Cash Flow Statement

Cash Flow Statement Why Cash Flow Statement? • Shareholder value is now widely accepted as an appropriate standard for performance in US business. The stock market sends a clear message that earning per share is not the most important measure. Now is growth for growth’s sake. What matters is long-term cash generation. (Werner & LeBer, “Managing for Shareholder Value--From Top to Bottom,” Harvard Busines Review, Nov.Dec. 1989 pp. 52-65.) Basic Form of Cash Flow Statement • Cash Flow From Operating Activities – Direct method or indirect method (direct requires also a reconciliation of net income to cash flow from operating activities) • Cash Flow from investing activities • Cash Flow from financing activities • Total (positive or negative) cash flow is added to beginning cash balance and should result in ending cash balance Flow from Operating Activities • Includes: – Current assets • except Marketable securities and s-term notes receivable which are investing – Current Liabilities • except s-t notes payable which are financing – Revenue and Expenses (includes interest expense and revenue, and dividends received) Flow from Investing Activities • Includes: – Short-term and long-term investments – Short-term and long term notes receivable – Property, Plant and Equipment (depreciation affects operating activities) – Intangible Assets Flow from Financing Activities • Includes: – Short-term and long-term loans – Capital Stock and Paid in Capital in excess of par – Retained earnings (net income aspect is operating) – Dividends Paid General Theory • Take revenue or expense account (includes cash and accrual) • adjust out accrual amounts • Result is net cash in or out. • Too expensive to classify all cash transactions into operating, financing, investing activities. Cheaper to use accrual systems and adjust out accrual information Operating Activities Indirect Method • Net Income • + Depreciation exp (noncash exp) • + Losses from sale of assets – (full amount of sale already included in investing section) • - Gains from sale of assets – (full amount of sale already included in investing section) • • • • • - increases in current assets + decreases in current assets + increases in current liabilities - decreases in current liabilities = Net cash from operating activities Operating Activities Direct Method • • • • • • • + Cash Received from Customers - Cash paid for inventory - Cash paid for operating expenses - Cash paid for income taxes - Cash paid for interest + Cash received from dividends and interest = Net cash from operating activities Cash Received from Customers • Sales • - Increase in A/R (receive less cash) OR + Decreases in A/R (receive more cash) • - writeoffs (beg allowance + bad debt exp. - ending allowance) • + Increase in unearned revenue (receive more cash) OR - Decrease in unearned revenue (receive less cash) • = Cash Received from Customers Cash Received from Customers (other variations) • • • • • • • Sales + Beg Net A/R - End Net A/R - Bad debt exp adj - Beg unearned rev + End undearned rev = Cash from Customers • • • • Sales + Beg A/R - End A/R - writeoffs – = beg allowance + bad debt exp. - ending allowance • - Beg unearned rev • + End unearned rev • = Cash from Customers Cash Paid For Inventory • • • • • • • Cost of Goods Sold + End Inventory - Beginning Inventory = Purchases + Beg A/P - End A/P = Cash paid for inventory Cash Paid for Operating Expenses • Operating Expenses (do not include interest • • • • • exp., depreciation exp., nor gains & losses from sale of investments) - Beg prepaids + End prepaids + Beg accrued exp - End accrued exp = Cash paid for operating expenses Cash Paid for Income Taxes • • • • Income Tax Exp + Beg tax payable - End tax payable = Cash paid for income Taxes Cash Paid for Interest • • • • Interest Exp + Beg interest payable - End interest payable = Cash paid for interest Cash Received from dividends and interest • • • • Dividend and Interest Income + Beg interest receivable - End interest receivable = Cash Received from dividends and interest Cash Flow from Investing Activities • Cash received (sale) or paid (purchase) for: – short term investments – long-term investments – property plant and equipment • Whole cash amount received or paid. • Look at change in investment and fixed asset accounts but may need more specific information Example Equipment • Balance Sheet Amount Change: Beg $300,000, Ending $400,000 • Can your just say net cash out for equipment was $100,000? • Why? Example Equipment Continued • Sold Equipment for $65,000 cash that had book value of $40,000 (original cost $100,000) • Bought equipment $200,000 with $80,000 down and the rest on a long term note payable • Accumulated depreciation increased by $50,000 Example Equipment Results on Cash Flow Statement • Cash from sale of equipment $65,000 • Gain on sale $25,000 subtracted from NI on indirect method (make sure amt is not included in direct method either) • Depreciation exp $110,000 ($50,000 increase in accum deprec from B/S + $60,000 acum depr reduced when sold equip added back in indirect method (make sure amt is not included in direct method operating expenses • Cash paid for purchase of equipment $80,000 • Noncash investing & financing Activities – Issued long-term note payable for some equipment $120,000 Equipment Example Think about journal entries • Cash Accum Depr 65,000 60,000 100,000 25,000 Equip Gain Sale of equipment • Depr Exp 110,00 Accum. Depr Year end Adj J/E for equip depr. • Equipment 200,000 Cash L-T Note Payable Equip Purchase 110,000 80,000 120,000 Financing Activities • Cash received from: – sale of stock – issuance of debt • Cash paid for – Payment of debt (principle only, interest is in operating activities) – Payment of dividends • Look at change in stock, debt and retained earnings (May need more details) (for R/E only dividends portion applies to financing activities while net income portion should tie into indirect method in operating activities) Ways to Check Your Work • Indirect and Direct methods must equal each other • Net cash flow added to beginning cash balance must equal ending cash balance (Marketable securities are most often included as part of these cash balances.) • In template must account for every change in B/S accounts and every item on income statement (some noncash items are adjusted out or not included in cash flow calculations)