1. STATEMENT OF CASH FLOWS 4th REQUIRED GAAP Statement. Covers a period of time (like an income statement). Focuses on: Inflows of CASH Outflows of CASH text p. 586 201Lec12.PPT

2. Questions the Statement of Cash Flow Answers

3. Format of the Statement of Cash Flows Four parts (called activities): Operating - Cash from sales less cash spent on expenses - 2 options: direct or indirect Investing - Cash in and out from buying and selling of balance sheet items Financing - Cash in from borrowing or stock issue less cash out from paying back debt, buying treasury stock or paying dividends Non-cash investing and financing activities (must be “significant” in $$$)

4. FORMAT - 3 main parts plus schedule Net Income Per income stmt (Accrual basis)xxx + or - Adjustments (Convert to cash basis)xxx Net Cash from Operationsxxx Called INDIRECT METHOD text p. 589 1 - Cash from OPERATING activities: Cash receipts from customers xxx less Cash payments: suppliersxxx operating expensesxxx taxesxxx - xxx Net Cash from Operationsxxx Called DIRECT METHOD A l t e r n a t i v e l y text p. 612 SAME AMOUNTSAME AMOUNT

5. 2 - Cash from INVESTING activities: Buy or sell PP&E.xxx Buy or sell OTHER company’s stock. xxx Lend Money, Receive repayments.xxxxxx 3 - Cash from FINANCING activities: Borrow money, pay back debt.xxx Buy or sell your OWN stock.xxx Pay dividends.xxx xxx NET INCREASE (DECREASE) IN CASH XXX Cash at Beginning of Year (On balance sheet) XXX Cash at End of Year (On balance sheet) XXX

6. 4 - Supporting Schedule SIGNIFICANT NON-CASH Transactions should be disclosed in a separate schedule. For example:Trade stock for a building or Sign note payable for building.

7. EXAMPLES: Operating activities adjustments. 1 - Accrual to Cash conversion: Assume: Sales for year = $100,000. Beginning A/R = $10,000. Ending A/R = 0. Cash Collected? Cash Collected if Ending A/R = $15,000 instead of $0? Operating Activities:Net incomeXXXX - Increase in A/R( 5,000) Cash from OperationsXXXX If DIRECT method: Operating Activities: Receipts from customers:95,000

8. Operating activities Indirect Method RULES: Increases in all current assets (except cash) require negative adjustments to arrive at cash flow. Decreases in all current assets (except cash) require positive adjustments to arrive at cash flow. Increases in all current liabilities require positive adjustments to arrive at cash flow. Decreases in all current liabilities require negative adjustments to arrive at cash flow.

9. EXAMPLES: Operating activities adjustments. 2 - Noncash revenues or expenses: Assume the following:Cash Revenues100,000 Cash Expenses 90,000 Depreciation Exp 50,000 NI(40,000) What is Cash Flow? Statement of cash flows: Net income(40,000) + Depreciation 50,000 Cash from Operations 10,000 If DIRECT method: Omit any mention of non-cash expenses! Cash Revenues100,000 Cash Expenses 90,000 Net cash flow 10,000

10. Additional Indirect Method RULES: To arrive at operating activities cash flows: Addback non-cash expenses such as: Depreciation Amortization Loss on sale of assets (Also subtract gains.)

11. EXAMPLES: Investing & Financing activities 3 - Examine all Non-current assets and liabilities beginning and ending balances. Assume selected balances are: BeginningEnding Long term assets: Land 100,000115,000 Long term liabilities: N/P 200,000175,000 Equity: Common Stock 500,000600,000 How did they change? Cash paid or received ? If no cash involved, significant exchange? Investing or financing? Note no difference if DIRECT method. Affects only operating activities format.

12. Investing and financing RULES: Locate investing and financing activity items by reviewing changes in long-term assets, liabilities and equity over the year. - If change used or generated cash, then put on statement of cash flows. - If cash not involved, do nothing unless it’s a significant exchange. Then put on supporting schedule.

13. EXAMPLE: B A L A N C E S H E E T ENDBEGIN Cash 1,000 1,500 A/R 4,000 5,000 Inventory 9,500 8,000 Prepaid Insurance 1,500 0 Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) Total Assets66,50036,500 A/P 6,000 2,000 Unearned Revenue 3,500 7,000 Note Payable10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 Total Liabs & Equity66,50036,500

14. EXAMPLE: I N C O M E S T A T E M E N T Sales 100,000 - CGS -60,000 Gross Profit 40,000 - Depreciation Expense -6,500 - Other Expenses -20,000 Net Income from operations 13,500 - Loss on sale of PP&E -1,000 Net Income 12,500 Other data: Land was bought by signing a note Old building which cost $25,000, accumulated of $15,000, was sold for $9,000 cash New building was bought for $35,000 cash Stock was issued for $10,000 cash Cash dividends paid were $3,000

