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Statement of Cash Flows
Shows the changes in cash for the same period of time as that covered by the income statement
What does the statement of cash flows provide information about?
Cash Receipts (inflows)
Cash Payments (outflows)
How does the statement of cash flows differ from the other major financial statements?
The cash flow statement simply shows all of the increases and decreases in CASH. Not accrual based.
The other financial statements are based on accrual accounting (realization principle and the matching concept)
Three categories of cash inflows and outflows
Operating Activities
Investing Activities
Financing Activities
Operating Activities
The cash effect of revenues and expenses (income statement related)
If the income statement reports sales revenue of $1 million, does that mean the company collected $1 million from customers?
NO!!! Sales could have been made on account.
Which income statement item does NOT have a cash effect?
Depreciation (a non-cash expense. no cash is paid)
Simply ‘using up’ of assets
Operating Cash Inflows
From sale of goods or services
From interest and dividends received from revenues
Operating Cash Outflows
To suppliers for inventory
To employees for salaries
To government for taxes
To lenders for interest
To others for expenses (“buying insurance”)
Investing Activities
The cash effect of investments and long-term assets
Investments
Both stock and bonds of other companies that we own
Long-Term Assets
PPE and intangibles
Investing Cash Inflows
By selling:
From sale of PPE
From sale of intangibles
From sale of investments in other entities
Investing Cash Outflows
By buying:
To purchase PPE
To acquire intangibles (patent)
To purchase investments in other entities
Financing Activities
The cash effect of bank loans and stockholders’ equity items
Financing Cash Inflows
From sale of our company’s stock to its stockholders (selling them our stock)
From borrowing money (bank loan)
Financing Cash Outflows
Cash paid to stockholders as dividends
Cash paid to creditors as the repayment of principle of funds borrowed
* The interest payment would be considered an operating activity since it effects net income
Statement of Cash Flows Format
Cash Flows from Operating Activities
(list of individual inflows and outflows) XX
Net cash flow from operating activities XXX
Cash Flows from Investing Activities
(list of individual inflows and outflows) XX
Net cash flow from investing activities XXX
Cash Flows from Financing Activities
(list of individual inflows and outflows) XX
Net cash flow from financing activities XXX
NET CHANGE IN CASH XXX
Net Cash Flow from Operating Activities Formula
Cash Receipts - Cash Payments = Net Cash Flow from Operating Activities
What is the major purpose of the operating activities section of the cash flow statement?
To convert net income from an accrual basis to a cash basis
What does the net cash flow from operating activities represent?
What the net income of the company would have been had the company used a cash accounting basis rather than accrual accounting
How to calculate net cash flow from operating activities
For each item on the income statement, determine a corresponding balance sheet account (ex. sales revenue matches with accounts receivable)
For these balance sheet accounts, draw a t-account and analyze it to determine the cash effect of the income statement item.
** NOT ALL ACCOUNTS ON THE INCOME STATEMENT HAVE A CASH EFFECT. SOME REVENUES/EXPENSES DO NOT RESULT IN AN INFLOW/OUTFLOW OF CASH
3 Examples of Non-Cash Revenues and Expenses
Depreciation Expense
Gains
Losses
** should be ignored when calculating the net cash flow from operating activities
To determine the cash paid for inventory purchases, you need to analyze both the ______ and _____ _____ t-accounts.
Why?
Inventory and accounts payable
Because some of the purchases were most likely made on account.
Liability t-account format
XXXX Payable
Cash Paid (X) $
XXXX Expense
$
$
How to solve for dividends
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
What dictates a financially healthy company?
Operating Activities - Net positive cash flow
Investing Activities - Net negative cash flow
Financing Activities - N/A
Operating Activities negative cash flow meaning
The operating activities are the operations of the company. If there is a negative cash flow, then it is costing the company more money to operate the business than they are bringing in.
BAD
Net negative cash flow = net loss using cash basis
(they spent more cash on operations than they generated)
Investing Activities negative/positive cash flow meaning
Negative cash flow = the company is re-investing in itself in order. to grow and expand
Positive cash flow = the company is selling off its long-term assets. Not a good sign for financial health
Note 
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