CASH FLOW –

WEEK 4

Hermie T. Bola
1/18/2022 1
 Course Learning Objective

Identify the purposes of the statement

of cash flows and distinguish among
operating, investing, and financing cash
flows.

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 The Cash Flow Statement
The statement of cash flows reports cash flows by three
types of activities:
Cash receipts and disbursements
Operating related to revenue or expense
Activities activities. Includes cash flows
related to:
Investing Activities
• interest income and expense
Financing • dividend revenue
Activities • income tax expense
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 The Cash Flow Statement
The statement of cash flows reports cash flows by three
types of activities:
Operating Cash receipts and disbursements
Activities related to increases and decreases
in long-term assets, including:
Investing Activities • PP&E
• Notes Receivable
Financing Activities • Investments
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 The Cash Flow Statement
The statement of cash flows reports cash flows by three
types of activities: Cash receipts and disbursements
Operating related to increases and decreases
in long-term liabilities and equity.
Activities Includes:
• Borrowing
Investing Activities • Issuing stock
• Paying dividends
Financing Activities
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 Reporting Cash Flows
Increases in Cash Decreases in Cash

Operating Operating
(receipts from (payments for
revenues) expenses)

Investing
Investing
(receipts from sales of
(payments for acquiring
noncurrent assets)
noncurrent assets)

Financing Financing
(receipts from issuing
equity and debt securities) (payments for treasury stock,
dividends, and redemption of debt
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securities)
 Cash Flow Analysis Summary

Sources of Cash Uses of Cash

Decrease in an asset account Increase in an asset account

Increase in a liability account Decrease in a liability account

Increase in an owner’s equity Decrease in an owners’ equity

account account

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 Non-cash Investing and Financing Activities
➢Issuing bonds to acquire land

➢Issuing common stock for convertible

preferred stock
➢Issuing a long-term note to acquire
equipment
➢Issuing a stock dividend

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 Statement of Cash flows
Indirect and Direct Methods

Indirect method Direct method

Adjusts net income for Shows operating cash

items that do not affect receipts and payments,
cash. making it more consistent
with the objective of a
statement of cash flows
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 Step 1: Operating Activities
Summary of Conversion to Net Cash Indirect Method
Provided by Operating Activities

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 Step 2: Investing Activities

Cash Flows From Investing Activities:

Cash Payment for Purchase of Fixed Asset Deduct
Cash Receipt from Disposal of Fixed Asset Add
Equity Investment Deduct
Net Cash Used for Investing Activities

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 Step 3: Financing Activities

Cash Flows From Financing Activities:

Repayment of Debt Deduct
Sale of Stock Add
Repurchase of Stock Deduct
Payment of cash dividends Deduct

Net cash used for Financing Activities

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 Prepare the statement of cash flows by the
direct method
➢ Each item on the income statement will be
converted from the accrual basis to cash basis.

➢ Most of the amounts will be adjusted based on

changes in current asset amounts and current
liability amounts.

➢ Non-cash expenses and gains and losses will be

ignored.
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 Cash Flows from Operating Activities

Cash Collections from Customers

Cash Receipts Beginning Ending
Sales
from = + Accounts - Accounts
Revenue
Customers Receivable Receivable

Cash Receipts of Interest

Beginning Ending
Interest Interest
= + Interest - Interest
Receipts Revenue
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Receivable
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Receivable 14
 Cash Flows from Operating Activities

Cash Receipts of Dividends

Beginning Ending
Dividend Dividend
= + Dividends - Dividends
Receipts Revenue
Receivable Receivable
Cash Receipts of Interest
Beginning Ending
Interest Interest
= + Interest - Interest
Receipts Revenue
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Receivable
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Receivable 15
 Cash Flows from Operating Activities

Payment to Employees
Salaries & Beginning Ending Salaries
Payments to
= Wages + Salaries & Wages - & Wages
Employees
Expense Payable Payable

Payment for Interest Expense and Tax Expense

Cash Paid for Beginning Ending Related
= Expense + -
the Expense Related Payable Payable

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Hermie T. Bola
 Best Wishes Company
Income Statement
For the Year Ended December 31, 2011

Sales $470,000
Cost of goods sold 254,000
Gross profit 216,000
Operating expenses
Selling expense 110,000
Administrative expense 73,000
Amortization expense
Projecting Pro Forma Statements with the 14,000 197,000
Net income Percent of Sales Method $19,000
Additional information:
a. Accounts receivable increased by $12,000.
b. Inventories increased by $28,000.
c. Prepaid expenses increased by $1,200.
d. Accounts payable to merchandise suppliers increased by $19,000.
e. Accrued expenses payable increased by $9,000.
Required: Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2011, for Best Wishes Company, using the direct method.
 Best Wishes Company
Statement of Cash Flows
For the Year Ended December 31, 2011

Cash flows from operating activities:

Cash receipts from customers 458,000 (1)
Cash payments:
To suppliers 263,000 (2)
For operating expenses 175,200 438,200 (3)
Net operating cash 19,800
1 Sales 470,000
Deduct: Increase in accounts receivable 12,000
Cash receipts from customers 458,000

2 Cost of goods sold 254,000

Add: Increase in inventory 28,000
282,000
Deduct: Increase in accounts payable (19,000)
Cash payments to suppliers 263,000

3 Operating expenses exclusive of depreciation and amortization 183,000

Add: Increase in prepaid expenses 1,200
Deduct: Increase in accrued expenses payable (9,000)
Cash payments for operating expenses 175,200
 Operating Cash Flow (OCF)

•A firm’s operating Cash Flow (OCF) is the cash flow a firm

generates from normal operations—from the production and
sale of its goods and services.

•OCF may be calculated as follows:

NOPAT = EBIT  (1 – T)

OCF = NOPAT + Depreciation

OCF = [EBIT  (1 – T)] + Depreciation

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 Free Cash Flow (FCF)

• Free cash flow (FCF) is the amount of cash flow

available to investors (creditors and owners) after the
firm has met all operating needs and paid for investments
in net fixed assets (NFAI) and net current assets (NCAI).
FCF = OCF – NFAI – NCAI
•Where
NFAI = Change in net fixed assets + Depreciation

NCAI = Change in CA – Change in (A/P + Accruals)

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 Free Cash Flow (FCF)

Financial Analysis and Interpretation

Free Cash Flow is used to measure the

financial strength of a business. A company that
has positive free cash flow is able to fund internal
growth, retire debt, and enjoy financial flexibility.

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