13:11

23-1
Statement of Cash Flows
Chapter
23
23-2
Overview
BECAUSE of the SCF, users of the financial
statements get the best of both worlds!
SCF bridges the gap created by paper income
resulting from applying an accrual basis of
accounting.
Reconciles GAAP income to operating cash flows
and separately displays cash from investing and
financing activities.
23-3
Illustration
(40)
(30)
(20)
(10)
-
10
20
30
40
50
2001 2002 2003 2004 2005 2006
Income Operating cash flows
Got any thoughts about the above chart???
Like: If the Company is showing all this income, why is the operating
cash flow not tracking income?
23-4
Statement of Cash Flows- summary
This will mean more later, but a statement of
cash flows is an analysis of the change in the
balance sheet accounts.
If you reconcile the change in each of your
balance sheet accounts, your SCF will work!!
The key is presentation- Operating vs. Investing
Vs. Financing activities.
13:11
23-5
Overview- how it works
Cash from operations:
Shows the cash provided by operations
Typical presentation called indirect because it reconciles
the net income (accrual) to cash from operations.
Think of it as net income, adjusted for non-cash activities,
including changes in current assets
Cash from investing:
Gross!
Shows cash from investing activities
Think of it as cash from long-term assets, similar to unusual items in
the income statement.
Cash from financing:
Gross!
Shows cash from financing activities
Think of it as cash from borrowing and equity transactions 23-6
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23-7
Operating section- Indirect Method
Reconciles net income to cash flows from
operations by:
Starts with net income and seeks to reconcile that
number to the cash actually generated from operations
Removes non-cash items, like depreciation &
amortization
Removes items which will be presented in the investing
and financing sections separately
i.e remove gains from sales of long-term assets
Shows changes in current assets
Think about it- if A/R increased $100k, how does this impact
cash?
23-8
Operating section illustration
Opening balance 1,000,000
Sales on credit 10,000,000
Cash sales 100,000
Collections 9,500,000
Opening balance 1,000,000
Sales on credit 10,000,000 (10,000,000)
Cash sales (100,000)
Collections (9,500,000)
Ending 1,500,000 (10,100,000)
Change in A/R 500,000
Net income 10,100,000
Adjustments to reconcile net income to cash provided by operations:
Increase in accounts receivable (500,000)
Cash provided by operations 9,600,000
We collected 9,500,000
We made cash sales 100,000
9,600,000
LETS CHECK IT- FROM ABOVE
Accounts Receivabl e NET INCOME
ASSUMED ACTIVITY:
HOW THE STATEMENT OF CASH FLOWS WOULD APPEAR:
13:11
23-9
Investing section
Now that the operating section reflects ONLY
operating activities, this section shows just
the cash from investing activities (principally
buying and selling long-term assets)
Presented gross-for instance a sale of a fixed
asset for a gain:
The gain is shown as a reduction from net
income in the operating section
The proceeds are shown as a source of cash
This works out to reflect the change in fixed
assets. See next slide
23-10
Investing illustration
Fi xed asset
Beginning of year 100,000
Sold (100,000)
Ending -
Accumul ated depreci ati on
Beginning of year 70,000
Cy Depreciation expense 5,000
Sold (75,000)
Ending -
Howmuch did fixed assets change by? 30,000
In the operati ng secti on we pul l out the
non-cash depreci ati on expense:
Depreciation expense 5,000 Operating section adjustments:
Gain on sale 75,000 Depreciation back-out 5,000
Gain back-out (75,000)
Sel l the thi ng for $100k: INVESTING section: Proceeds fromsale 100,000
Purchase price 100,000 WOW- PRESENTING IT THIS WAY REFLECTS THE 30,000
NBV at sale (25,000) CHANGE!
Gain on sale 75,000
In the i nvesti ng secti on we show:
Cash proceeds fromsale of fixed assets 100,000
In the statement of cash fl ows we have accounted for the
change of $30,000:
23-11
Financing section
Now that the operating section reflects ONLY
operating activities, this section shows just the cash
from financing activities (principally cash received
and paid to borrow money and complete equity
transactions)
Presented gross-for instance borrow $1 million and
repay $250,000 under a line of credit:
The borrowings of $1million are shown as cash provided
by financing (positive cash);
The repayment of $250,000 is shown as a repayment
(negative cash)
NOTICE that combined they represent the change in that
23-12
FINANCING ACTIVITY EXAMPLE
Remember that we are trying to reconcile the change in each
of the balance sheet accounts.
