Statement of Cash Flows

Chapter 13:
Statement of Cash Flows:

Reports the cash inflow (receipts) and cash outflows (payments), and net change in cash resulting from
operating, investing and financing activities during an accounting period.
Statement of Cash flows aid investors, creditors and others to assess:
1. An entitys ability to generate future cash flows
2. An entitys ability to pay dividends and meet other maturing obligations
3. The reason for the difference between net income and cash provided or used by operations
4. The cash investing and financing transactions during the period
Classification of Cash Flows:

Operating Activities: Generally include transactions that enter into the determination or calculation of current
net income

Investing Activities: Include the acquiring and selling of property, plant, equipment and investment. It also
includes lending money and collecting the loans

Financing Activities: Include (a) Obtaining cash from issuing debt and repaying the amounts borrowed, and
(b) Obtaining cash from issuing stock, paying dividends and repurchasing its own shares (treasury stock)
Cash Flow: Operating Activities

Cash Inflows
Cash collections from (customers) receivables

Cash Outflows
Cash payment to suppliers for inventory

Cash sales for goods & services

Cash paid for wages, salaries

Cash received from interest

Cash paid for taxes - Government

Cash received from dividends

Cash paid for interest to lenders

Cash paid for other expenses

Cash Flow: Investing Activities

Cash Inflows
Sale of property, plant & equipment

Cash Outflows
Purchase of property, plant and equipment

Sale of investments in debt or equity securities

of other firms or entities

Purchase of investments in debt or equity

securities of other firms

Collections of principal on loans made to other

firms or entities

Making loan to other entities

Cash Flow: Financing Activities

Cash Inflows
Sale of stock

Issuance of long-term debt

Cash Outflows
Payment of dividends
Repayment of long-term debt
Repurchase of capital stock
(Treasury Stock)

Non-cash investing and financing activities

Issuance of common stock to purchase assets
Conversion of bonds into common stock
Issuance of debt to purchase assets
Exchange of plant assets
Two Methods of Preparing Statement of Cash flows
Indirect Method
A method of preparing statement of cash flows in
which net income is adjusted for items that do not
affect cash to determine cash provided by operating
activities.

Add back to net income: non-cash

expenses such as depreciation,
amortization and depletion

Add back to net income: losses resulting

from investing and financing activities

Add back to net income: bond discount

Deduct from net income: gains from

investing and financing activities

Deduct from net income: bond premium

Finally, add to net income or deduct

from net income: changes in current assets
and current liabilities

Direct Method
A method of determining net cash provided by
operating activities by adjusting each item in the
income statement from the accrual basis to cash
basis.
Note:
The difference between direct and indirect method
is the method of preparing Cash flow from
operating activities.

Free Cash Flow:

Free Cash flow: Measures cash-generating ability of a business
Cash provided from operation often fail to take into account that a company must invest in new
fixed asset to maintain current operations. Companies must also maintain dividend level to satisfy
investors.
Suppose that XYZ Corporation produced and sold 10,000 personal computers this year. It reported
$100,000 cash provided by operations. In order to maintain production at 10,000 computers, XYZ
Corporation invested $15,000 in equipment. It chose to pay $5,000 in dividends.
Required: Compute Free Cash Flow
Free Cash flow = Cash provided by operations Capital expenditures - Cash Dividends
= $100,000
- $15,000
- $5,000
= $80,000
Note:
The $80,000 could be used to either purchase new assets for expansion or to pay an $80,000 dividend and
continue to produce 10,000 computers.

Computer Services Company

Comparative Balance Sheet
December 31, 2011
Assets
Current assets
Cash
Accounts receivable
Merchandising inventory
Prepaid expense

2011
$55,000
20,000
15,000
5,000

Indirect Method:
Statement of Cash flow
For the year ended December 31, 2011

2010

Chg

$33,000
30,000
10,000
1,000

$22,000
10,000
5,000
4,000

Property, Plant and Equipment

Land
130,000
20,000
Building
160,000
40,000
Acc dep- building
11,000
5,000
Equipment
27,000
10,000
Acc dep- equipment
3,000
1,000
Total assets
$398,000
$138,000
====================
Liabilities and Stockholders Equity
Current liabilities
Accounts payable
$28,000
Income tax payable
6,000
Long-term liabilities:
Bonds payable

