Introduction to Corporate Finance

By:

Dr. TAREK MOHAMED ALI

PhD. Management Information Systems (MIS), Graduate

School of Business Administration - KOBE University,
JAPAN
 CH. 1.
Financial statements

2
 The Field of Finance
Financial field consists of three interrelated areas

1)Working Capital Management: transactions

related to current assets and liabilities
2)Investments Management: transactions involved
in the acquisitions or disposition of non-current assets
3)Financial management: transactions involved
borrowing from creditors, and owners of a company

3
 Financial Staff Responsibilities

1) Coordinating financial data

2) Forecasting & Planning.
3) Make investment and financing decision
4) Return - Risk management

4
 Forms of Business Organization
Entrepreneurships

1) Sole proprietorship:
Individual with Unlimited liability

2) Partnership:
Two or more partners

3) Corporation:
Joint stock with Limited liability

5
 Goals of Corporation
• Ultimate goal of financial management
should be Stockholder wealth maximization.
• However, stockholders goal is related to
other beneficiaries goals.
• Action should be taken to link goals of these
beneficiaries with stockholders goal.

6
 Beneficiaries contradictory
Owners` Target (3)

Highest revenues on invested capital (ROI) with lowest risk

Operators` Target (2) Consumers` Target (1)

Highest salary, secured job Highest quality with fair price.

with better business condition.
7
MITSUBISHI Research Institute (MRI) 1997
Major Trends in Financial Management

1. Globalization of Business
2. Improvements of transportation &
communication
3. Shift operations to areas of lower costs.
4. Lower trade barriers to benefit consumer.
5. Increased use of Information Technology

8
 Accounting Information System (AIS)
• An accounting information system (AIS) is a system designed
to transform financial and other data into information.
• Accounting information systems perform this transformation
whether thorough manual or computerized systems.

Supporting Ledger Financial

voucher Statements

Input Data Processing Output

9
Basic Financial Statements

• Income statement
• Retained Earnings Statement
• The statement of financial position
(Balance Sheet)

10
 Users of Financial Statements

Internal External
Users Users
Shareholders
Financial Management Lenders / Creditors

Regulatory Authorities

Customers
Analysts
Potential Investors

11
The Income Statement

• Financial document showing a company's income /

revenues and expenses over a given period (one
fiscal year).

• Also known as the Earnings Statement or Statement of

Operations.

12
Revenues & Expenses (Basic Definitions)

Revenues/Sales: what is charged to customers

for good or services.

Costs & Expenses what the company pays in

order to generate the sales.

13
Income Statement (Basic Format)
Item Description
Total Sales
Less: Cost of Goods Sold
Gross Profit

Less: Selling, General & Administrative Expenses

Operating Profit

Plus: Other Sundry Income

Less: Other Sundry expense
Earnings Before Interest & Tax (EBIT)
Less: Interest Expenses

Earnings Before Tax (EBT)

Less: Tax

Net Profit After Taxes

14
Income Statement (Example)

15
The Balance Sheet

• A balance sheet is a snapshot of a business’ financial

condition at a specific moment in time (at the close of an
accounting period).

• A balance sheet comprises assets, liabilities, and owners’

or stockholders’ equity.

16
The Balance Sheet Equation

Liabilities
Assets

Owners’
Equity

Assets = Liabilities + Owners’ Equity

17
Assets
Assets are the resources that the firm owns.
These Assets benefit the business now and in
the future

Current Assets Fixed Assets

•Land Intangible
•Cash
•Accounts receivable •Buildings Assets:
•Inventory •Machines •Patents
•Notes receivable •Equipment •Copyrights
•Prepaid expenses •Tools •Licenses
•furniture
18
Liabilities

Liabilities are the debts of the company.

Short – term
liabilities Long – term Loans
•Notes payable
•bonds
•Accounts payable
•Accrued expenses

19
Shareholders’ Equity

Stockholders’ (owners’) equity is the

owners’ claims to the assets of a corporation.

