Comm 293 - Cash Flow Statements

Purpose of cash flow statement

Shows actual cash movement and removes accrual effects

Three sections of cash flow

Operating activities Investing activities Financing activities

Operating activities

Cash from core business operations

Investing activities

Cash from buying or selling long term assets

Financing activities

Cash from borrowing repaying debt issuing shares or paying dividends

General cash rule

Increase in asset is outflow decrease in asset is inflow increase in liability is inflow decrease in liability is outflow

Indirect method

Start with net income then adjust for non cash items gains or losses and working capital changes

Step 1 net income

Begin with net income from income statement

Step 2 non cash items

Add back depreciation amortization bad debt and impairment

Step 3 gains and losses

Subtract gains and add losses because they are not operating cash

Step 4 working capital

Adjust for changes in current assets and current liabilities

Increase in current asset

Deduct from CFO

Decrease in current asset

Add to CFO

Increase in current liability

Add to CFO

Decrease in current liability

Deduct from CFO

Depreciation

Add back to CFO

Amortization

Add back to CFO

Bad debt expense

Add back to CFO

Impairment loss

Add back to CFO

Gain on sale

Deduct from CFO

Loss on sale

Add to CFO

CFO inflows

Cash from customers dividends received and interest received

CFO outflows

Cash paid for inventory salaries taxes and interest

Investing inflows

Cash from selling PPandE or selling investments

Investing outflows

Cash used to buy PPandE or buy investments

Asset purchase formula

Beginning balance plus purchases minus disposals equals ending balance

Financing inflows

Cash from loans bonds or issuing shares

Financing outflows

Cash used to repay loans buy back shares or pay dividends

Dividends received

Classified as operating activity

Dividends paid

Classified as financing activity

Dividend paid formula

Beg dividend payable plus declared minus end dividend payable

Noncash investing or financing

Includes issuing shares for assets or converting debt to equity

Free cash flow

CFO minus capital expenditures

Reconciliation formula

CFO plus CFI plus CFF equals change in cash

Ending cash formula

Beginning cash plus change in cash equals ending cash