2. WHAT’S UP WITH C&C’S CASH?
Increases in sales and income, yet they still have to borrow cash to make it through the year
Time lag between payments for raw materials and collections from customers
The timing difference is causing C&C to run out of cash

4. NET INCOME VS. CASH FLOWS
Income Statement
Cash Flow
Statement of Cash Flows / =

5. Generate cash receipts
SOURCES OF CASH
Generate cash receipts
Collections from customers 
Cash proceeds from sale of building 
Payment of salaries Χ
Gain on sale of investment Χ

6. Require cash disbursements
USES OF CASH
Require cash disbursements
Payment of interest on a loan 
Purchase of inventory on account Χ
Payment of salaries 
Declaring dividends Χ

7. CASH FLOWS ARE GENERATED BY…
OPERATING ACTIVITIES
Cash flows from activities that accomplish the organization’s business purposes
INVESTING ACTIVITIES
Cash flows from activities related to investing in assets other than current operating assets
FINANCING ACTIVITIES
Cash flows from activities related to external funding sources such as debt and equity
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8. C&C’S STATEMENT OF CASH FLOWS
Cash from operating activities
Cash from investing activities
Cash from financing activities

9. EXAMPLES OF SOURCES AND USES OF CASH

11. TWO METHODS TO REPORT OPERATING CASH FLOWS
Direct Method
Indirect Method
Start with net income and add items to reconcile to cash flows provided by operating activities
Most commonly used method in practice
Report specific operating activities that generate and use cash
Method preferred by FASB, but rarely used in practice

12. INDIRECT METHOD

13. TREATMENT OF NON-CASH EXPENSES
Income Statement
Sales
$100,000
Expenses
(30,000)
Depreciation
(10,000)
Net income
$60,000
Cash Flow
from Operations
$100,000
(30,000)
$70,000
Depreciation expense is subtracted from revenue to calculate net income.
But depreciation expense has no effect on cash flow.

14. TREATMENT OF NON-CASH EXPENSES
Rule: When calculating cash flow from operations under the indirect method, add back all non-cash expenses that reduce net income.
Cash Flow
from Operations
Sales
$100,000
Expenses
(30,000)
$70,000
Net income
$60,000
Depreciation
10,000
Cash flow
$70,000
Therefore depreciation expense must be added back to net income when calculating cash flows under the indirect method.

15. TREATMENT OF GAINS & LOSSES
Assume: A building with a book value of $115,000 is sold for $130,000 in cash
Reported on statement of cash flows as investing activity
Journal Entry:
Cash $130,000
Building, net $115,000
Gain on sale $ 15,000
Reported on income statement

16. TREATMENT OF GAINS & LOSSES
Income Statement
Sales
$80,000
Expenses
(60,000)
Gain on sale
15,000
Net income
$35,000
Cash Flow
from Operations
$80,000
(60,000)
$20,000
The gain is added to revenue to calculate net income.
But the total cash received has been reported in cash flow from investing.

17. TREATMENT OF GAINS & LOSSES
Rule: When calculating cash flow from operations under the indirect method, subtract all gains from net income.
Cash Flow
from Operations
$80,000
(60,000)
$20,000
Net income
$35,000
Gain on sale
(15,000)
Cash flow
$20,000
Therefore any gains must be subtracted from net income when calculating cash flows under the indirect method.

18. TREATMENT OF CHANGES IN CURRENT ASSETS
Reported on income statement
Sales
$300,000
Collections
(280,000)
Change in A/R balance
$ 20,000
Cash flow to report in cash flows from operations
Therefore, actual cash collected is $20,000 less than the amount included in sales revenue, and thus, net income.

19. TREATMENT OF CHANGES IN CURRENT ASSETS
Accounts Receivable
Beg. Bal.
5,000
Credit sales
300,000
280,000
Cash collections
End. Bal.
25,000
Change in Accounts Receivable:
Ending Balance – Beginning Balance
$25,000 - $5,000 = $20,000

20. TREATMENT OF CHANGES IN CURRENT ASSETS
Reported on income statement
Sales
$300,000
Collections
(280,000)
Change in A/P balance
$ 20,000
Cash flow to report in cash flows from operations
Rule: If current assets increase, subtract the amount of the increase from net income. If current assets decrease, add the amount of the decrease to income.

21. TREATMENT OF CHANGES IN CURRENT LIABILITIES
Reported on income statement
Salaries expenses
$75,000
Payments to employees
(80,000)
Change in A/P balance
$( 5,000)
Cash flow to report in cash flows from operations
Therefore, actual cash payment is $5,000 more than the amount included in salaries expense, and thus, net income.

22. TREATMENT OF CHANGES IN CURRENT LIABILITIES
Salaries Payable
Beg. Bal.
8,000
Salaries expense
75,000
80,000
Payments to employees
End. Bal.
3,000
Change in Salaries Payable:
Ending Balance – Beginning Balance
$3,000 - $8,000 = ($5,000)

23. TREATMENT OF CHANGES IN CURRENT LIABILITIES
Reported on income statement
Salaries expenses
$75,000
Payments to employees
(80,000)
Change in A/R balance
$( 5,000)
Cash flow to report in cash flows from operations
Rule: If current liabilities increase, add the amount of the increase from net income. If current liabilities decrease, subtract the amount of the decrease to net income.