130,000

Stockholders equity
Common stock
Retained earnings
Total liabilities & S/Equity

$12,000
8,000
20,000

Inc/Dec
Dec
Inc
Inc

110,000
120,000
6,000
17,000
2,000

$ 16,000
2,000

Inc
Dec

110,000

70,000
50,000
164,000
48,000
$398,000
$138,000
====================

20,000
116,000

Cash flow from operating activities:

Net income
Depreciation
$ 9,000
Loss on sale of equipment
3,000
Decrease in account receivable
10,000
Increase in inventory
- 5,000
Increase in prepaid rent
- 4,000
Increase in Accounts payable
16,000
Decrease in taxes
- 2,000
Net cash provided by operations

27,000
$ 172,000

Cash flow from investing activities:

Purchas of Building
- $120,000
Purchase of equipment
- 25,000
Sale of equipment
4,000
Net cash flow from investing activities

- 141,000

Cash flow from financing activities:

Issuance of common stock
Payment of cash dividends
Net cash used by financing activities

$145,000

$ 20,000
- 29,000
- 9,000

Net increase/decrease in cash

Cash at beginning of period
Cash at end of period

$ 22,000
33,000
$ 55,000
========

Noncash investing and financing activities

Issuance of bonds payable to purchase land

$ 110,000
========

Computer Services Company

Comparative Income Statement
For the year ended December 31, 2011
Revenues
Cost of goods sold
Operating exp (excluding dep.)
Depreciation expense
Loss on sale of equipment
Interest expense
Income tax expense
Net income

$507,000
$ 150,000
111,000
9,000
3,000
42,000

_______________________________________________
315,000
47,000
$145,000
========

Additional information for 2011:

1.
Net income for 2011, $145,000
2.

The company declared and paid a $29,000 cash dividend

3.

Issued $110,000 long term debt in exchange for land

4.

A building costing $120,000 was purchased for cash.

5.

Equipment worth of $25,000 bought for cash.

6.

Equipment with a book value of $7,000 sold for $4,000. (Cost $8,000 less
accumulated depreciation $1,000

7.

Issued common stock for $20,000 cash

8.

Depreciation expense consisted $6,000 for building and $3,000 for equipment.

#4: To compute gain or loss

Sales

$4,000

Cost of equipment
$8,000
Less acc. Depreciation
1,000
= Book value
7,000
Loss on sale of equipment <$3,000> (Operating Activity)
=======

Practice Exercise
1.

Indicate if each of these transactions is an inflow from or an outflow from operating activities,
investing activities, or financing activities. Also identify with X non-cash investing and financing
activities

Operating
Activities

Transactions
1

Investing
Activities

Financing
Activities

Non-cash
Investing
&Financing
Activities

Sold land for cash

Declared & paid cash dividends

2
Paid cash for interest expense
3
Issued Preferred stock for cash
4
Firm repurchases its stock for cash
5
Received cash dividend
6
Issued common stock for Equipment
7
Collected cash from customers
8
9

Made loans to clients

Issued debt to acquire a plant asset

10

2.

During 2010, Arizona Company issued $500,000 long-term bonds at 96, repaid $75,000 of bonds at face
value, paid interest of $40,000, purchased equipment of $50,000 and paid dividends of $25,000. Prepare
the cash flow from financing activities

Required: Prepare cash flow from financing activities

3.

. During 2010, Mina Corporation had a net income of $144,000. Included on its income statement were
depreciation expense of $16,000 and amortization expense of $1,800. During the year, accounts
receivable decreased by $8,200, inventories increased by $5,400, prepaid expense decreased by $1,000,
accounts payable decreased by $14,000 and accrued liabilities decreased by $1,700.

Required: Prepare cash flow from operating activities using the indirect method.

4.

The condensed single-step income statement for the year ended December 31, 2010 of Sunderland
Chemical Company, a distributor of farm fertilizer and herbicides appears as follows:
Sales .
$13,000,000
Less costs: Cost of goods sold $7,600,000
Operating expense (including dep. of $820,000)
3,800,000
Income taxes expense .
400,000
11,800,000
Net income ....
$ 1,200,000
=========
Selected accounts from Sunderland Chemical Companys balance sheet for 2009 and 2010 are show below
:
Accounts

2009

2010

2,400,000

$1,700,000

Inventory

840,000

1,020,000

Prepaid expense

260,000

180,000

Accounts payable

960,000

720,000

Accrued liabilities

60,000

100,000

Income taxes payable

140,000

120,000

Accounts receivable

Change

Inc./Dec

Required: Prepare cash flow from operating activities using the indirect method