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FAR - Statement of Cashflow

The document provides an overview of the statement of cash flows, detailing its purpose in measuring a company's cash management and the sources and uses of cash. It explains the two methods for generating the statement: the indirect method and the direct method, along with the distinctions between operating, investing, and financing activities. Additionally, it outlines the steps for preparing the statement of cash flows using the indirect method.

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Zhackie Zoave Plaza
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18 views24 pages

FAR - Statement of Cashflow

The document provides an overview of the statement of cash flows, detailing its purpose in measuring a company's cash management and the sources and uses of cash. It explains the two methods for generating the statement: the indirect method and the direct method, along with the distinctions between operating, investing, and financing activities. Additionally, it outlines the steps for preparing the statement of cash flows using the indirect method.

Uploaded by

Zhackie Zoave Plaza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FINANCIAL ANALYSIS AND REPORTING

STATEMENT OF CASH FLOW

Instructor: Z. Plaza
CASH FLOW
STATEMENT
Measures how well a company manages
its cash position, meaning how well the
company generates cash to pay its debt
obligations and fund its operating
expenses. The cash flow statement
complements the balance sheet and income
statement and is a mandatory part of a
company's financial reports since 1987.
Purpose of the 2
The statement of cash flows
shows the amount of cash
Statement Cash Flow inflows and outflows during a
year.

The statement of cash flows


1 One purpose of the statement 3 provides information about the
quality of a company’s net
of cash flows to answer the income.
following to questions:

What are the sources of A third use of the statement


cash (where does the cash 4 of cash flows is that it
come from)? provides information about a
company’s sources and uses
What are the uses of cash of cash not related to the
(where does the cash go)? income statement.
Methods of Generating the
Statement of Cash Flows

INDIRECT METHOD DIRECT METHOD


Approach reconciles net income to Lists net cash flows from revenue
cash flows by subtracting non-cash and expenses; in other words, accrual
expenses and adjusting for changes basis revenue and expenses are
in current assets and liabilities, which converted to cash basis collections
reflects timing differences between and payments.
accrual-based net income and cash
flows.
THE DIFFERENCE BETWEEN
OPERATING ACTIVITIES,
INVESTING ACTIVITIES &
FINANCING ACTIVITIES
Cash flows from Operating
Activities
Primarily arise from the activities a
business uses to produce net income;
basically the cash generated from doing
what the company is in business to do such
as cash from selling inventory,cash used to
buy inventory, cash used to pay wages, etc.
Cash flows from Investing
Activities
Arise from the business buying and
selling of long-term assets such as buying
and selling of equipment or investments.
Cash flows from Financing
Activities
Arise from the changes related to long-
term debt and equity financing such as
issuing bonds or stock, borrowing money,
and paying back long-term loans.
Prepare the Statement of Cash
Flows Using the Indirect Method
The 5 Steps are:
Step 1: Determine Net Cash Flows from Operating
Activities
Begin with net income from the income statement.

Cash flow from Operating expenses


Net Income 4,340
Add back non-cash expenses, such as depreciation,
amortization and depletion.
Adjustments to Reconcile Net Income to Net Cash Flow from Operating Activities:
Depreciation 14,400

Remove the effect of gains and/or losses from


disposal of long-term assets, as cash from the
disposal of long-term assets is shown under investing
cash flows
Depreciation 14,400
Gain on Sale of Plant Assets (4,800)
Adjust for changes in current assets and liabilities to
remove accruals from operatingactivities.

Increases in current assets indicate a decrease in


cash, because either (1) cash was paid to generate
another current asset, such as inventory, or (2)
revenue was accrued, but not yet collected, such as
accounts receivable.
Depreciation 14,400
Gain on Sale of Plant Assets (4,800)
Accounts Receivable decrease 4,500
Prepaid Insurance increase (700)
Inventory increase (2,500)
Accounts Payable decrease (1,800)
Salaries Payable decrease 400
Decrease in current liabilities indicate a decrease in
cash relating to (1) accrued, or (2) deferred
revenues.

Depreciation 14,400
Gain on Sale of Plant Assets (4,800)
Accounts Receivable decrease 4,500
Prepaid Insurance increase (700)
Inventory increase (2,500)
Accounts Payable decrease (1,800)
Salaries Payable decrease 400
Cash flow from Operating expenses
Net Income 4,340
Adjustments to Reconcile Net Income to Net Cash Flow from Operating Activities:
Depreciation 14,400
Gain on Sale of Plant Assets (4,800)
Accounts Receivable decrease 4,500
Prepaid Insurance increase (700)
Inventory increase (2,500)
Accounts Payable decrease (1,800)
Salaries Payable decrease 400
Total 9,500
Net Cash Flow: Operating Activities 13,840
Step 2: Determine Net Cash Flows from
Investing Activities
Prepare the Investing Section of the Statement of Cash Flow
Preparation of the investing section of the statement of cash flows is an
identical process for both the direct and indirect methods, since only the
technique used to arrive at net cash flow from operating activities is affected
by the choice of the direct or indirect approach.
Focus on this section of the long-term assets from the balance sheet:
Also recall the following additional information:
Propensity Company sold land with an original cost of 10,000, for 14,800
cash.
A new parcel of land was purchased for 20,000 in exchange for a note
payable.
Plant assets were purchased for 40,000 cash.
Analysis of investing activities would yield the following results:
Net Cash Flow from Investing Activities

Putting all together:


Step 3: Prepare the Financing Section of the
Statement of Cash Flow
Prepare of the financing section of the statement of cash flow is an
identical process for both the direct and indirect methods, since only
the technique used to arrive at net cash flow from operating activities
is affected by the choice of the direct of the direct or indirect
approach.
Focus on this section of the long-term liabilities and the
stockholders’ equity section of the balance sheet:
Also recall the following additional information:
A new parcel of land was purchased for 20,000, in exchange for
a note payables.
Propensity declared and paid a 440 cash dividend to
shareholders.
Propensity issued common stock in exchange for 45,000 cash
Analysis of Financing activities would yield the following results:
Net Cash Flow from the Financing Activities :

Putting it all together:


Step 4: Reconcile Total Net Cash Flows to Change in Cash
Balance during the Period

Step 5: Present Non-Cash Investing and Financing


Transactions

SIDE-BY-SIDE COMPARISON: INdIRECT AND DIRECT METHOD


SIDE-BY-SIDE COMPARISON: INdIRECT AND DIRECT METHOD
THANK YOU!

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