Accounting Statement of Cash Flows

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

1. Operating Activities

2. Investing Activities

3. 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

1. For each item on the income statement, determine a corresponding balance sheet account (ex. sales revenue matches with accounts receivable)

2. 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

1. Depreciation Expense

2. Gains

3. 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