15. EXAMPLE: Sales 100,000 - CGS -60,000 Gross Profit 40,000 - Depreciation Expense -6,500 - Other Expenses -20,000 Net Income from operations 13,500 - Loss on sale of PP&E -1,000 Net Income 12,500 CASH FROM OPERATING ACTIVITIES: NET INCOME12,500 + Depreciation Expense 6,500 + Loss on Sale of PP&E 1,000

16. EXAMPLE: ENDBEGIN Cash 1,000 1,500 A/R 4,000 5,000 Inventory 9,500 8,000 Prepaid Insurance 1,500 0 Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) Total Assets66,50036,500 A/P 6,000 2,000 Unearned Revenue 3,500 7,000 Note Payable10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 Total Liabs & Equity66,50036,500 CASH FROM OPERATING ACTIVITIES: NET INCOME12,500 + Depreciation Expense 6,500 + Loss on Sale of PP&E 1,000 + Decrease in A/R 1,000 - Increase in Inventory ( 1,500) - Increase in Prepaid Insurance ( 1,500)

17. EXAMPLE: ENDBEGIN Cash 1,000 1,500 A/R 4,000 5,000 Inventory 9,500 8,000 Prepaid Insurance 1,500 0 Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) Total Assets66,50036,500 A/P 6,000 2,000 Unearned Revenue 3,500 7,000 Note Payable10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 Total Liabs & Equity66,50036,500 CASH FROM OPERATING ACTIVITIES: NET INCOME12,500 + Depreciation Expense 6,500 + Loss on Sale of PP&E 1,000 + Decrease in A/R 1,000 - Increase in Inventory( 1,500) - Increase in Prepaid Insurance( 1,500) + Increase in A/P 4,000 - Decrease in Unearned Revenue ( 3,500) Net Cash From Operations 18,500

18. EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) N/P10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 LAND: LAND:Increased $10,000. If bought with Cash, then Investing Activity Other data - land was bought by signing a note. Other than cash > Significant non-cash for schedule. All Non - current accounts

19. Buy new building for $35,000 cash Sell old building for $9,000 cash EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) N/P10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 BuildingAccum Depr: Building: Increased $10,000. Accum Depr:Decreased $8,500. Depreciation Expense 28000 19500 Building Accum Depr 50000 60000 15000 25000 35000 6500

20. EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) N/P10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 N/P: N/P:Increased $10,000. Relates to land purchase discussed earlier.

21. Common Stock: Common Stock:Increased $500. Paid In Capital: Paid In Capital:Increased $9,500. Other data – Stock was issued for $10,000 cash so 500 shares must have been issued for $20 per share. Financing Activities: $10,000 inflow. EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) N/P10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500

22. 3,000 of cash dividends were paid. Retained Earnings Retained Earnings:Increased $9,500. EXAMPLE: INVESTING & FINANCING activities. Analyze all noncurrent accountsENDBEGIN Land10,000 0 Building60,00050,000 Accum Depr (19,500) (28,000) N/P10,000 0 Common Stock ( $1 Par) 1,500 1,000 Paid In Capital Excess Par24,50015,000 Retained Earnings21,00011,500 Retained Earnings 11500 21000 12500 = Net Income 3000

23. CASH FROM OPERATING ACTIVITIES: NET INCOME12,500 + Depreciation Expense 6,500 + Loss on Sale of PP&E 1,000 + Decrease in A/R 1,000 - Increase in Inventory( 1,500) - Increase in Prepaid Insurance( 1,500) + Increase in A/P 4,000 - Decrease in Unearned Revenue( 3,500) Net Cash From Operations 18,500 CASH FROM INVESTNG ACTIVITIES: Proceeds from building sale 9,000 Purchase of building (35,000) Net Cash From Investing(26,000) CASH FROM FINANCING ACTIVITIES: Proceeds from stock issuance 10,000 Payment of Dividends( 3,000) Net Cash From Financing 7,000 NET DECREASE IN CASH( 500) Cash at beginning of year 1,500 Cash at end of year 1,000

24. SCHEDULE OF SIGNIFICANT NON-CASH EXCHANGES: Land was obtained by signing a $10,000 note payable.

25. Cash Provided By Operations – Capital Expenditures – Dividends Paid Free Cash Flow Considered excess cash available after spending to maintain operational efficiency and shareholders satisfied. Text p 604

26. Current Cash Debt Coverage Ratio = Cash provided by operations Average current liabilities Probably better than current ratio in assessing ability to meet current liability payments. Text p 607