15 - Cash Flows

CHAPTER 15 – CASH FLOWS
Why the statement of cash flows?
The statement of cash flows reports a firm’s major cash inflows and outflows
for a period. It provides useful information about a firm’s ability to generate
cash from operations, maintain and expand its operating capacity, meet its
financial obligations, and pay dividends.
Three sections of statement of cash flows:
_______________:
_______________:
_______________:
WRITING EXERCISE
Review the following financial data from two companies in the same
industry. Comment on any strengths or weaknesses you notice.
Income statements: Company A Company B

Sales ..................................................... $500,000 $500,000
Expenses .............................................. 425,000 425,000
Net income ........................................... $ 75,000 $ 75,000
Cash held:
Beginning of year ................................ $ 25,000 $ 25,000
End of year ........................................... 25,000 25,000
Increase in cash ................................... $ 0 $ 0
A detailed analysis of the cash account reveals the following cash re-
ceipts and payments:
Cash received:
from customers .............................. $450,000 $350,000
from sale of fixed assets ............... 5,000 60,000
Total cash received.............................. $455,000 $410,000
Cash paid:
to suppliers..................................... $380,000 $400,000
for purchase of fixed assets .......... 70,000 10,000
for purchase of investments ......... 5,000 0
Total cash paid..................................... $455,000 $410,000
Increase in cash ................................... $ 0 $ 0
SECTIONS OF THE
STATEMENT OF CASH FLOWS
Cash Flows from Operating Activities—Report cash
received and paid in the daily operations of the busi-
ness, including:
1. Cash received from customers
2. Cash paid to suppliers
Cash Flows from Investing Activities—Report cash

received and paid as a result of the sale and purchase
of investments. The investments reported in this sec-
tion can be divided into two categories:
1. Investments in YOURSELF, for example:
a. Purchase of fixed assets
b. Sale of fixed assets
2. Investments in OTHERS, for example:

a. Purchase of equity or debt securities of
another corporation
b. Sale of equity or debt securities held as
investments
c. Making of a loan to another company
d. Collection of principal payments on a
loan made to another company
(Continued)
SECTIONS OF THE
(Concluded)
Cash Flows from Financing Activities—Report cash
received and paid as a result of the activities to obtain
and repay funds used to finance the operations of a
company. Financing activities can be divided into two
categories:
1. EQUITY financing:
a. Issuing shares of stock
b. Retiring shares of stock
c. Purchasing shares of treasury stock
d. Selling shares of treasury stock
e. Paying cash dividends on stock
2. DEBT financing:
a. Borrowing cash
b. Repaying principal on a loan
Income Statement:
Cash Flows Template:
Company Name
Statement of Cash Flows
For the year ended 12/31/xx
Cash flows from Operating Activities:
Net Income: $XX
Adjustments to reconcile net income to net cash flow from
Operating activities:
Depreciation/Amortization +XX
Gain on sale of LT asset (XX)
Loss on Sale of LT asset XX
Changes in current operating assets and liabilities:
Increase in A/R (XX)
Decrease in Inventory XX
Decrease in A/P (XX)
Net Cash Flow from Operating Activities XX
Cash flows from Investing Activities:

Cash from sale of land XX
Less: Cash paid for building (XX)
Net Cash flows from investing activities XX
Cash flows from Financing Activities:

Cash received from common stock XX
Less: Cash paid for dividends (XX)
Net Cash flows from financing activities XX
Increase/Decrease in cash $XX
Cash at the beginning of the year XX
Cash at the end of the year $XX
“Cheat”
Non-Cash Activities
0 Cash flows from operating activities-indirect method
Obj. 1, 2 The net income reported on the income statement for the current
year was $185,000. Depreciation recorded on equipment and a building
amounted to $96,000 for the year. Balances of the current asset and current iMD11' Wf HOii
liability accounts at the beginning and end of the year are as follows:
End of Beginning of
Year Year
cash $75,900 $86,150
Accounts receivable (net) 84,550 90,000
Inventories 186,200 175,000
Prepaid expenses 3,600 4,500
Accounts payable (merchandise creditors) 91,500 110,000
Salaries payable 7,200 4,000
A. Prepare the Cash Flows from Operating Activities section of the statement of cash flows,
using the indirect method.
B. --- If the direct method had been used, would the net cash flow from operating
activities have been the same? Explain.
IAns.-er+J
0 Changes in current operating assets and liabilities-indirect
method
Obj. 2 Huluduey Corporation's comparative balance sheet for current assets .-
and liabilities was as follows:
SIIOW N[ IIO'K
Dec. 31, Year 2 Dec. 31, Year 1

Accounts receivable $17,500 $12,500
Inventory 51,650 44,200
Accounts payable 8,480 5,100
Dividends payable 9,480 6,100
Adjust net income of $75,800 for changes in operating assets and liabilities to arrive at net
cash flow from operating activities.
Schedule of Noncash Investing and
Financing Activities
Used to report transactions that are investing and/or
financing activities but do not bring in or use up any
cash. These transactions need to be reported because
they will affect cash flows in the future. Examples in-
clude the following:
1. Purchasing fixed assets by signing a note

payable
2. Purchasing a building through a mortgage
loan
3. Exchanging stock for fixed assets
4. Issuing stock to retire debt
5. Converting preferred stock to common stock

15 - Cash Flows

Uploaded by

Copyright:

Available Formats

15 - Cash Flows

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

15 - Cash Flows

Uploaded by

Copyright:

Available Formats

CHAPTER 15 – CASH FLOWS

Why the statement of cash flows?

Three sections of statement of cash flows:

Income statements: Company A Company B

Cash Flows from Investing Activities—Report cash

2. Investments in OTHERS, for example:

Cash flows from Investing Activities:

Cash flows from Financing Activities:

activities have been the same? Explain.

Dec. 31, Year 2 Dec. 31, Year 1

1. Purchasing fixed assets by signing a note

You might also like