1. Chapter 3 Financial Statements
Updated

2. Basic Financial Statements
Income statement
Balance sheet
Cash flow statement 1.

3. Income Statement
Table 1
2013
2013

4. Table 2
2012 and 2013
2012
2013
2012
2013

5. Cash Flow Statement
Cash Flow Statement is used by firms to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash.
Source of cash is any activity that brings cash into firm.
Ex. sale of equipment
Use of cash is any activity that causes cash to leave firm.
Ex. purchase of equipment
Note: Ending cash balance for 2012 = Beginning cash balance for 2013
2013
2013
2012

6. Table 3
2012 and 2013
2012
2013
2012
2013

7. Cash Flow Analysis
Why did cash balance decline by $4.5 M. from 2012 to 2013?
Accounts receivable increased by $22.5 M. representing an increase in uncollected cash from credit sales.
Use of cash to invest in account receivables
Inventory increased by $ M.
Use of cash to buy inventory
3. Equipment increased by $ M.
Use of cash to buy equipment
Summary:
An increase in an asset account = Use of cash
A decrease in an asset account = Source of cash

8. Cash Flow Analysis (cont.)
4. Accounts Payable (credit extended to firm by suppliers) increased by $4.5 M.
Source of cash provided by suppliers when firm buys inventory
5. Long-term debt increased by $51.75 M.
Source of cash from long term financing
6. Short-term debt decreased by $9 M.
Use of cash to pay off debt
7. Retained earnings increased by $ M.
Source of cash to firm from its operations
Summary:
An increase in a liability or an owner’s equity account = Source of cash
A decrease in a liability or an owner’s equity account = Use of cash

9. Cash Flow Analysis Summary
Uses of Cash
Sources of Cash
Increase in an asset account
Decrease in an asset account
Decrease in a liability account
Increase in a liability account
Decrease in an owners’ equity account
Increase in an owner’s equity account

10. Cash Flow Statement The format for cash flow statement:
Beginning Cash Balance
Plus: Cash Flow from Operating Activities
Plus: Cash Flow from Investing Activities
Plus: Cash Flow from Financing Activities
Equals: Ending Cash Balance

11. Cash Flow Statement (cont.)
Operating activities represent company’s core business including sales & expenses. Basically any activity that affects net income for that period.
Investing activities include cash flows that arise out of the purchase & sale of long-term assets (i.e. plant & equipment).
Financing activities represent changes in firm’s use of debt & equity (i.e. issue of new shares, bonds) and payment of dividends.

12. Table 4
2013
2012
2013
Decrease
2013

13. Personal Summary
Write down one thing you learned in this chapter that is interesting, new, or useful to you.
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