Capital Reserves Retained Earnings

20
Balance Sheet (Example)

21
Balance Sheet (Example)

22
 Exercise No.1
For December 31, 2008, the balance sheet of Grander Corporation is as follows :

Current Assts Liabilities

Cash $ 15000 Account payable $ 20000
Account receivable 22500 Notes payable 30000
Inventory 37500 Bonds payable 75000
Prepaid expense 18000
Stockholders Equity
Fixed Assets Common stocks $ 112500
Plants and equipments $ 375000 Paid-in-capital 37500
Less: Accumulated Retained earnings 118000
depreciation (75000)
Net plant and equipments 300000

Total liabilities & $ 393000

Total assets $ 393000 stockholders equity
23
1. Sales for the year 2009 were $ 330000.
2. Cost of goods sold was 60 percent of sales.
3. Selling and administrative expense was $ 33000.
4. Depreciation expense was 10 percent of plant and equipment (gross) at
beginning of the year.
5. Interest expense for note payable was 10 %.
6. Interest on the bonds payable was 12 %.
7. The tax rate averaged 20 percent.
8. Tow thousand dollars in preferred stock dividends were paid.
9. $ 4100 in dividends were paid to common stockholders.
10.There were 10000 shares of common stock outstanding.
11.During 2009, the cash balance&prepaid expenses balance were unchanged.
12.Account receivable increased by 20 %.
13.Inventory increased also by 20 %.
14.A new machine was purchased on December 31, 2009, at cost of $ 60000.
15.Account payable increased by 30 percent.
16.At year-end, December 31, 2009, note payable increased by $ 10000
17.Bonds payable decreased by $ 15000.
18.Common stock and paid-in capital in excess of par account didn't change.
24
Based on information indicated in the previous
slides, prepare the following:

1. An income statement for the year 2009.

2. The statement of retained earnings for the

year 2009.

3. Balance sheet as of December, 31, 2009.

25
 income statement for the year ended December 31, 2009

1- Sales $ 330.000
2- Cost of goods sold (198.000)
Gross profits 132.000
3- Selling & administrative expense (33.000)
4- Depreciation expense (37.500)
Operating profits (EBIT) 61.500
5+6- Interest expense (12.000)
Earnings before taxes (EBT) 49.500
7- Taxes (9.900)
Earnings after taxes (EAT) 39.600
8- Preferred stock dividends (2.000)
Earnings available to dividends 37.600
9- Common stockholders dividends (4.100)
10- 10.000 Shares outstanding
Earnings per share 0.410
Earnings after dividends 33.500 26
Statements of retained earnings for the year 2009

Retained earnings, balance, December 31. 2008 $ 118.000

Add: earnings available to common stockholders 2009 37.600
Deduct: Cash dividends declared in 2009 (4.100)

Retained earnings, balance, December 31, 2009 151.500

27
Balance sheet of Gardner Corporation for December 31.2009
Current Assts Liabilities
11- Cash $ 15000 15- Account payable $ 26000
11- Prepaid expense 18000 16- Notes payable 40000
12- Account receivable 27000 17- Bonds payable 60000
13- Inventory 45000

Fixed Assets Stockholders Equity

14- Plants and 18- Common stocks $ 112500
equipments (gross) $ 435000 18- Paid-in-capital 37500
Less: Accumulated Retained earnings 151500
depreciation 112500
Net plant and assets 322500
Total liabilities and $ 427500
stockholders equity
Total assets $ 427500
28
Questions
&
Discussion

29
 CH. 2.
STATEMENT OF CASH FLOWS

30
Purpose of Cash Flows Statement

• Provide information about the cash receipts and

cash payments.
• Provide information on the “utilization” of cash.
• Reports the cash inflows and out flows generated
from:
1- Operating activities.
2- Investments.
3- Financing.
31
 data provided in cash flow statement
Helps investors with questions about
the company’s

• Ability to generate positive cash flows.

• Ability to meet its obligations and to
pay dividends.
• Need for external financing.
• Investing transactions for the period.
32
 Classification of Cash Flows
The Statement of Cash Flows must
include the following three sections:
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities

33
 Operating Activities

All transactions related to current

assets and liabilities are classified as
operating activities

34
 Operating Activities

Inflows from:
• Sales to customers.
• Interest and dividends +
received. Cash
Flows
Outflows to: from
• Suppliers of merchandise and Operating
services.
• Employees expenses.
_ Activities
• Lenders as interest.
• Government as taxes.
35
The Operating Activities section includes cash inflows
and outflows that result from the operations of the
business, and some incidental business transactions.

Operating cash inflows include cash received from

customers in payment of goods sold as well as cash
received as dividends and interest.

Operating cash outflows include cash payments for

salaries, supplies, inventory, taxes, and interest.

36
 Investing Activities

All transactions that involved in the

acquisitions or disposition of non-
current assets are classified as
Investing activities.

37
 Investing Activities
Inflows from:
• Selling plant assets.
• Selling of stocks invested
in another company + Cash
Flows
from
Outflows to:
Investing
• Purchase of plant assets. _ Activities
• Purchase equity investments.

38
The Investing Activities section includes cash inflows and
outflows that result from the sale and purchase of fixed assets
and investments.