So if debt increased by $10, but the companys activity were to
borrow $1 million and repaid $999,990 (net $10 change),
the statement of cash flows would reflect the activity and
would look like this:
Cash flows from financing activities:
Borrowings from bank $1,000,000
Repayments under loans $ 999,990
Cash flows from financing activities $ 10
13:11
23-13
SO HOW DO WE DO IT?
First, you need:
Balance sheet
Income statement
Equity statement
Then, you compute the change in each item on the
balance sheet.
For each change, allocate to:
Operating, investing or financing
Then you post them all over the the statement of
cash flows!
23-14
Unaccounted
12/31/2004 12/31/2003 CHANGE Operating Net Income For
Cash 10,000 12,000 (2,000) N/A n/a
A/R 70,000 65,000 5,000 (5,000) -
Inventory 500,000 425,000 75,000 (75,000) -
Fixed assets - -
Accumulated depr. - -
TOTAL ASSETS 580,000 502,000
A/P 75,000 70,000 5,000 5,000 -
Debt 400,000 400,000 -
common stock 10,000 10,000 -
retained earnings 95,000 22,000 73,000 73,000 -
TOTAL LIAB &EQTY 580,000 502,000
- - -
NET INCOME FOR 2004 WAS 73,000 B/C all accounted for, we are ready to do SCF!
Cash flows fromoperating acitivities:
Net income 73,000
Adjustments to reconcile net income to net cash fromoperations
Increase in accounts receivable (5,000)
Increase in inventory (75,000)
Increase in accounts payable 5,000
Net cash USED in operating activities (2,000)
Cash flows frominvesting and financing activities:
NONE IN THIS EXAMPLE -
Net decrease in cash (2,000)
Cash at the beginning of the year 12,000
Cash at the end of the year 10,000
XYZ, Inc.
Statement of Cash Flows
Year Ended December 31, 2004
23-15
OKAY, MORE DIFFICULT
Prepare the statement of cash flows for ABC,
Inc. based on the following information:
The comparative balance sheet and income statement are
on the next slide.
Equity transactions are as follows:
Sold stock for $10,000 cash
Declared and paid dividends of $5,000
Long-term assets and liabilities
Borrowed $100,000, repaid $50,000
Purchased a warehouse with $1 million in cash and assumed an
existing $8 million loan;
Sold equipment for $200,000 resulting in a gain of $190,000 (net
book value was 10,000 representing 500,00 of equipment with
490,000 of accumulated depreciation).
23-16
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2004 2003
Cash 225,000 100,000 Sales 10,000,000
Accounts receivable 265,000 250,000 COS 7,000,000
Inventory 1,000,000 500,000 Gross Profit 3,000,000
Prepaidexpenses 10,000 12,000
Total current assets 1,500,000 862,000 SG&A expense 750,000
Interest expense
Fixedassets Depreciationexpense 200,000
At cost 18,500,000 10,000,000 Amortizationexpense 25,000
accumulateddepreciation (6,210,000) (6,500,000) Incomefromrecurring op's 2,025,000
12,290,000 3,500,000
Leasecommissions Gainondisposal of f. assets 190,000
At cost 1,250,000 1,250,000
accumulatedamortization (725,000) (700,000) Incomebeforeincometaxes 2,215,000
525,000 550,000 Incometaxprovision 775,000
Total assets 14,315,000 4,912,000
Net income 1,440,000
Accounts payable 433,000 500,000
Accruedexpenses 150,000 175,000
Current portionof debt 50,000 50,000
LT Debt 10,050,000 2,000,000
Commonstock 110,000 100,000
Retainedearnings 3,522,000 2,087,000
Total liabilities &Equity 14,315,000 4,912,000
ABC, Inc.
Income statement
Year Ended December 31, 2004
ABC, Inc.
Balance Sheets
December 31
Equity transactions are as follows:
Sold stock for $10,000 cash
Declared and paid dividends of $5,000
Long-term assets and liabilities:
Borrowed $100,000, repaid $50,000
Purchased a warehouse with $1 million
in cash and assumed an
existing $8 million loan;
Sold equipment for $200,000 resulting in
a gain of $190,000 (net book value was
10,000 representing 500,00 of
equipment with 490,000 of accumulated
depreciation).
