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Statement of Cash Flows


									Chapter 2: The Basic Financial Statements
Financial statements are essentially accounting constructs, and therefore they
    are based on the rules of accounting. The rules of accounting (GAAP) are
    based on the conceptual framework of accounting.

Conceptual Framework of Financial Accounting (Briefly)
    Objectivity: Information is reproducable and verifiable. Don't Guess.
    Going Concern: In the absence of overpowering evidence to the contrary, assume the busin
    Stable Monetary Unit: Ignore inflation.
    Conservatism: If you must guess, make things look worse, not better.

Implications for financial statements:                                       How do you mix
                                                                            in the same cell? How do
    Historic cost versus true values.                                        shape to another locatio
    Raw information presented in a consistent manner.
    Financial statements are reports of past transactions, not
        predictions of the future nor diagnoses of current financial condition.
    The Balance Sheet does not portray true values.
    The Income Statement does not portray true profit.

Review of Income Statement
−   Shows the FLOW of income and expenses during an arbitrary period
−   Includes both cash flows and non-cash flows
       Depreciation is not a cash flow, and is not meant to reflect the real change in value
−   Does not show all income or expenses
       Change in the value of land or buildings, some securities, etc.
−   Does not show true profit
       True profit is the change in the VALUE of the company during the period.
−   Does not show net cash flow.
−   Is a standardized way to present this information so each user can do his or her
          OWN analysis.

                                      Part 2
Build an Income Statement for Elvis Products
−   Use the setup on the Income Statement page. This is from the Exhibit 2-1.
−   Note the addition of the INPUTS table to the chapter example.
        This would not really be needed, but it helps us learn how to build formulas
        based on input cells.
−   Review the two Principles on Pg. 43.
−   Note the lack of formatting features. This is in GENERAL format.
−   Change sheet to accounting format and notice the differences
    −   Cell padding, underlines work more correctly for numbers, etc.
                Change the underlining from borders to actual underlines.
                Why is this better?
    −   Some items will need to be fixed to display correctly - Year for example
−   Increase the width of Rows 3 and 16 (years) and center the lables horizontally and verticall
    −   Trick - Can do two ranges at once
    −   Trick - Can do one range first and the use format painter on the other
−   Why does the tax rate input show as zero? Fix that by changing the format to percent.
−   Why do the numbers in one column show only ##########?
−   Change the width of the data columns so they are wider but have the same width
−   Review how to change tab names
−   Use indenting to improve appearance of text entries
−   Use bold, italics, and underlining to improve appearance
−   Replace number entries with formulas where possible
    − Use the =sum( ) function
    − Use the Autosum tool
−   Try out conditional formatting - make Net Income red if negative

                                        Part 3

Review of Balance Sheet
−   Shows the STOCK of assets or liabilities at a point in time - a snapshot of the firm's account
−   Includes assets, liabilities, and owners' equity
−   Does not show true values for most assets. Shows BOOK VALUE = Cost - Depreciation
−   Does not show true values for most long-term debt. Shows issue price.
−   Does not show the true value of owners' equity or of the firm as a whole
    − The Market Value of Owners' Equity = Today's share price x number of shares outstan
−   Does not include all assets that have value
    − Leaves out human capital, reputation, etc.
−   Can overstate or understate values significantly
    − Increase/decrease in value of land, other assets -- also changes in values of debt and s
−   Retained earnings is not a reserve account with available funds.
    − It represents owner's equity that has already been reinvested in the company.
−   Is a standardized way to present this information so each user can do his or her
          OWN analysis.

Build a Balance Sheet for Elvis Products
−   Note the formatting that has already been done
−   Complete the formulas for the balance sheet
    − Note that Retained Earnings depends on the Income Statement (Net Income)
−   Change the underlining to be more appropriate
−   Note that if the inputs change, the balance sheets won't balance. Use Short Term Notes as
        to make the balance sheet balance no matter how the inputs are changed.

                                      Part 4

Build Common Size statements for Elvis Products
−   Common size statements state all income statement items as a percentage of SALES
       and all balance sheet items as a percentage of TOTAL ASSETS.
        This helps in comparing one company to another to see structural differences
        and it helps to spot structural changes and trends over time in the same company.
−   Create a common size income statement and balance sheet for Elvis Products.
    − Create a new tab sheet for each statement
    − Copy the formatted statement to the new sheet to retain all formatting.
    − Create formulas that take the data from the parent sheet to create the common size s
           − Make good use of reference locking in formulas to make copying formulas easy
           − Use Paste Special to copy just the formulas and not the formatting
               or use the format painter to replace the formatting from the parent sheet after
−   Note that common size statements produce some useful ratios:
        Gross profit margin, Net profit margin, debt-to-assets, equity-to-assets, etc.