If a company purchases a piece of equipment, it is classified

as a cash outflow in the investing section.

If a company has excess cash and invests it in the stock of

another company, it is also classified as a cash outflow in the
investing section.

If this equity investment is sold in the future, it will be classified

as a cash inflow in the investing section.

39
 Financing Activities

All transactions involved in borrowing

from creditors, and owners of a
company are classified as Financing
activities.

40
 Financing Activities
Inflows from:
• Short-term and long-term
borrowing. +
• Owners (for example, from Cash
issuing stock). Flows
from
Outflows to: Financing
• Make payments on borrowed _ Activities
funds.
• Owners for dividends.

41
The Financing Activities section includes cash inflows and
outflows that result from transactions with the company’s
creditors and stockholders.

If a company borrows money from a bank, it is classified as a

cash inflow in the financing section.

If this debt is repaid in the future, the amount of the principal

payment is classified as a cash outflow in the financing section.

Remember, the interest payment is classified as a cash outflow

in the operating section.

If a company issues stock of the company, it is classified as a

cash inflow in the financing section.
42
 Managing Cash Flows efficiently

▪ Increase collection of accounts receivables.

▪ Keep inventory low.
▪ Delay payment of liabilities.
▪ Plan timing of major expenditures.
▪ Invest idle cash.

43
Now, let’s prepare
an indirect method
Statement of Cash
Flows that is used
by over 97% of all
companies.

44
 Indirect Method
Changes in current assets and current
liabilities as shown on the following table.

Cash Flows
Net
from Operating
Income
Activities

+ Losses and + Noncash

- Gains expenses such as
depreciation.

45
The Indirect Method starts with accrual-based net income and makes
certain adjustments to arrive at Cash Flows from Operating Activities.
Adjustments to accrual-based net income include adding back any
noncash items that were included to arrive at net income, such as
depreciation and amortization. This basically cancels out that they were
originally subtracted to arrive at net income. Since these items do not
represent cash outlays, they should not be included in the Statement of
Cash Flows.

Gains and losses are other items on the income statement to consider.
They result from the sale of an asset. Gains are added and losses are
subtracted on the income statement to arrive at net income. Since gains
and losses do not represent operating cash flows, gains are canceled out
by subtracting and losses are canceled out by adding to net income in the
operating section.

Appropriate adjustments should also be made on the income statement to

reflect the change from accrual-based revenues reported to cash-based.
This is done by analyzing the changes in noncash current assets and
current liabilities. 46
 Indirect Method
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Use this table when adjusting Net

Income to Operating Cash Flows.
47
This chart explains how to treat a change in a noncash current asset
or current liability in the operating section of the statement of cash
flows. Let’s begin with current assets.

If Accounts Receivable, a current asset, decreases during the year,

this decrease is added to net income. A decrease in Accounts
Receivable means that customer cash payments on account
exceeded customer charges on account during the period. This
excess of payments over charges is used to adjust the accrual-
based revenues reported on the income statement to report the total
cash received from customers during the period. Similarly, if
Accounts Receivable increased during the year, this increase would
be subtracted from net income. An increase in Accounts Receivable
means that customer charges on account exceeded customer cash
receipts on account during the period. This excess of charges over
cash receipts is used to adjust the accrual-based revenues reported
on the income statement to report the total cash received from
customers during the period.
48
Now, let’s look at how to treat changes in current liabilities. If Salaries
Payable, a current liability, decreased during the year, this decrease
would be subtracted from net income.

A decrease in Salaries Payable means that the company paid more in

salaries than it charged during the period.

This excess of cash payments over charges is used to adjust the

accrual-based expense reported on the income statement to report
the total cash paid for salaries during the period.

Similarly, if Salaries Payable increased during the year, this increase

would be added to net income.

An increase in Salaries Payable means the company charged more

than it paid during the period. This excess of charges over cash
payments is used to adjust the accrual-based expense reported on
the income statement to report the total cash paid for salaries during
the period. 49
 Indirect Method
Joyce, Inc. has prepared the Balance Sheet
as of March 31, 2006, and March 31, 2007.
The Income Statement for the year ended
3/31/07 has also been prepared. Joyce
needs help preparing the Statement of
Cash Flows using the indirect method.