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23-17
SOLUTION
To Deprec. Cash N-Cash Proceeds Stock
Change Operating Gain & Amort. Purchase Purchase sale asset Borrow Repay Sale Dividends Net incom LEFTOVER
Cash 125,000 n/a n/a
Accounts receivable 15,000 (15,000) -
Inventory 500,000 (500,000) -
Prepaid expenses (2,000) 2,000 -
Fixed assets, net 8,790,000 (190,000) 200,000 (1,000,000) (8,000,000) 200,000 -
Cap. Com At cost (25,000) 25,000 -
Accounts payable (67,000) (67,000) -
Accruedexpenses (25,000) (25,000) -
All debt 8,050,000 8,000,000 100,000 (50,000) -
Commonstock 10,000 10,000 -
Retainedearnings 1,435,000 (5,000) 1,440,000 -
Cashflows fromoperating activities:
Net Income 1,440,000
Adjustments toreconcilenet incometonet cash fromoperatingactivities:
Depreciation&amortization 225,000
Gainondisposal of fixed asset (190,000)
Increase in accounts receivable (15,000)
Increase in inventory (500,000)
Decreaseinprepaid expenses 2,000
Decreaseinaccounts payable (67,000)
Decreaseinaccruedexpenses (25,000)
Cashprovided byoperating activities 870,000
Cashflows frominvesting activities
Purchaseof warehouse (1,000,000)
Proceeds fromsaleof fixedassets 200,000
Cashused ininvestingactivities (800,000)
Cashflows fromfinancingactivities
Borrowings 100,000
Repayments (50,000)
Stock soldfor cash 10,000
Dividends paid (5,000)
Cashprovided byfinancing activities 55,000
Net increasein cash 125,000
Cashat thebeginning of theyear 100,000
Cashat theendof theyear 225,000
Supplemental disclosureof non-cash investing andfinancing activity
Portionof warehousepurchasefunded byassumptionof debt 8,000,000
ABC, Inc.
Statement of Cash Flows
Year ended December 31, 2004
23-18
DIRECT VS. INDIRECT
Everything we just did is the Indirect method. The
INDIRECT METHOD which is by far the most common.
There is a Direct method as well.
The only difference is in the operating section- financing
and investing sections are exactly the same either way
The indirect method is called indirect because it reconciles
net income to cash from operationsi.e indirectly
determines cash from operations by starting with a non-
cash-based number and reconciling to the cash-based
number:
Strength: highlights the differences between net income and
operating cash flows
The direct method is called direct because it only shows
the cash flows, rather than reconciling to them.
Strength: prominently displays cash receipts and payments.
23-19
DIRECT METHOD: LOOKS LIKE
Cash flows from operating activities:
Cash received from customers $765,000
Cash payments:
To suppliers (550,000)
For operating expenses (148,000)
For income taxes ( 48,000)
Net cash provided by operating activities $ 19,000
23-20
Illustration of the two:
Indi rect Di rect
OPERATING SECTION Net income Cash received fromcustomers
Adjustments to net income, such as Cash paid for inventory
Depreciation Cash paid for operating expenses
Gains on l-termassets Cash paid for income taxes
Changes in current assets &liabilities
INVESTING SECTION
FINANCING SECTION
THE ABOVE ITEMS ADD UP TO THE SAME AMOUNT OF OPERATING CASH FLOWS
SAME FOR BOTH
SAME FOR BOTH
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23-21
How do you compute:
You simply perform a roll-forward for the operating
assets and liabilities. (works on the same premise
as reconciling from net income, but in reverse)
If a Company has sales of $1,000,000 and accounts
receivable went from $100,000 to $110,000, then
cash received from customers is:
Beginning A/R $ 100,000
Plus sales 1,000,000
Less Ending (110,000)
Cash received MUST be $ 990,000
23-22
REQUIRED DISCLOSURE ETC.
If reconciling cash and cash equivelants, use
the term cash and cash equivelants in the
SCF
Show cash paid for interest, and cash paid
for income taxes at the bottom of the
statement
Dont forget to disclose non-cash investing
and financing activities at the bottom of the
statement
23-23
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10. Insurance expense 5,000
Prepaid insurance 7,500
Retained earnings 12,500
11. Amortization expense 1,250
Retained earnings 1,250
Trademark 2,500
Problem 23-6, pg. 1261 Problem 23-6, pg. 1261