                                      Part 5

View the session covering the slide presentation concerning the statement of cash flows

                                      Part 6

Build a Statement of Cash Flows for Elvis Products
−   Also known as a Sources and Uses of Cash statement -- since that's what it really shows
−   The Statement of Cash Flows has three sections:
    − Cash Flows from Operations
    − Cash Flows from Investing
    − Cash Flows from Financing
−   To get the signs right, remember that:
    − An increase in an ASSET is a USE of cash (like buying more assets)
    − An increase in a Liability is a SOURCE of cash (like borrowing more cash)
    − An increase in equity is a SOURCE of cash (like selling more stock)
    − Dividends are a USE of cash (Net Income - Retained Earnings) = Dividends
    − Depreciation is not a cash flow (source or use) so it gets added back to
                Net Income for an estimate of the cash from from earnings.
−   Try out Excel's OUTLINE tool to collapse and expand the rows in the Statement of Cash Flow
    − On the DATA menu tab, apply the GROUP tool to each major section of the
        Statement of Cash Flows to create the outline
    −   Highlight the rows that you want to hide/show and then click on GROUP
        Don't highlight the row that has the subtotal

    −   Set up this page to print in landscape format so that nothing gets cut off on the
               right side.
    −   Use the Page Break Preview mode to manually adjust where the page breaks occur.
efore they

                      How do break a line of text
                     and have it wrap in the same
                     cell? And how do you use one
                            of these callouts?

 contrary, assume the business will continue.

        How do you mix types of text formats
       in the same cell? How do you copy one
        shape to another location (Ctrl-Drag)


 he real change in value

ng the period.

an do his or her
xhibit 2-1.

o build formulas

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s horizontally and vertically

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he format to percent.

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pshot of the firm's accounts
 = Cost - Depreciation

 number of shares outstanding

 ges in values of debt and shares.

ed in the company.
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 s are changed.

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uctural differences
 in the same company.
Elvis Products.

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 he formatting
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                                                2009        2008
Sales                                        3850000     3432000
Cost of Goods Sold                           3250000     2864000
Selling and G&A Expenses                      330300      240000
Fixed Expenses                                100000      100000
Depreciation Expense                           20000       18900
Interest Expense                               76000       62500
Tax Rate                                          0.4         0.4

                   Elvis Products International
                         Income Statement
                 For the Year Ended Dec. 31, 2009
                                                  2009      2008
Sales                                         3850000    3432000
Cost of Goods Sold                            3250000    2864000
Gross Profit                                    600000    568000
Selling and G&A Expenses                        330300    240000
Fixed Expenses                                  100000    100000
Depreciation Expense                             20000     18900
EBIT                                            149700    209100
Interest Expense                                 76000     62500
Earnings Before Taxes                            73700    146600
Taxes                                            29480     58640
Net Income                                       44220     87960
                     Elvis Products International
                            Balance Sheet
                          As of Dec. 31, 2009
                  Assets                       2009        2,008
    Cash and Equivalents                        52,000    57,600
    Accounts Receivable                        402,000   351,200
    Inventory                                  836,000   715,200
Total Current Assets
     Plant & Equipment                         527,000   491,000
     Accumulated Depreciation                  146,200   146,200
Net Fixed Assets
Total Assets
      Liabilities and Owner's Equity
    Accounts Payable                           175,200   145,600
    Short-term Notes Payable                   225,000   200,000
    Other Current Liabilities                  140,000   136,000
Total Current Liabilities
    Long-term Debt                             424,612   323,432
Total Liabilities
     Common Stock                              460,000   460,000
     Retained Earnings                                   203,768
Total Shareholder's Equity
Total Liabilities and Owner's Equity
                     Elvis Products International
                       Statement of Cash Flows
                   For the Year Ended Dec. 31, 2009
    Cash Flows from Operations
+   Net Income
+   Depreciation Expense
    Change in Accounts Receivable
    Change in Inventories
    Change in Accounts Payable
    Change in Other Current Liabilities
    Total Cash Flows from Operations
    Cash Flows from Investing
    Change in Plant & Equipment
    Total Cash Flows from Investing
    Cash Flows from Financing
    Change in Short-term Notes Payable
    Change in Long-term Debt
    Change in Common Stock
-   Cash Dividends Paid to Shareholders
    Total Cash Flows from Financing
    Net Change in Cash Balance

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