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FINANCIAL ACCOUNTING A USER PERSPECTIVE

FINANCIAL ACCOUNTING A USER PERSPECTIVE. Hoskin • Fizzell • Davidson Second Canadian Edition. Cash Flow Statement. Chapter Five. Ajax Widget Company. Product Line Ajax Widget company sells widgets Supplier Credit Widgets cost Ajax $4 each.

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FINANCIAL ACCOUNTING A USER PERSPECTIVE

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  1. FINANCIAL ACCOUNTINGA USER PERSPECTIVE Hoskin • Fizzell • Davidson Second Canadian Edition

  2. Cash Flow Statement Chapter Five

  3. Ajax Widget Company • Product Line • Ajax Widget company sells widgets • Supplier Credit • Widgets cost Ajax $4 each. • All inventory must be paid in cash when it is ordered.

  4. Ajax Widget Company • Sales/Customer Credit • Ajax sells the widgets for $5 each • Ajax allows customers up to 30 days to pay • Assume: customers pay 30 days after a sale

  5. Ajax Widget Company • Inventory Policy • Ajax must maintain sufficient inventory for customer purchases • Ajax’ inventory at the end of a period is equal to 50% of the current month’s sales

  6. Ajax Widget Company

  7. Ajax Widget Company

  8. Ajax Widget Company • Net income is growing • Increased level of sales is shown in: • Accounts receivable • Inventory

  9. Ajax Widget Company

  10. Ajax Widget Company Cash-to-Cash Cycle Inventory Purchase (cash outflow) Sale of Widget Cash Collection (cash inflow)

  11. Cash-to-Cash Cycle • Lead/lag relationship between • cash paid out to buy inventory, and • cash coming in from collections of accounts receivable

  12. Income Statement • Income Statement • measures performance at a point in the cycle • ignores timing differences between revenues and expenses and the related cash flows • not useful in tracking cash flows

  13. Income and Cash Flow Statements • Income Statement • summarizes the profitability of the company’s operations • Cash Flow Statement • summarizes the cash flows

  14. Ajax Widget Company

  15. Ajax Widget Company • Cash flow has been negative for the first three months • March 31 cash balance: $900. • Will the company run out of cash? • What will it do to continue doing business?

  16. Ajax Widget Company Net Income, Cash Flow, and Cash Balance Forecast

  17. Ajax Widget Company • Net cash flow will be negative for the next three months • The trend is improving • What will happen in July? • Should the company take out a loan, or establish a line of credit, with the bank?

  18. Cash Flow Solutions • Capitalization • the amount of cash the company starts with • Start-up companies tend to be under-capitalized • How should start-up companies manage their cash flows?

  19. Cash Flow Solutions • Growth • Slow down the rate of growth of sales • May be detrimental in the long run • May divert customers to competitors

  20. Cash Flow Solutions • Capitalization • Start with a larger amount of cash • Issue additional shares • borrow the cash (debt)

  21. Cash Flow Solutions • Lead/Lag Relationships • change the relationships between cash inflows and outflows • change the policies regarding accounts receivable, accounts payable, or inventory

  22. Cash Flow Statement • Cash and Cash Equivalents • short-term, highly liquid investments that are readily convertible into known amounts of cash

  23. Cash Flow Statement • Financing Activities • Investing Activities • Operating Activities

  24. Cash Flow Statement • Financing activities • obtaining and repaying resources from shareholders and lenders • Examples: shares, bonds, mortgages, notes, dividends

  25. Cash Flow Statement • Investing Activities • investment, sale or disposal of long-term assets • Examples: property, plant, equipment, long-term marketable securities

  26. Cash Flow Statement • Operating Activities • sale of goods and services to customers • changes to current assets and current liabilities

  27. Cash Flow Statement • Approaches • Direct approach • theoretically informative • rarely used • Indirect approach • normally used in published statements

  28. Cash Flow Statement • Direct and Indirect Approaches • differ only in format and content of the Operating Activities section • Investing Activities and Financing Activities sections are the same

  29. Cash Flow Statement • Indirect approach • shows only net cash flows from operating activities • then shows adjustments to net income to arrive at net cash flows from operations

  30. Cash Flow Statement • Indirect approach • Adjustments: • Items from the income statement that do not involve cash flows • Amortization, deferred income taxes, loss on sale of capital assets • Net changes in noncash working capital • current assets and current liabilities

  31. Cash Flow Statement Change in the Current Account Decrease Increase Current Asset Subtract Add Current Liability Add Subtract

  32. Preparation of the Cash Flow Statement (Indirect Approach) • Using T-Accounts • need balance sheet, income statement, and additional information • objective is to reconstruct all transactions affecting cash

  33. Preparation of the Cash Flow Statement (Indirect Approach) Inflows Outflows

  34. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (1) Net income: $12,480

  35. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (2) Decrease in A/R: $10,000

  36. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (3) Increase in Inventory: $10,000

  37. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (4) Increase in Prepaid Rent: $100

  38. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (5) Increase in A/P: $5,000

  39. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (6) Increase in Acc.Sal.: $100

  40. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (7) Amortization: $20,000

  41. Preparation of the Cash Flow Statement (Indirect Approach) Operating: (8) Gain on sale of equip.: $300 Financing: (8) Sale of equipment: $500

  42. Preparation of the Cash Flow Statement (Indirect Approach) Investing:(9) Purchase of PP&E: $60,000

  43. Preparation of the Cash Flow Statement (Indirect Approach) Financing:(10) Proceeds from note: $100

  44. Preparation of the Cash Flow Statement (Indirect Approach) Financing:(11) Proceeds from bond: $8,000

  45. Preparation of the Cash Flow Statement (Indirect Approach) Financing:(12) Repayment of bond: $2,000

  46. Preparation of the Cash Flow Statement (Indirect Approach) Financing:(13) Issue of shares: $4,000

  47. Preparation of the Cash Flow Statement (Indirect Approach) Financing: (14) Pmt. of dividends: $1,230 Declaration of dividends: $1,400

  48. Preparation of the Cash Flow Statement (Indirect Approach)

  49. Huskies Industries Ltd.Cash Flow StatementFor the Year Ended December 31, 2001 Operating activities: Net income $12,480 Add back items not representing cash flows: Amortization 20,000 Gain on disposal (300) (Continued)

  50. Huskies Industries Ltd.Cash Flow StatementFor the Year Ended December 31, 2001 Operating activities: Adjustments for working capital items: Decrease in Accounts Receivable 10,000 Increase in Inventory (10,000) Increase in Prepaid Rent (100) Increase in Accounts Payable 5,000 Increase in Salaries Payable 100 Cash from operating activities 37,180

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