purchases AP Purchases = AP + Payments COGS = AP + Payments inventory Payments = COGS + inventory AP
7 Direct Method Example ABC Co. Balance Sheets Account Cash $100,000 $130,000 Accounts Receivable 420, ,000 Inventory 800, ,000 Prepaid Rent 70,000 50,000 PP & E 1,000, ,000 Total Assets $2,390,000 $2,140,000 Accounts Payable $300,000 $360,000 Accrued Wages 175, ,000 Stockholders Equity 1,915,000 1,660,000 Total Liab & S.E. $2,390,000 $2,140,000 ABC Co. s Income Statement 2000 Sales $5,000,000 Cost of Goods Sold 3,500,000 Gross Margin $1,500,000 Rent Expense $240,000 Wage Expense 800,000 Depreciation Expense 150,000 Net Income $310,000
8 Statement of Cash Flows Direct Method Example Assume that accounts payable was only used to acquire inventory. Use the preceding information to compute the following: 1. Cash Received from Customers. Sales AR 5,000,000 (-40,000) = 5,040, Cash Paid to Suppliers for Inventory COGS + Inventory AP 3,500, ,000 (-60,000) = 3,660, Cash Paid to Landlords Rent Expense + Prepaid rent 240, ,000 = 260, Cash Paid to Employees Wage expense Accrued wages 800,000 55,000 = 745, Cash received from customers 5,040,000 Cash paid to suppliers -3,660,000 Cash paid to landlords -260,000 Cash paid to employees -745,000 Cash flows from operations 375,000
9 Statement of Cash Flows: Indirect Method The indirect method uses changes in balance sheet accounts to reconcile net income to cash flows from operations. Assets = Liabilities + Stockholders Equity Cash + Noncash Assets = Liabilities + SE Cash = L + SE NCA Cash = L + SE NCA This means that we can evaluate changes in cash by looking at changes in balance sheet accounts. We can adjust this further by noting that SE = NI Dividends Cash = L + NI Dividends NCA To get cash flows from operations we start with net income and adjust for changes in current assets and current liabilities.
10 Statement of Cash Flows Indirect Method The operating cash flow section of the Statement of Cash Flows using the indirect method has the following form: Net Income + Depreciation Expense - Current Assets (minus increases, plus decreases) + Current Liabilities (plus increases, minus decreases) = Cash flows from operations Following the previous example, we would have: 2000 Net Income $310,000 Depreciation Expense 150,000 - Accounts Receivable 40,000 - Inventory (100,000) - Prepaid Rent (20,000) + Accounts Payable (60,000) + Accrued Wages 55,000 Cash Flows From Operations 375,000 Note that you get the same cash flow from operations under both methods. However, the information provided in the details is substantially different.
11 Investing and Financing Cash Flows Once we have computed the cash flows from operations we need to complete the sections on investing and financing cash flows. In general this is fairly simple. Investing cash flows include purchases of long-term assets and proceeds from the disposal of long-term assets. Financing cash flows include proceeds from the issuance of long-term debt or capital stock, repayments of long-term debt, repurchases of capital stock and dividends.
12 Sample Problem: Use the following data to construct a statement of cash flows using the direct and indirect methods Cash $4,000 $14,000 Accounts receivable 25,000 32,500 Prepaid insurance 5,000 7,000 Inventory 37,000 34,000 Fixed assets 316, ,000 Accumulated Depreciation (45,000) (30,000) Total assets 342, ,500 Accounts payable $18,000 $16,000 Wages payable 4,000 7,000 Note payable 173, ,000 Capital stock 88,000 84,000 Retained earnings 59,000 60,500 Total Liabilities & Equity 342, , Sales $200,000 Cost of goods sold (123,000) Depreciation expense (15,000) Insurance expense (11,000) Wage Expense (50,000) Net Income 1,000 During 2000 declared and paid dividends of $2,500 During 2000, ABC paid $46,000 in cash to acquire new fixed assets. The accounts payable was used only for inventory. No debt was retired during 2000.
13 Direct Method Cash Flow from Operations: Cash received from customers 207,500 Cash paid for inventory -124,000 Cash paid for insurance -9,000 Cash paid for wages -53,000 Cash flow from operations 21,500 Cash Flow from Investments: Cash paid for fixed assets -46,000 Cash flow from financing activities: Cash dividend payments -2,500 Proceeds from issuance of note payable 13,000 Proceeds from issuance of stock 4,000 Cash flows from financing activities 14,500 Net Cash Flow -10,000 Beginning Cash Balance 14,000 Ending Cash Balance 4,000
14 Indirect Method Cash Flow from Operations: Net Income 1,000 Depreciation Expense 15,000 Accounts receivable 7,500 Prepaid insurance 2,000 Inventory -3,000 Accounts payable 2,000 Wages payable -3,000 Cash Flow from Operations 21,500 Cash Flow from Investments: Cash paid for fixed assets -46,000 Cash flow from financing activities: Cash dividend payments -2,500 Proceeds from issuance of note payable 13,000 Proceeds from issuance of stock 4,000 Cash flows from financing activities 14,500 Net Cash Flow -10,000 Beginning Cash Balance 14,000 Ending Cash Balance 4,000
1. Operating, Investment and Financial Cash Flows Solutions Problem 1 During 2005, Myears Oil Co. had gross sales of $1 000,000, cost of goods sold of $400,000, and general and selling expenses of $300,000.
