Statement of Cash Flows

Cash Flow Statement

 Flow statement
 Periodic
 Provides information regarding the liquidity of a firm
 explains the reasons for increase or decrease in cash balance
from one balance sheet date to the next
 classifies the reasons for the change as an operating, investing
or financing activity.
 amount of net income in a period is usually different than the
amount of increase in cash in the same period
 reconciles net income with cash flow from operations.
 Classification of Cash Flows

Operations -- cash flows related to selling goods and

services; that is, the principle business of the firm.
Investing -- cash flows related to the acquisition or sale of
noncurrent assets.
Financing -- long term and short term cash flows related
to liabilities and owners’ equity; dividends are a
financing cash outflow.
What is Cash?
 Cash includes cash and cash equivalents
 Cash equivalents:
 treasury bills maturing in 90 days or less;
 investment funds;
 foreign currency on hand;
 checking account and free savings account
External Uses of CFS
 To assess the ability of a firm to manage cash flows
 To assess the ability of a firm to generate cash
through its operations
 To assess the company’s ability to meet its
obligations and its dividend policy
 To provide information about the effectiveness of the
firm to convert its revenues to cash
 To provide information to estimate or anticipate the
company’s need for additional financing
Internal Uses of CFS
 Along side with cash budget CFS is used:
 To assess liquidity
 Determine if short-term financing is necessary

 To determine dividend policy

 Decide to distribute; or increase or decrease

 To evaluate the investment and financing

decisions
Cash flow from operating
activities
 Examples (IAS No.7):
 cash received from customers through sale of
goods or services performed;
 cash received from non-operating activities such
as dividends from investments, interest revenue,
commissions, and fees;
 cash payments to suppliers or employees;
 cash payments for taxes and other expenses;

In effect, the income statement is changed from

accrual basis to cash basis
Investing Activities
Examples of investing activities include:
 cash payments to acquire property, plant, and equipment
(PPE), other tangible or intangible assets, and other long-term
assets; and sale of such assets
 loans extended to other companies; and collection of such
loans;
Financing Activities
Examples of financing activities are :
 cash received from issuing share capital;
 cash proceeds from issuing bonds, loans, notes,
mortgages and other short or long-term borrowings;
 cash repayment of loans and other borrowings; and
 cash payments to shareholders as dividends.
 Classification of Cash in-flows and outflows
From sales of goods and To wages salary
services to customers payments
From receipt of customer To suppliers for
advances purchases of inventories
Operating Activities
From receipt of interest To other operating
revenue or dividends or expenses
rent revenue or similar To interest payments
revenue items To tax payments
To advance payments to
suppliers

From sale of PPE and other To purchase PPE and

long-term assets other long-term assets
Investing Activities
From collection of loans To make loans and to
collect such loans

From sale of common or

preferred stock Financing Activities To repay debt
From issuance of short To pay dividends
or long term debt
 Format of the Cash Flow Statement

Name of the Company

Cash Flow Statement
For the period …

Cash from operating activities A

Cash from investing activities B
Cash from financing activities C
Net Change in Cash D = (A+B+C) increase or (decrease)
+ Beginning Cash balance CB, from the beginning balance sheet
Ending Cash balance =CB + D should equal to ending
cash
balance in the ending balance sheet
Non-cash Investing and Financing Activities
Determination of Cash Flows From
Operating Activities

Direct Method
Income Statement items are converted to cash flows
individually

Indirect Method
Net income or loss is adjusted for accruals such as
accounts receivable and payable, and for non-cash
expenses such as depreciation
reconciliation of the accrual based and cash based
accounting
 Comparison of Methods
 Direct method of presentation calculates cash flow from
operations by subtracting cash disbursements to supplies,
employees, and others from cash receipts from customers.
 The indirect method calculates cash flow from operations by
adjusting net income for non-cash revenues and expenses.
 Most firms present their cash flows using the indirect method.

Only operating activities section is different between the

methods, investing and financing sections are the same .
How to prepare cash flow
statement
 Firms could prepare their own cash flow
statement directly from the cash account.
 however, we need two consecutive balance
sheets and the income statement that covers
the period between the two balance sheets
 Indirect Method – cash flow from operations
Adjusting Net Income of the period (accrual) to cash
basis income
INCREASE DECREASE
Increase
Increaseininnon-cash
non-cash Decrease
Decreaseininnon-cash
non-cash
assets shows that cash
assets shows that cash assets
assetsshows
showsthat
that
Assets was
wasspent,
spent, they
theyprovided
provided cash
cash
so cash outflow.
so cash outflow. so
socash
cashinflow.
inflow.