25. CASH FLOWS FROM INVESTING ACTIVITIES
All cash flows from investing in non-operating assets
Marketable securities
Land
Buildings
Equipment
Other assets
Analyze each of these balance sheet accounts for changes

26. MARKETABLE SECURITIES
From the balance sheet
2010
2009
$100,000
$80,000
Sold securities with a book value of $30,000 for $28,000 in cash. All purchases were made with cash.
Beginning Balance
$80,000
Cash Source
Sales: $28,000
Cash Use
Purchases: $50,000 +
Purchases ? +
Purchases
50,000 -
Sales
(30,000) =
Ending Balance
$100,000

27. PLANT & EQUIPMENT Beginning Balance $1,050,000 + Purchases + Purchases
From the balance sheet
2010
2009
$800,000
$1,050,000
Sold equipment with a book value of $100,000 for $110,000 in cash. Depreciation expense was $150,000.
Beginning Balance
$1,050,000 +
Purchases +
Purchases ?
Cash Source
Sales: $110,000 -
Sales
(100,000) -
Depreciation
(150,000) =
Ending Balance
$800,000

28. INVESTING SECTION Sale of marketable securities $28,000
Sale of equipment
110,000
Purchase of marketable securities
(50,000)
Net cash provided by investing activities
$88,000

29. CASH FLOWS FROM FINANCING ACTIVITIES
All cash flows from investing in non-operating liabilities and equities
Short-term debt
Bonds payable
Common stock
Retained earnings
Analyze each of these balance sheet accounts for changes

30. The company paid off $20,000 of its bonds payable.
From the balance sheet
2010
2009
$500,000
$520,000
The company paid off $20,000 of its bonds payable.
Beginning Balance
$520,000 +
Bonds issued ? +
Bonds issued
Cash Use
Payments: $20,000 -
Bond payments
(20,000) =
Ending Balance
$500,000

31. RETAINED EARNINGS Beginning Balance $700,000 + Net income 110,000 -
From the balance sheet
2010
2009
$780,000
$700,000
Net income was $110,000. All declared dividends were paid in cash during the year.
Beginning Balance
$700,000 +
Net income
110,000
Cash Use
Payments: $30,000 -
Dividends declared
(30,000) -
Dividends declared ? =
Ending Balance
$780,000

32. FINANCING SECTION Repayment of bond payable $(20,000) Dividends paid
(30,000)
Net cash provided by financing activities
$(50,000)

34. GENERAL FORMAT Cash flows provided by operating activities +
Cash flows provided by investing activities
Cash flows provided by financing activities =
Change in Case
Cash, beginning balance
Cash, ending balance

35. THINGS TO LOOK FOR Does the company generate cash from operations?
How are the current asset accounts changing? Do these changes match with the company’s strategic direction?
Is the company maintaining its productive capacity through acquisition of replacement equipment?
How is the company choosing to finance its operations – debt or equity?

37. MAJOR OPERATING ACTIVITIES
Collections from customers
Payments to suppliers
Payments to employees
Payments for operating costs
Payments for income taxes

38. COLLECTIONS FROM CUSTOMERS
Use this information that is readily available from the balance sheet and income statement
A/R, Beginning Balance
$11,200 +
Sales
1,050,000 -
Collections from customers ? -
Collections from customers
(1,038,000) =
A/R Ending Balance
$23,200

39. PAYMENTS TO SUPPLIERS – STEP 1: PURCHASES
Use this information that is readily available from the balance sheet and income statement
Inventory, Beginning Balance
$326,340 +
Inventory Purchases
774,030 +
Inventory purchases ? -
Cost of Goods Sold
(777,000) =
Inventory, Ending Balance
$323,370

40. PAYMENTS TO SUPPLIERS – STEP 2: PAYMENTS
Use the results from step 1 and from this information that is readily available from the balance sheet and income statement
A/P, Beginning Balance
$162,200 +
Inventory purchases
774,030 -
Payments to suppliers
(1,038,000) -
Payments to suppliers ? =
A/P Ending Balance
$23,200

41. PAYMENTS TO EMPLOYEES
Use this information that is readily available from the balance sheet and income statement
Salaries Payable, Beg. Bal.
$1,600 +
Salaries Expense
92,400 -
Payments to employees ? -
Payments to employees
(92,050) =
Salaries Payable, End. Bal.
$23,200

42. PAYMENTS FOR OPERATING COSTS
Use this information that is readily available from the balance sheet and income statement
Accrued Liabilities, Beg. Bal.
$42,540 +
Operating expenses
124,900 -
Payments for operating costs ? -
Payments for operating costs
(122,220) =
Accrued liabilities, End. Bal.
$45,220

43. PAYMENTS FOR INCOME TAXES
Use this information that is readily available from the balance sheet and income statement
Income Taxes Payable, Beg. Bal.
$12,000 +
Income Tax expense
13,200 -
Payments for income taxes ? -
Payments for income taxes
(12,000) =
Income Taxes Payable, End. Bal.
$45,220