ILLUSTRATION 24-1 OPERATING, INVESTING, AND FINANCING ACTIVITIES COMPONENTS OF THE STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES + Sales and Service Revenue Received Cost of Sales Paid Selling
C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of
EXERCISES Ex. 14 1 There were net additions, such as depreciation and amortization of intangible assets of $389 million, to the net loss reported on the income statement to convert the net loss from the
Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where
THE CONTENT AND VALUE OF THE STATEMENT OF CASH FLOWS The cash flow statement reconciles beginning and ending cash by presenting the cash receipts and cash disbursements of an enterprise for an accounting
PREPARING THE STATEMENT OF CASH FLOWS: THE INDIRECT METHOD OF REPORTING CASH FLOWS FROM OPERATING ACTIVITIES The work sheet method described in the text book is not the recommended approach. We will provide
Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation
Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users
C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,
HOSP 2110 (Management Acct) Learning Centre Statement of Cash Flows The Statement of Cash Flows (or cash flow statement) is one of the main financial statements used by investors. It shows the cash generated
CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset
Chapter 13 > DO IT! Classification of Cash Flows Identify the three types of activities used to report all cash inflows and outflows. Report as operating activities the cash effects of transactions that
Overview Statement of Cash Flows Chapter 23 BECAUSE of the SCF, users of the financial statements get the best of both worlds! SCF bridges the gap created by paper income resulting from applying an accrual
CASH FLOW STATEMENT On the statement, cash flows are segregated based on source: Operating activities: involve the cash effects of transactions that enter into the determination of net income. Investing
23 The Statement of Cash Flows Direct Method DEMONSTRATION PROBLEM The financial statements of Bolero Corporation follow. Copyright Houghton Mifflin Company. All rights reserved. 1 Bolero Corporation Income
Statement of Cash Flows Study Objectives Indicate the primary purpose of the statement of cash flows. Distinguish among operating, investing, and financing activities. Explain the impact of the product
TRANSACTIONS ANALYSIS EXAMPLE Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: 1. Billings to clients for services provided: $350,000
Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease
Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an
Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The
E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating
HOSP 2110 (Management Acct) Learning Centre Statement of Change in Working Capital & Inflows/Outflows of Working Capital The statement of changes in working capital shows the net change in working capital
Cash Flow Analysis 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 16, 2004 1 Statement of Cash Flows Reports operating
Financial Statement Review: Financial Statements Tutorial There are four major financial statements used to communicate information to external users (creditors, investors, suppliers, etc.) - 1. Balance
Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation
THE STATEMENT OF CASH FLOWS Purpose of the Statement of Cash Flows The purpose of the statement of cash flows is to identify the sources and uses of cash and the change in cash from the beginning to the
Cash Flow Analysis 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Mar 1/3, 2004 1 About The Exam March 10 th a week from today.
Mastering the Cash & Free Cash Flow CFA Levels I & II Jonathan.email@example.com Financial Reporting and Analysis LOS 27.a Compare/Classify: CFAI pg 253 Schweser pg 109 Importance of Cash Net income from
Section A : 26 FILL IN THE BLANK Section B : 10 TRUE OR FALSE QUESTIONS Section C : 11 Multiple Choice Questions Section A: Questions Fill In The Blanks the right column please insert the items from which
Management Accounting 337 Statement of Cash Flow Cash is obviously an important asset to all, both individually and in business. A shortage or lack of cash may mean an inability to purchase needed inventory
UNIVERSITY OF WATERLOO School of Accounting and Finance AFM 101 Professor Shari Mann Professor Donna Psutka Professor Mindy Wolfe Mid-Term Examination Fall 2010 Date and Time: October 21, 2010, 6:30 8:00pm
business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business
This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools
CENTURY 21 ACCOUNTING, 8e General Journal Chapter Objectives Chapter 1 Starting A Proprietorship: Changes that Affect the Accounting Equation After studying Chapter 1, you will be able to: 1. Define accounting
Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of
MIDTERM EXAMINATION Afaaq_tariq@yahoo.com Fall 2009 FIN621- Financial Statement Analysis Asslam O Alikum FIN621- Financial Statement Analysis (Session 3) solved by Afaaq n Shani Bhai with reference n numerical
266 Part 1 E M Foundations of Financial Accounting With these adjustments to the income statement, we can now present the operating activities section of the statement of cash flows using either the direct
ACS-1803 Introduction to Information Systems Instructor: David Tenjo Functional Area Systems Lecture 4 1 Overview Overview of Functional Areas in the organization Functional Area: Accounting Accounting
THE BASIC MODEL The accounting information system is designed to collect and organize data into information that is useful for stakeholders. The Accounting Equation The basic accounting equation is what
