Topic 11 Statement of cash flows

Purpose of statement of cash flows

Reports cash receipts and cash payments for a period.

Operating activities

Transactions and events that affect net income

Examples of operating activities

Production and purchase of inventory, the sale of goods and services to customers, and the expendigtures to operate the business

Investing activities

Transactions and events that come from the purchase and sale of long-term assets.

Cash inflows from investing activities

Selling intangible assets

Selling investments

Collecting principal on notes receivable

Selling plant assets

Cash outflows from investing activities

Buy plant assets

Buy intangible assets

Buy investments

Loan money in return for notes receivable

Financing activities

Transactions and events that affect long-term liabilites and equity.

Cash inflows from financing activities

From contributions by owners

From issuing long-term debt (notes payable and bonds payable)

From reissuing its treasury stock

From issuing its common and preferred stock

Cash outflows

To pay dividends to shareholders

To purchase treasury stock

Withdrawls by owners

To pay off long-term debt(notes payable and bonds payable)

Cash inflows from opearting activities

Cash sales to customers

Collections on credit sales

Receipt of interest revenue

Receipt of divident revenue

Cash outflows from operating activities

Pay operating expenses

Pay salaries and wages

Pay taxes

Pay interest owed

Pay suppliers for goods and services

Indirect method

Reports net income and then adjusts it for items that do not affect cash

Direct method

Seprateley lists operating cash receipts and operating cash payments

Indirect method for operating activities

Net Income + Non-Cash Expenses + Changes in Current Liabilities - Changes in Current Assets

Net cash from investing

Cash received from asset sales - Cash paid for asset purchases

Net Cash from Financing

Cash recieved from issuing stock or borrowing - Cash paid for dividends or debt repayment

Importance of cash flows

Cash flows help :

Users decide if a comapny has cash to pay its debts

Users evaluate company’s ability to pursue opportunities

Managers plan day to day operations

Managers make long term investment decisions

Cash flow life stages

The typical cash flow patterns a company experiences as it matures

Start up

Negative cash flow from opeartions

Negative cash flow from investing

Positive cash flow from financing

Growth

Positive cash flow from opeartions

Negative cash flow from investing

Positive cash flow from financing

Mature

Positve cash flow from opeartions

Negative cash flow from investing

Negative cash flow from financing

Decline

Negative cash flow from opeartions

Positive cash flow from investing

May have positive and/or negative cash flow from financing