CH 5 Statement of Cash Flows

Rules of statement cash flow

Sources: Positive (+) Uses: Negative (-) Deprecation (Income Statement): Positive (+)Dividends paid (Retain Earning Statement): Negative (-) Capital Stock = Common Stock + Paid in Capital

sources and uses of funds statement

a document, usually included in the financial section of a business plan, that lays out specifically how much money a firm needs, where the money will come from, and what the money will be used for

Sources of cash

activities that bring in cash

A positive free cash flow

can grow and invest its excess cash in its own expansion or alternative investments.

Cash flow from operating activities

cash flows directly related to sale and production of the firm's products and services the result of all of the transactions and events that normally make up a business's day to day activities. include cash payments for items such as inventory, payroll, taxes, interest, utilities, and rent. will come from current assets and current liabilities. exceptions to this are marketable securities, which belongs in investing activities, and notes payable (short-term debt), which belongs in financing activities. nterest paid and interest received are classified as operating activities (as part of the income statement).

investment in operating activites

gain on a sale of an investment/equipment occurs when the original cost of the investment/equipment is lower than the price at which it is sold at a later date. a loss on a sale of an investment/equipment occurs when the original cost of the investment/equipment is higher than the price at which it is sold at a later date.

A negative cash flow

it will need to supplement its cash from other sources, such as borrowing funds or seeking additional investors.

Purpose of Cash Flow Statement

to provide relevant information about the cash receipts and cash payments of an enterprise during a period Cash equivalents: short-term temporary investments (treasury bills, certificates of deposit, or commercial paper that can be quickly and easily converted to cash)

Increase of assets

use of funds

Decrease Accumulated Depreciation

uses of fund

Decrease of cash

uses of funds

cash flow operating activities remaining adjustments to net income

when calculating cash flow from operating activities come from the sources and uses of funds calculated from the balance sheets.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Uses of cash

A firm's activities in which cash is spent. Also called applications of cash.

Free cash flow formula

Net cash provided from operating activities - Cash used to acquire property and equipment

The cash flow in a businesses is affected by three activities:

Operating activities Investing activities Financing activities

Net changes in cash

A representation of all cash inflows minus cash outflows from operating, investing, and financing activities must equal the difference between the cash account at the beginning of the accounting period and the cash account at the end of the accounting period (Balance Sheet).

format of statement of cash flow

Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net changes in cash Supplementary schedules

two most common items on the income statement that may need to be adjusted from an accrual basis to a cash basis are:

Depreciation Gains/losses from a sale of investments/equipment.

Building a statement of cash flow

Income statement for this year, including a statement of retained earnings Balance sheet from last year Balance sheet from this year A condensed income statement statement of retained earnings

cash flow from financing activities

cash flows that result from debt and equity financing transactions; include incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends Obtaining resources (funds) from the owners of a business (e.g. by selling company stocks) Providing owners with a return of their original investment amount (e.g. payment of dividends) Borrowing money Repaying borrowed money

Free cash flow

net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital Present cash flows in a business are certainly no absolute guarantee of future cash flows an important measure of its economic health and to pay its debts simply the amount of cash a business generates from its operating activities minus the amount of cash it must spend on its investment activities and capital expenditures.

Decerease of assets

source of funds

Increase of Liability and Owner's equity

source of funds

increase in accumulated depreciation

sources of fund

A complete SCF should include:

A summary of cash inflows and outflows resulting from operating activities A summary of cash inflows and outflows resulting from investing activities A summary of cash inflows and outflows resulting from financing activities Net changes in cash from the beginning to the ending of the accounting period A supplementary schedule of noncash investing and financing activities (if applicable) A supplementary disclosure of cash flow information

General cash flow investing activities are

sources and uses of funds used for cash flow from investing activities will come from long-term assets (investments, property and equipment, and other assets).

Supplementary schedule

statement of cash flows include additional information reporting noncash investing and financing activities and cash paid for interest and income taxes. Supplementary Disclosure of Cash Flow Information, which reports cash paid during the year for interest and income taxes.

Depreciation in operating activities

subtracted from the income statement primarily to lower income, and thus lower taxes. properly adjust net income to reflect actual cash, then, depreciation must be added back

Cash Flow Investing Activities

summarizes this part of a business's action. A business's investing activities include transactions and events involving the purchase and sale of marketable securities, investments, land, buildings, equipment, and other assets not purchased for resale. sources and uses of funds that you calculated from your balance sheets.

Cash Flow

the difference between cash coming in and cash going out of a business income from a variety of sources. These sources may include money paid to you from a job, income from parents or other family members, and interest you may earn on savings accounts.

calculating and reporting the amount of cash flow from operating activities on the statement of cash flows:

the indirect method (most used) and the direct method.

general financing activities

the sources and uses of funds needed for cash flow from financing activities come from long-term debt and equity.