Cash Flow Statement

Subject: Introduction to Financial Management

Cash Flow Statement
• Cash: The meaning of cash is cash in hand and cash at bank including
deposits.
• Cash and Cash Equivalents: The purpose of keeping cash equivalents
is to meet our current and short-term commitment rather than for
investments. Only those investments having short maturity terms
qualify as cash equivalents.
Cash ;
Cash equivalents imply readily convertible & Highly liquid
investments, the value of which in cash is well-known to us
without risk of change in its realization amount.
Cash Flow Conversion Cycle
Cash

Purchase
Debtors
Stock

Supplier
Sales
Payment

Work in
Progress
Cash Flow Statement
• The cash flow statement (CFS) measures how well a company
manages its cash position, meaning how well the company generates
cash to pay its debt obligations and fund its operating expenses.
• The purpose of the cash flow statement is to provide information
about the cash flows associated with the period’s operations and also
about the entity’s investing and financing activities during the period.
Cash Flow Statement
• It provides information regarding the liquidity of a firm.
• It 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.
Cash Flow Statement
Types of Flows:
The activities that the cash flow statement describes can be classified
in two categories:
(1) Cash Inflows: Activities that generate cash, called sources of
cash; and
(2) Cash Outflows: Activities that involve spending cash, called uses
of cash.
Cash Flow Statement
Categories of activities:
(A) Operating: cash flows related to selling goods and services; that is,
the principle business of the firm.
(B) Investing: cash flows related to the acquisition or sale of
non-current assets.
(C) Financing: long term and short term cash flows related to liabilities
and owners’ equity; dividends are a financing cash outflow.
Cash Flow Statement
(A) Operating activities: The transactions include the cash inflows
associated with sales revenues and the cash outflows associated with
operating expenses, including payments to suppliers of goods or
services and payments for wages, and taxes, and the changes in these
current assets.
Cash Flow Statement
Direct method Vs. Indirect method to determine the operating cash flows :
There are two methods for identifying and presenting the cash flows from
operating activities.
1) Direct Method: reports the sources of operating cash and the uses of
operating cash.
2) Indirect Method: reports the operating cash flows by beginning with net
income and adjusting it for revenues and expenses that do not involve
the receipt or payment of cash. In other words, accrual net income is
adjusted to determine the net amount of cash flows from operating
activities.
Cash Flow Statement
(A.1) Direct Method (Operating activities)
Cash inflows:
• From sale of goods or services.
Cash outflows:
• To suppliers for inventory.
• To employees for wages.
• To government for taxes.
• To others for operating expenses.
Cash Flow Statement
(A.2) Indirect Method (Operating activities)
Net income……………………………………..…
(+)Depreciation………………………..……….
(+)Deferred taxes.…………………………..…
(+)Increase in current liabilities………...
(-)Increase in current assets……………..
(-) Gain on sale of equipment……………
Cash from operating activities………..
** In effect, the income statement is changed from accrual basis to
cash basis in Cash Flow Statement
Cash Flow Statement
(B) Investing activities: include acquiring long-lived assets such as
property, plant, equipment, and investments in securities that are not
cash equivalents; and lending money (i.e., loans receivable).
Investing activities also include the opposites of these transactions:
disinvesting activities such as disposing of long-lived assets, and
collecting loans.
Cash Flow Statement
(B) Investing activities— Changes in investments and long-term assets
Cash inflows:
• From sale of property, plant, and equipment.
• From sale of investments in debt or equity securities of other
entities.
• From collection of principal on loans to other entities.
Cash outflows:
• To purchase property, plant, and equipment.
• To purchase investments in debt or equity securities of other
entities.
• To make loans to other entities.
Cash Flow Statement
(C) Financing activities: include the borrowing of cash (mortgages,
bonds, and other noncurrent borrowings) and the issuance of equity
securities (common or preferred stock). Repayments of borrowings are
also financing activities, as are dividend payments to shareholders and
the use of cash to retire stock.
Cash Flow Statement
(C) Financing activities — Changes in long-term liabilities and
stockholders’ equity
Cash inflows:
• From sale of common stock.
• From issuance of debt (bonds and notes).
Cash outflows:
• To stockholders as dividends.
• To redeem long-term debt or reacquire capital stock (treasury
stock).
Identify cash flow from Operating, Investing
and Financing activity.
1. Amount paid to creditors 7. Redeemed bonds
2. Purchased buildings 8. Paid cash dividends
3. Purchased treasury stock 9. Sold long-term investment
4. Sold equipment 10. Issued common stock
5. Net income 11. Issued bonds
6. Issued preferred stock 12. Interest received
(Direct method) Statement of Cash flows……………
Cash flow from operating activities:
(Cash generated from operating activities):
(+)Cash received from customers
(Cash Disbursed from operating activities):
(-)Cash paid to suppliers and employees
(-) Income taxes paid
Net Cash flow from operating activities

Cash flows from investing activities:

(+) Proceeds from disposals of fixed assets
(+) Proceeds from sales of investment securities
(+)Dividend and Interest received
(-) Purchase of investment securities
(-) Acquisition of fixed assets
Net cash used by investing activities
Cash flows from financing activities:
(+) Proceeds from issuing common stock
(+) Proceeds of long-term debt
(+) Proceeds of short-term debt
(-) Payments to settle short-term debt
(-) Payments on long-term debt
(-) Dividends and Interest paid
Net cash provided by financing activities
(+) Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
 (Indirect method) Statement of Cash flows……………
Adjusts Non-cash expenses,
revenues, gains, and losses
included in income:
Cash flow from operating activities:
Net income From Income Statement
(+)Depreciation
(+)Deferred taxes
(-)Increase in current assets
(+)Increase in current liabilities
(-) Gain on sale of equipment
Net Cash flow from operating activities
Cash flows from investing activities:
(+) Proceeds from disposals of fixed assets
(+) Proceeds from sales of investment securities
(+)Dividend and Interest received
(-) Acquisition of fixed assets
(-) Purchase of investment securities
Net cash used by investing activities
Cash flows from financing activities:
(+) Proceeds from issuing common stock
(+) Proceeds of long-term debt
(+) Proceeds of short-term debt
(-) Payments to settle short-term debt
(-) Payments on long-term debt
(-) Dividends and Interest paid
(-) Net cash provided by financing activities
(+) Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Statement of Cash flows……………
Significant Non-cash Activities
Not all of a company’s significant activities involve cash.
Examples of significant non-cash activities are as follows.
1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.

** Companies do not report in the statement of cash flows

significant financing and investing activities that do not affect cash.
Problem 1: Classify each of these transactions by type of cash
flow activity.
During its first week, Duffy & Stevenson Company had these
transactions.
1. Issued 100,000 shares of $5 par value common stock for $800,000
cash.
2. Borrowed $200,000 from Castle Bank, signing a 5-year note bearing
8% interest.
3. Purchased two semi-trailer trucks for $170,000 cash.
4. Paid employees $12,000 for salaries and wages.
5. Collected $20,000 cash for services performed.