Increase
Increasein inliabilities
liabilities
Liabilities Decrease
Decreasein inliabilities
liabilities
cash
cashsavings;
savings;
and or
orSHE
SHEshows
shows
increase
increasein inSHE
SHEcashcash
Shareholders’ cash
cashpaid;
paid;
received;
received;
equity so
socash
cashoutflow
outflow
so
socash
cashinflow
inflow
Indirect Method- operating activities-
Adjustments to net income

Net income
+ noncash expenses: depreciation, amortization,
uncollectible account expense,etc
+ loss on sale of asset
+ increases in current liabilities
+ decreases in current assets
- gain on sale of asset
- decrease in current liabilities
- increase in current assets

= Cashflow from operating activities

 Noncash Expenses

 Noncash expenses, such as depreciation expense,

are added back – because they were deducted to
measure net income but did not require any cash
payment in the current period
 They are not truly sources of cash, even though
they are associated with cash inflows but reversal
of an accrued expense
Portakal Company
Prepare Cash Flow Statement
increase
Accounts with Debit Balances 2008 2007 (decrease)
Cash 37.500 39.250 (1.750)
Notes Receivable (from loans to other companies) 69.000 50.000 19.000
Accounts Receivable 53.700 39.900 13.800
Merchandise Inventory 158.000 120.000 38.000
Prepaid Operating Expenses 2.100 1.800 300
Interest Receivable 1.400 600 800
Land 110.000 65.000 45.000
Property,Plant and Equipment-PPE-net 377.000 380.000 (3.000)
808.700 696.550 112.150

Accounts with Credit Balances

Accounts Payable 45.000 38.000 7.000
Accrued Wages Payable 3.000 2.400 600
Income Taxes Payable 6.000 4.500 1.500
Unearned Revenues 2.500 1.250 1.250
Bank Notes Payable - long term 215.000 200.000 15.000
Common Stock; TL 15 par value 405.000 375.000 30.000
Additional Paid in Capital 70.000 50.000 20.000
Retained Earnings 62.200 25.400 36.800
808.700 696.550 112.150
 Portakal Company 0
Income Statement 2008

Sales Revenue 750.000

Cost of Goods Sold (375.000)
Depreciation Expense (43.000)
Salary and Wages Expense (125.000)
Administrative Expenses (80.000)
Loss on Sale of Equipment (4.000)
Other Operating Expenses (5.000)
Interest Revenue 4.000
Interest Expense (20.000)
Income Tax Expense (28.000)
Net Income 74.000

The company paid TL 50.000 of Bank Notes and borrowed new bank loan.
The company declared and paid cash dividends.
The company sold equipment with a cost of TL 12000 and accumulated depreciation of TL
6000 for TL 2000 receving a note in return to be collected in 2009.
The company purchased equipment for TL 46.000; paid TL 44.000 in 2008 and gave a
note for Jan. 2009.
The company issued common stock during the year .
Portakal Company 2008
Cash Flow Statement

Cashflow from Operating Activities

Net Income 74000
Add back noncash:
Depreciation Expense 43.000
Loss on Sale of Equipment 4.000
121.000
adjustments that increase cash:
increase in Acct.Payable 7.000
Increase in Acc.Wages Payable 600
increase in Income Taxes payable 1.500
increase in unearned revenued 1.250
10.350
adjustments that decrease cash:
increase in Accts Rec. (13.800)
increase in Merch. Inv. (38.000)
Increase in Prepaid Expense (300)
increase in interest recev. (800)
(52.900)

Cashflow from operations 78.450

Cashflow from investing
Sale of PPE (note will be received in 2009)
Purchase of PPE (44.000)
Loans extended( to other companies) (19.000)
Purchase of land (45.000)
Cashflow from investing (108.000)
Cashflow from financing
Bank Notes Payable - long term 65.000
Common Stock; TL 15 par value 30.000
Additional Paid in Capital 20.000
Payment of Bank loan (50.000)
Payment of Dividends (37.200)
Cashflow from financing 27.800

Net Change in Cash (1.750)