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 growths 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

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

100,000
25,000

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)