50
 Indirect Method

Joyce, Inc.
Income Statement
For the Year Ending 3/31/07
Revenues $ 727,000
Operating Expenses (748,000)
Depreciation Expense (6,000)
Gain on Sale of Land 8,000
Net Loss $ (19,000)

51
 Indirect Method
The $8,000 gain was the
Joyce, Inc.
result of selling land
Income Statement
costing $32,000 for $40,000
For the Year Ending 3/31/07
cash during the period.
Revenues $ 727,000
Operating Expenses (748,000)
Depreciation Expense (6,000)
Gain on Sale of Land 8,000
Net Loss $ (19,000)

52
 Indirect Method
Joyce, Inc.
Balance Sheets

The depreciation of The 3/31/2006 3/31/2007

year $ Assets
6000 led to
decreasing
Cash the 2006 net $ 90,000 $ 62,000
equipment
Accountsfrom 45000 to
Receivable 40,000 23,000
39000 in 2007
Inventory 300,000 350,000
Land 112,000 80,000
Equipment, net 45,000 39,000
Total Assets $ 587,000 $ 554,000
53
 Indirect Method
Joyce, Inc.
Balance Sheets (cont.)
3/31/2006 3/31/2007
Liabilities
Accounts Payable $ 27,000 $ 38,000
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities $ 91,000 $ 47,000
Owners' Equity
Common Stock $ 450,000 $ 500,000
Retained Earnings 46,000 7,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000
54
 Indirect Method
Joyce, Inc.
Joyce issued $50,000 of no
Balance Sheets (cont.)
par common stock to 3/31/2006 3/31/2007
settle theLiabilities
$50,000 note
payable.
Accounts Payable $ 27,000 $ 38,000
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities $ 91,000 $ 47,000
Owners' Equity
Common Stock $ 450,000 $ 500,000
Retained Earnings 46,000 7,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000
55
 Indirect Method
Joyce, Inc.
Balance Sheets (cont.)
3/31/2006 3/31/2007
Liabilities
Accounts Payable $ 27,000 $ 38,000
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities $ 91,000 $ 47,000
Owners' Equity
Common Stock $ 450,000 $ 500,000
Retained Earnings 46,000 7,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000
56
 Indirect Method
Joyce, Inc.
Ending Retained Earnings
Balance Sheets (cont.)
at 3/31/07 was computed 3/31/2006 3/31/2007
as follows:
Liabilities
Accounts Payable $ 27,000 $ 38,000
Beginning
Salaries R/E, 3/31/06
Payable $14,000
46,000 9,000
–Long-Term
Net Loss during year
Note Payable (19,000)
50,000 -
–Total
Dividends Paid during year$ 91,000
Liabilities (20,000) $ 47,000
= Ending R/E,Equity
Owners' 3/31/07 $ 7,000
Common Stock $ 450,000 $ 500,000
Retained Earnings 46,000 7,000
Total Owners' Equity $ 496,000 $ 507,000
Total Liabilities and OE $ 587,000 $ 554,000
57
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

With the indirect method, always

start with the net income or net
loss for the period.

58
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add/Less: Changes in Current Assets & ?
Current Liabilities

Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
59
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000

Accounts receivable decreased.

3/31/07 3/31/06
$23,000 - $40,000 = $(17,000)

60
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000

Accounts payable increased.

3/31/07 3/31/06
$38,000 - $27,000 = $11,000

61
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)

Inventory increased.
3/31/07 3/31/06
$350,000 - $300,000 = $50,000
62
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)

63
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)

Salaries payable decreased.

3/31/07 3/31/06
$ 9,000 - $14,000 = $(5,000)
64
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Add: Depreciation Expense 6,000
Add back non-cash expenses.

65
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Add: Depreciation Expense 6,000
Subtract: Gain on Sale of Land (8,000)
Net cash flows from operations $ (48,000)

66
 Indirect Method
Joyce, Inc.
Cash Flows from Operations:

Net Loss $ (19,000)

Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Add: Depreciation Expense 6,000
Subtract: Gain on Sale of Land (8,000)
Net cash flows from operations
Subtract gains. $ (48,000)

67
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities

Cash Flows from Financing Activities

Net Change in Cash for the Period

Beginning Cash Balance
Ending Cash Balance
68
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows fromThe
Investing Activities
operating cash
flows amount comes
Cash Flows from from the schedule
Financing Activities
just prepared.
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
69
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities

Net Change in Cash for the Period

Beginning Cash Balance
Ending Cash Balance
70
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows
Land from Financing
originally Activities
costing $32,000
was sold for $40,000.
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
71
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
72
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Net Change of
Dividends in Cash forwere
$20,000 the Period
paid to
Beginning Cash Balance
owners during the year.
Ending Cash Balance
73
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance
Ending Cash Balance
74
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Compute
Cash Flowsthe
fromnet change in
Financing cash
Activities
forpaid
Dividends the period.
to owners (20,000)
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance
Ending Cash Balance
75
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000
76
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Complete the Statement of Cash
Cash Flows from Financing Activities
Flows by reconciling
Dividends beginning
paid to owners (20,000)
cash to ending cash.
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000
77
 Indirect Method
Joyce, Inc.
Statement of Cash Flows
For the Year Ending 3/31/07
Cash Flows from Operating Activities $ (48,000)
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000
78
 Indirect Method
Joyce, Inc.
Note that the ending
Statement of Cash Flows
cash amount ties
For the Year Ending 3/31/07
back to Joyce’s
Cash Flows from Operating Activities
Balance Sheet $ (48,000)
at
Joyce, Inc.
Cash Flows from Investing
Balance Sheets 3/31/07.
Activities
Proceeds from sale of land 3/31/2007
3/31/2006 40,000
Cash Flows from Financing Activities
Assets
Cash $ owners
Dividends paid to 90,000 $ 62,000 (20,000)
Decrease in Cash for the Period $ (28,000)
Beginning Cash Balance 90,000
Ending Cash Balance $ 62,000
79
Questions
&
Discussion

80
 Cash flows basic traps

Change in cash because of change in sundry income or/and

sundry expense

Change in cash because of change in depreciation of the year

as in the latest income statement

Change in cash because of change in dividends paid for

stockholders (either common or preferred)

Composing The report highlighting cash sources and uses

81
 Quiz on cash flows statement

For the years ended in 2011 and 2012, the statements of income, and the comparative
financial position of X Corporation were as follows:

X Corporation, Income statement for the year ended December 31, 2011 and 2012

2011 2012

Sales (all on credit)………………………………………………… 1800000 2160000

Cost of goods sold………………………………………………….. 1120000 1300000

Gross profits……………………………………………………….. 680000 860000

Selling and administrative expense……………………………... 490000 590000

Operating profits ………………………………………………….
190000 270000
Interest expense…………………………………………………….
40000 85000
Earnings before taxes ……..………………………………………
150000 185000
Taxes………………………………………………………………..
48720 64850
Earnings after taxes (EAT) ……………………………………….
101280 120150
 X Corporation, Comparative balance sheets for 2011 and 2012

Assets Liabilities & Owners Equity

2011 2012 2011 2012

Current assets: Current liabilities:
Cash 30000 20000 Account payable 225000 200000
Market securities 35000 50000 Notes payable 100000 300000
Account receivable 230000 330000 Total current liabilities 325000 500000
Inventory 285000 325000 Long-term liabilities
Total current assets 580000 725000 Total liabilities 331120 550740
plant& equipment 720000 1169000 Stockholders equity 656120 1050740
Total assets 1300000 1894000 Common stocks 400000 460000
Paid-in-capital 50000 80000
Retained earnings 193880 303260
Total stockholders equity 643880 843260
Total liabilities& equity 1300000 1894000
Based on the above-financial data, prepare the following:

•The statement of cash flows for the year ended December

2012 for X Corporation.

•Comment on the statement's net cash flows and total

adjustment.

84
 Exercise on Cash flows statement

For December 31, 20011 and 2012, the comparative balance

sheet of the SIFE Corporation was as in the following slide.

Net income (EAT) for the year 2012 is $ 160.000. Otherwise,

depreciation of the year has been estimated by 150.000 in 2012.
Earning/preferred shareholder is 0.1

Based on the above-financial data, prepare the statement of cash

flows for the year ended December 2012 for SIFE Corporation. Then,
Comment on the statement's net cash flows and total adjustment.

85
 Year-End 2011 Year-End 2012
Current assets:
Cash $ 150.000 $ 150.000
Account receivable 300.000 350.000
Inventory 410.000 430.000
Prepaid expense 50.000 30.000
Total current assets 910.000 960.000
Fixed Assets:
Net plant& equipment 1.000.000 1.270.000
Total assets $1.910.000 $2.230.000
Current liabilities:
Account payable $250.000 $440.000
Notes payable 400.000 400.000
Accrued expenses 70.000 50.000
Long-term liabilities:
Bonds payable, 2013 70.000 120.000
Total liabilities 790.000 1.010.000
Shareholders equity:
Preferred stocks, $100 per value 90.000 90.000
Common stocks, $ 1 per value 120.000 120.000
Paid-in-capital 410.000 410.000
Retained earnings 500.000 600.000
Total stockholders equity 1.120.000 1.220.000

Total liabilities & shareholders’ equity $ 1.910.000 $ 2.230.000