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

Financial Statements Income Statement Statement of Retained Earnings Cash flow Statement Statement Of Balance Sheet

Introduction Summarizes a company’s 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 management’s 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:- Cash proceeds from issuing shares and other similar instruments Cash proceeds from issuing debentures, loans, notes, bonds and other short or long term borrowings

Cash repayment of amounts borrowed Dividends paid

Investing activities Activities concerned with acquisition and disposal of long term assets. Examples:- Cash payments to acquire fixed assets Cash receipts from disposal of fixed assets Cash payments to acquire shares, warrants or debt instruments of other enterprises 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:- Cash receipts from the sale of goods and the rendering of services. Cash receipts from royalties, fees , commissions and other revenues. Cash payments to suppliers for goods and services. Cash receipts and payments to insurance enterprise for premiums and claims, annuities and other benefits. 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 entity’s 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 Reports major classes of gross cash receipts and cash payments The amount of cash provided by operating activities is the same under both methods 2. Indirect Method 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: Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

Indirect Method: Operating Activities Income Statement Conversion of accrual to cash basis Cash Flows from Operating Activities

Assets Cash Assets Cash Liabilities Cash Liabilities Cash

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 Gain is not part of operating activities Add back noncash expense Report entire outflow as a financing activity

Cash Flow Adequacy Measures company’s 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

For the Year Ended December 31, 2008 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) Income taxes (7) $50,000 Loss on retirement of bonds (b) $3,000 Total expenses and losses $570,000 Net income (13) $120,000 harigopal@kusom.edu.np

Comparative Balance Sheets Total liabilities and stockholder's equity Julian Corp. Comparative Balance Sheets December 31 Assets 2008 2007 Liabilities + Equity Cash $35,000 $46,000 Accounts payable (3) $38,000 $31,000 Accounts receivable (1) $63,000 $57,000 Salaries and wages payable (4) $7,000 $9,000 Inventory (3) $84,000 $92,000 Income taxes payable (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 Long-term investments (8) $120,000 $90,000 Bonds payable (11) $200,000 $260,000 Land (9) $150,000 $100,000 Property and equipment (10) $320,000 $280,000 Total long-term liabilities $285,000 $295,000 Accumulated Depreciation ($100,000) ($75,000) Capital stock (12) $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 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

Partial Statement of Cash Flows For the year Ended December 31, 2007 Julian Corp. Partial Statement of Cash Flows For the year Ended December 31, 2007 Direct Method Indirect Method 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 activities: Total cash receipts $679,000 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 Insurance (5) Decrease in salaries and wages 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) Net cash provided by operating activities $174,000 harigopal@kusom.edu.np

Statement of Cash flows For the Year Ended December 31, 2007 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) 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 Acquisition of land in exchange for note payable (9) $50,000 harigopal@kusom.edu.np

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