In-depth Notes on Statement of Cash Flows

  • Session 10: Statement of Cash Flows

  • Focus on the preparation and understanding of Cash Flow Statements (SCF) using both direct and indirect methods.

  • Agenda for Today

  • Review DCT Corp. SCF example (from Learning Notes, page 7)

  • Discuss SCF from a user’s perspective and two case studies (examples)

  • DCT Corp. Revisited

  • Objective: Prepare SCF for DCT Corp using both direct and indirect methods.

  • Direct Method

  • Cash Flow from Operations (CFO):

    • Cash received from customers: $1,200
    • Sale of gift cards: $300
    • Cash paid for:
    • Rent: ($2,400)
    • Wages: ($2,300)
    • Suppliers: ($1,500)
    • Net cash from operating activities: ($4,700)

  • Cash Flow from Investing (CFI):

    • Purchase machinery: ($7,000)

  • Cash Flow from Financing (CFF):

    • Issuance of common stock: $20,000
    • Cash dividends paid: ($500)
    • Net cash from financing: $19,500

  • Final Cash Changes:

    • Change in cash and equivalents: $7,800
    • Beginning cash: $0
    • Ending cash: $7,800

  • Example Comparison

  • Walmart's Cash Flow:

    • Highlights significant differences in cash flows over different fiscal years.

  • Indirect Method

  • Begins with net income and adjusts for non-cash transactions.

  • DCT Corp example shows adjustments for:

    • Depreciation: $117
    • Changes in working capital like Accounts Receivable: ($6,300), Inventory: ($80), etc.
    • Total adjustments lead to net cash flow from operating activities being ($4,700).

  • Balance Sheet & Income Statement of DCT Corp

  • Assets and liabilities detailed, showing cash position, accounts receivable, accounts payable, total expenses, and equity calculations.

  • User’s Perspective on SCF

  • Essential to analyze SCF to assess financial health and operational efficiency of corporates.

  • Understanding the trends in cash flow information helps identify potential risks and opportunities.

  • Trends in Cash Flows:

  • Case studies of Company Alpha and Company Beta emphasizing performance over the years and the importance of cash flow management.

  • Key Takeaways

  • Ample information is provided within SCFs regarding sources and uses of cash.

  • Monitor cash flows across operational, investment, and financing activities to identify potential financial pitfalls.