Understanding Cash Flow Statements: A Comprehensive Guide

1. June 2 Statement of Cash Flows

2. Cash Flow Statements What Cash Flow Statements show us Building a Cash Flow Statement Today’s Agenda

3. Cash Flow Statements present a company’s Changes in cash over a period of time Sources and uses of its cash Cash position Is the company generating sufficient cash? To maintain operations? To re-pay its debts? Pay dividends Cash flows and net income differ Cash Flow Statements

4. Four Areas of Cash Sources and Uses • Profit & Loss • Net income or loss • Plus non-cash expenses - depreciation and amortization • Changes in working capital • Increases and decreases in current assets and current liabilities • Investment activities • Investments in and disposals of longer term assets • Financing activities • Issuance of or repayment/redemption of debt or equity • Dividends

5. Constructing the Statement of Cash Flows

6. Cash flows are divided into three categories. Organization of the Full-Fledged Statement of Cash Flows

7. Operating Activities Includes those activities that enter into the determination of net income.

8. Investing Activities Includes transactions that involve the acquisition or disposal of noncurrent assets.

9. Financing Activities Includes transactions involving receipts from or payments to creditors and owners.

10. A Full-Fledged Statement of Cash Flows: Indirect Method

11. A Full-Fledged Statement of Cash Flows: Indirect Method Additional Information: • There was a net loss for the year of $27,000. • Depreciation charges for the year were $6,000. • During the year, Ed sold land originally costing $32,000 for $32,000. • During the year, Ed paid dividends of $3,000 to the stockholders. • Ed issued $50,000 of common stock to settle the note due to Joe Doe.

12. Preparing the Statement of Cash Flows: Step 1 List each account appearing on the comparative balance sheets except for cash and cash equivalents and retained earnings.

13. Preparing the Statement of Cash Flows: Step 2 Compute the change from the beginning balance to the ending balance for each account.

14. { Recall that the transaction involving the Note Payable and Common Stock was noncash. Preparing the Statement of Cash Flows: Step 3 Code each entry on the worksheet as a source or use of cash.

15. Preparing the Statement of Cash Flows: Step 4 Code sources of cash as positive numbers and uses of cash as negative numbers.

16. { We need to make an adjustment for the noncash transaction. Preparing the Statement of Cash Flows: Step 5 Make any necessary adjustments, including adjustments for gains and losses. The net effect of these should equal zero.

17. Preparing the Statement of Cash Flows: Step 6

18. Preparing the Statement of Cash Flows: Step 7 Copy the data from the worksheet into the Statement of Cash Flows section by section.

19. Preparing the Statement of Cash Flows: Step 8 Prepare a cash reconciliation at the bottom of the statement.

20. Preparing the Statement of CashFlows In addition, on the face of the statement or in a supplemental schedule, disclose the issuance of $50,000 of stock to a creditor, a noncash financing activity.

21. Tutorial • Assignment • Complete Review Problems

22. Similarities and Differences in Handling Data Adjustments for accounts that affect revenue are the same in the direct method and indirect methods. In either case, increases in the accounts are deducted and decreases in the accounts are added. Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect methods. In the indirect method, an increase in prepaid expenses is deducted from net income. However, in the direct method an increase in prepaid expenses is added to operating expenses.