1. Statement of Cash Flows
Chapter 13
Financial Accounting

2. Highlights Purposes of a cash flow report
Review of operating, financing and investing activities
Preparation of the statement of cash flows
Evaluation of a company’s cash flows

3. Why do we need a cash flow report?
Outlines where cash came from and where it went
Separates out inflows and outflows by activity type
Helps identify ability to pay out dividends, and generate cash

4. Business Activity Review
Operating Activities
Cash effects of transactions that create revenues and expenses and
Enter into determination of net earnings
Keep in mind: Balance Sheet: Noncash Current Assets and Current Liabilities; Statement of Earnings Items

5. Business Activity Review
Investing Activities
Purchasing and disposing of investments and productive long-lived assets using cash and
Lending money and collecting the loans
Keep in mind:
Balance Sheet: Investment and Long-Term Asset Items

6. Business Activity Review
Financing Activities
Obtaining cash from issuing debt and repaying the amounts borrowed and
Obtaining cash from shareholders and paying them dividends
Keep in mind: Balance Sheet: Long-Term Liability and Shareholders’ Equity Items

7. Statement of Cash Flow Sample
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items) XX
Net cash provided (used) by operating activities XXX
Cash flows from investing activities
(List of individual items) XX
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 XXX
Cash at beginning of period XXX
Cash at end of period XXX

8. Preparing a Statement of Cash Flows

9. Preparing a Statement of Cash Flows
Next step look at the Statement of Earnings
For the operations section – start off with the Net Income figure then adjust for all non-cash items (ie moving from accrual method to cash)
Can use either the direct or indirect method for the Operations Section only will provide the same end results

10. Preparing a Statement of Cash Flows
Also need comparative balance sheets (ie covering two years)
Indirect method:
Start off with net income
Adjust for all noncash items on Earnings stmt (ie. depreciation & gains/loss on sale of assets)
Add back or subtract normally all current items (both liabilities & assets – ie A/R, Inventory & A/P)
Need to add or subtract the change from 1 yr to the next (ie if A/R goes up = deduct as not an increase in cash)

11. Preparing a Statement of Cash Flows
Adjustments to Convert Net Earnings
to Net Cash Provided (Used) by Operating Activities
Add* Deduct*
Change in Current Asset Account Balance
Accounts Receivable Decrease Increase
Inventory Decrease Increase
Prepaid expenses Decrease Increase
Other current assets Decrease Increase
Change in Current Liability Account Balance
Accounts payable Increase Decrease
Accrued expenses payable Increase Decrease
Other current liabilities Increase Decrease
* Add (deduct) change in account balance to net earnings

12. Preparing a Statement of Cash Flows
Adjustments to Convert Net
Earnings to Net Cash Provided (Used) by Operating Activities
Noncash Items on Statement of Earnings
Amortization (of capital assets) expense Add
Amortization of bond discount to interest expense Add
Amortization of bond premium to interest expense Deduct
Loss on sale of asset Add
Gain on sale of asset Deduct
Income from long-term equity investment Deduct

13. Preparing a Statement of Cash Flows - sample
Food Sampling Services
Statement of Cash Flows
For the Year Ended December 31, 2002
Cash Flow from Operating Activities:
Net Earnings $36,000
Adjustments to reconcile to cash:
Amortization Expense $15,000
Loss on Sale of Equipment 3,000
Increase in A/R (2,000)
Increase in Prepaid (1,000)
Increase in A/R , ,000
Net Cash Provided by Operations $74,000

14. Indirect Method Used extensively in practice
Most companies favour the indirect method for the following reasons
Easier to prepare
Focuses on the differences between net earnings and net cash flow from operating activities
Reveals less company information to competitors

15. Direct Method
CICA prefers the direct method but allows the use of either method
Details cash receipts and payments
Easier to understand

16. Direct Method
Start off in the same way as the indirect method – with Net Income (Earnings)
Breaks up the change in cash as related to Sales, COGS, operating exp and income tax expenses
Next start off with your sales figure

17. Direct Method
The relationships among cash receipts from customers, revenues from sales, and changes in accounts receivable is:
Cash receipts from customers =
Revenues from sales {
+ Decrease in accounts receivable or – Increase in accounts receivable

18. Direct Method
The relationship among cash payments to suppliers, cost of goods sold, changes in inventory, and changes in accounts payable is:
Cash payments to suppliers =
Cost of goods sold {
+ Increase in inventory or – Decrease in inventory
+ Decrease in accounts payable or – Increase in accounts payable

19. Direct Method
The relationship among cash payments for operating expenses, changes in prepaid expenses, and changes in accrued expenses payable is:
Cash payments for services
+ Increase in Prepaid Expenses or – Decrease in Prepaid Expenses
+ Decrease in accrued expenses payable or – Increase in accrued expenses payable {
Operating Expenses =

20. Statement of Cash Flows For the Year Ended December 31, 2002
Direct Method - sample
New Suites
Statement of Cash Flows
For the Year Ended December 31, 2002
Cash Flows from Operating Activities:
Cash Receipts from Customers $865,000
Cash Payments:
To suppliers $550,000
To operating expenses $ 150,000
For income taxes $ 50, ,000
Net Cash Provided by Operations $1,615,000

21. Statement of Cash Flows
Once operations section complete then move on to the Investing and Financing Sections

22. Investing Section
Study the balance sheet to determine changes in investments and long-term assets
Changes in each short-term investment (unless incorporated as part of cash definition) and long-term account are analysed using selected transaction data to determine the effect, if any, the changes had on cash

23. Financing Activities
Study the balance sheet to determine changes in noncurrent liabilities and shareholders’ equity
Changes in each noncurrent account are analyzed using selected transaction data to determine the effect, if any, the changes had on cash

24. Sample Net cash provided by operating 218,000 activities - continued
Cash flows from investing activities
Purchase of building ($160,000)
Purchase of equipment ( 25,000)
Sale of equipment ,000
Net cash used by investing activities (181,000)
Cash flows from financing activities
Payment of cash dividends $ 15,000
Net cash used by financing activities ( 15,000) Net increase in cash ,000
Cash at beginning of period ,000
Cash at end of period $56,000

25. Evaluation of Cash Flows
Liquidity
Cash current debt coverage ratio
Solvency
Capital expenditure ratio
Cash total debt coverage ratio
Profitability
Cash return on sales ratio

26. Evaluation of Cash Flows
Accrual-based measures allow management discretion
Getting back to the cash takes out some of the uncertainty

27. Cash Current Debt Coverage Ratio
Since cash from operating activities involves the entire year rather than a balance at one point in time, the cash current debt coverage ratio is a better representation of liquidity than the current ratio
Cash current debt coverage ratio =
Cash provided by operating activities
Average current liabilities

28. Capital Expenditure Ratio
Indicator of company’s ability to generate sufficient cash to finance new capital assets (industry type has a significant effect on this ratio)
Capital expenditure ratio =
Cash provided by operating activities
Capital expenditures

29. Cash Total Debt Coverage Ratio
Measures a company’s ability to repay its liabilities from cash generated from operating activities
Cash total debt coverage ratio =
Cash provided by operating activities
Average total liabilities

30. Cash Return on Sales Ratio
Indicates ability to turn sales into cash
Cash return on sales =
Cash provided by operating activities
Net sales

31. Chapter 13 Cash Flow Statement
The end
Chapter 13
Cash Flow Statement