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BUSA 102 Mr. Moloney Statement of Cash Flow Summary Why do we have a statement of cash flows? To see how much cash the business generates. To see where the cash is being generated. Is it from operations - the best place From selling assets - investing From stock issues -financing To see where cash is going - Investing - buying equipment, etc. Financing - paying dividends, for example To help us make more informed decisions It's required by GAAP Why we need it and what we are doing: The operating section of the statement of cash flows takes the net income of the company and converts the items on it. Net income represents income based on the accrual basis of accounting - NOT THE CASH BASIS Since the net incomes is computed on the accrual basis (where revenue and expenses are recognized when incurred, not when actually paid), we need to adjust the net income. We do this by adjusting the net income for a variety of transactions that were deducted from net income, such as depreciation expense, which really did not use any cash THE THREE SECTIONS AND WHAT GOES IN THEM: SECTION ONE Operating Activities include: Step A: Start with Net Income: Step B: Add back to (decreases in non-cash current assets & inc. in current liabilities): Depreciation and/or amortization expense Decrease in accounts receivable Decrease in inventories Decrease in prepaids Increase in accounts payable (or other s.t. liabilities) Loss on disposal of assets, etc. Step C: Subtract from net income (increases in non-cash current assets & decreases in non-cash current liabilities): Increase in accounts receivable Increase in inventories Increase in prepaids Decrease in accounts payable Gains on disposal of assets, etc. = Net cash flow from Operating Activities SECTION TWO Investing Activities (tends to look at the longer-term assets) include: Cash inflow 1. Proceeds/receipts from sale of assets. 2. Capital expenditures. 3. Collection of principal on loans to others. Cash outflow 1. Buying/payments of/for fixed assets. . BUSA 102 Mr. Moloney Statement of Cash Flow Summary SECTION THREE Financing Activities (tends to look at the longer-term liabilities, capital accts and retained earnings) include: Cash inflow 1. Proceeds from loans, bonds, or issuance of common stock. Cash outflow 1. Dividends paid. 2. Repayment of loans, bonds, or purchase of treasury stock. Non-cash investing/financing activities that require disclosure: Examples include acquisition of fixed assets by bond or stock issuance – no cash was currently used, but will be in the future. Stock dividends are not disclosed. Detailed Step-by –Step Creation of Statement of Cash Flows 1) Determine the change in cash – this is the number you reconcile to. 2) Identify each item on the balance sheet or in the notes as O, I, or F. 3) Calculate the change in each account as an increase or a decrease. 4) Mark “O” items as “deduct” or “add”* 5) Have a skeleton SCF to work with. 6) Start with net income/loss 7) Add depreciation or amortization 8) Follow the above steps and complete the operating section 9) Complete the investing section 10) Complete the financing section 11) Reconcile your change in cash from the statement with the beginning and ending balances of cash. *DEDUCT = subtract or use and ADD = “increase” or “source” Three foolers: The following transactions are reported in the operating activities section of the statement of cash flows: 1. Interest paid on debt: Justification: The decision to finance the business through debt is a financing activity. Once that decision has been made, the cash to pay for the interest on debt must come from operating activities. 2. Interest received on investments 3. Dividends received on investments. Justification: The decision to use cash to purchase equity or debt securities is an investment decision. Once that decision has been made, the cash received from interest or dividends is used to operate the business.
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