Statement of Cash Flows example #20258

the statement of cash flows shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources (i.e., receipts) of cash and all the users (i.e., payments) of cash it provides information about: cash receipts (inflows) cash payments (outflows)

Operating Activities Investing Activities Financing Activities

1. Ability to generate future cash flows 2. Ability to pay dividends and meet obligations 3. Why net income is different from operating cash flows 4. Cash investing and financing transactions

includes the cash inflows and outflows related to the normal course of business operations

from sale of goods and services from return on loans (interest received) and equity securities (dividends received)

to suppliers for inventory to employees for services to government for taxes to lenders for interest to others for expenses

includes the cash inflows and cash outflows related to the purchase and sale of long-term assets and investments long-term assets include PPE & Intangibles Investments represent both stock and bonds of other companies that we own as well as loans that we have made (i.e., lending money to customers)

From the sale of property, plant and equipment from the sale of investments in other entities from collection of principal on loans to other entities (note: the interest received would be considered an operating activity since it would effect net income)

to purchase of property, plant and equipment to purchase of investments in other entities making loans to other entities

cash that is either paid to or received from owners and creditors

from sale of company's own stock to its stockholders from borrowing money (i.e., a bank loan)

to stockholders as dividends to creditors as the repayment of principal of funds borrowed (Note: the interest payment would be considered an operating activity since it would effect net income)

convert net income from an accrual basis to a cash basis

1. Direct Method 2. Indirect Method the direct method involves listing each specific cash flow

the direct method but allows the use of either method

when the direct method is used, the net cash flow from operating activities as computed using the indirect method must also be reported in a separate schedule

in practice

it is easier to prepare it focuses on the differences between net income and net cash flow from operating activities it tends to reveal less company information to competitors

with net income and makes a series of adjustments to convert the accrual net income into cash net income

lists each individual cash inflow and cash outflow for all items appearing on the income statement this method will require us to analyze t-accounts to calculate the amount of each individual cash flow

Cash Receipts - Cash Payments

1. for each item on the net income statement, determine a corresponding balance sheet account(i.e., sales revenue on the income statement will match up with accounts receivable on the balance sheet) 2. for these balance sheet accounts, draw a t-account and analyze it to determine the cash effect of the income statement item

not all accounts on the income statement have a cash effect. in other words, we have some revenues and expenses which do not result in an inflow or outflow of cash

1. Depreciation Expense 2. Gain 3. Losses (Note: these items should be ignored when using the direct method to calculate net cash provided by operating activities!)

you need to analyze both the inventory and accounts payable t-accounts

starts with Accrual Basis net income then makes a series of adjustments to convert it to cash basis net income Net Income + Depreciation Expense

1. Cash - is detailed by entire financial statement thus it would be incorrect to include it in any one section 2. Investments - classified as an investing activity (this includes loans made by the company -> notes payable) 3. Notes Payable - represents amounts borrowed from creditors and thus would be classified as a financing activity

significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows for in the notes to the financial statements

issuance of common stock to purchase assets conversion of bonds into common stock issuance of debt to purchase assets exchanges on long-lived assets

Companies preparing financial statements under IFRS must prepare a statement of cash flows as an integral part of the financial statement

Both IFRS & GAAP require that the statement of cash flows should have three major sections - operating, investing, and financing - along with changes in cash and cash equivalent

Similar to GAAP, the statement of cash flows can be prepared using either the direct or indirect method, under IFRS. For both IFRS & GAAP, most companies use the indirect method for reporting net cash flow from operating activities

IFRS requires that non-cash investing and financing activities be excluded from the statement of cash flows. Instead, these non-cash activities should be reported elsewhere. This requirement is interpreted to mean that non-cash investing and financing activities should be disclosed in the notes to the financial statement instead of the financial statements. Under GAAP, companies may present this information in the cash flow statement.

One area where there can be substantial differences between IFRS & GAAP relates to the classification of interest and dividends.

IFRS : Operating or Financing GAAP : Operating

IFRS : Operating or Investing GAAP : Operating

IFRS : Operating or Financing GAAP : Financing

IFRS : Operating or Investing GAAP : Operating

1. the firm should have positive cash flow provided by operating activities. the operating activities are the operations of the company. if there is a negative cash flow here, then it is costing the company more money to operate the business than they are bringing in - not a good thing. a net negative cash flow from operations would indicate the company had a net loss using the cash basis of accounting ( meaning they spent more cash on operations than they generated from their operations)

2. the company should have a negative cash flow (i.e., cash used) from investing activities. a negative cash flow here indicates the company is re-investing in itself in order to grow and expand. a positive cash flow her would indicate the company is selling off its long-term assets which is not a good sign for financial health

3. the cash flows from financing activities can be either a positive net cash flow

rather than using numbers solely from the balance sheet for assessment purposes, we will use numbers from the statement of cash flows and from balance sheets at several points in time the ratios are cash-based instead of accrual-based

is the ability of a business to pay its debts as they come due

a disadvantage of a current ratio is that it uses year-end balances of current assets and current liabilities (may not be representative of a company's position during most of the year)

a ratio that partial corrects this problem with the current ratio is the current cash debt coverage ratio

Net Cash flow provided by operating activities / average current liabilities

Current Liabilities @ (1/1) + Current Liabilities @ (12/31) / 2

since cash from operations involves the entire year rather than a balance at one point in time, it is often considered a better representation of liquidity on the average day

this (and all other) cash-baed measures is no readily available published industry averages for comparision