Chapter 14 1 Identify the purposes of the statement of cash flows Distinguish among operating, investing, and financing cash flows Prepare the statement of cash flows by the indirect method Identify noncash
MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size
Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written
4. Common stock the usual or normal stock of the corporation. It is the voting stock and generally ranks after the preferred stock for dividends and assets distributed upon dissolution. Often it is called
FINANCIAL ACCOUNTING WEEK 12 STATEMENT OF CASH FLOWS I. LEARNING OBJECTIVES - STATEMENT OF CASH FLOWS A. Understand the basic structure and format of the statement of cash flows. B. Distinguish cash flows
Financial Reporting & Analysis Chapter 17 Solutions Statement of Cash Flows Exercises Exercises E17-1. Determining cash flows from operations Using the indirect method, cash flow from operations is computed
Master Budgeting 1 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of
Accounting II True/False Indicate whether the sentence or statement is true or false. 1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is
BRIEF EXERCISES BE11 1 Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid. 2. Repayment of notes payable. 3. Payment for inventory. 4. Purchase of
CHAPTER 3 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts
CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring
PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance
Accounting for Long-Term Debt 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology April 5, 2004 1 Agenda Long-Term Debt Extend our
Management Accounting 31 Financial Statements for Manufacturing Businesses Importance of Financial Statements Accounting plays a critical role in decision-making. Accounting provides the financial framework
MBA Finance Part-Time Financial Statement Analysis and Cash Flows Professor Hugues Pirotte Spéder 1 1 Levers of Performance Return on Equity Return on Invested Capital Leverage Profit Margin Asset Turnover
14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = $138,000 Costs = $71,500 Other expenses = $4,100 Depreciation expense = $10,100 Interest
CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and
ACCOUNTING COMPETENCY EXAM SAMPLE EXAM 1. The accounting process does not include: a. interpreting d. observing b. reporting e. classifying c. purchasing 2. The financial statement or statements that pertain
Century 21 Accounting, 8e General Journal Chapter Outlines PART 1 Chapter 1 ACCOUNTING FOR A SERVICE BUSINESS ORGANIZED AS A PROPRIETORSHIP Starting A Proprietorship: Changes that Affect the Accounting
GBA 521 Midterm Review Dr. Markelevich Multiple Choice (3 points for each question) Identify the letter of the choice that best completes the statement or answers the question. Wynn Corp. Wynn Corp. reported
Chapter 8 Accounting for Receivables Accounts Receivable Accounts Receivables are current assets. They are usually expected to be collected within 30 days. Allowance Method and Bad Debt Expense 2 methods:
NEW YORK STATE ASSOCIATION FUTURE BUSINESS LEADERS OF AMERICA SPRING DISTRICT MEETING ACCOUNTING II 2010 TEST DIRECTIONS 1. Complete the information requested on the answer sheet. PRINT your name on the
CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,
03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize
APPENDIX 1 The Statement of Financial Position 1. Assets: the resources of the organization which are used to provide service and generate value 2. Current assets: assets which can be converted to cash
Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare
Vertical and Horizontal Analysis Financial Analysis Lecturer: Dr. Constantinos Adamides Horizontal Analysis Comparison of financial information of a single company for two more years Examination of absolute
HHIF Lecture Series: Financial Statement Analysis Alexander Remorov Based on the Materials by Daanish Afzal University of Toronto November 5, 2010 Alexander Remorov, Daanish Afzal (University of Toronto)
UNIVERSITY OF WATERLOO School of Accounting and Finance AFM 101 Professor Duane Kennedy Mid-Term Examination Fall 2008 Date and Time: October 16, 2008, 7:15 8:45pm Pages: 16, including cover Name: Student
BALANCE SHEET Assets Property, plant and equipment: 30. 6. 2014 31. 12. 2013 Plant in service 319 440 319 081 Less accumulated provision for depreciation (188 197) (182 282) Net plant in service 131 243
100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II firstname.lastname@example.org
Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements
ookkeeping Quiz I. Match the account titles with the appropriate financial statement classification: A Current Assets Sales Property, Plant and Equipment Cash in Checking C Other Assets Accumulated Depreciation
Advanced Accounting Chapter 4: Financial Reporting for a Departmentalized Business Financial statements are used to summarize financial info and then are used to evaluate the financial position and progress
Modeling Readiness Quiz 1 Dear Students, Modeling Readiness Quiz Prepared by Prof. Dan Gode http://www.dangode.com Modeling is a useful course, but it also a rigorous and demanding elective. In the future,
An introduction to the cash flow statement in the context of building a financial model. This series introduces the financial statements in the context of a financial model. Cash Flow Statement NOTES TO
Objectives: Long-Term Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Premium Mortgages!