Statement of Cash Flows

PROF.B.RAMOS
Why Do We Need the Cash Flow
Statement?
• It explains the change during the
period on cash and cash
equivalents.
• Sometimes earnings fail.
• Everything is on one page.
• It is used as a forecasting tool.

2009
 Cash Equivalents
• To qualify as a cash equivalent:
1. The item must be readily convertible
to cash.
2. It must be so near to its maturity
that there is insignificant risk of
change in value due to changes in
interest rate.(Acquired three (3)
motnhs prior to maturity)
2009
 Cash Flow Activities
• Operating Activities -Transactions and
events that enter into the determination
of net income.
• Investing Activities -Transactions and
events that involve the purchase and sale
of securities, property, plant, equipment,
and other assets not generally held for
resale, and the making and collecting of
loans.
• Financing Activities -Transactions and
events whereby resources are obtained
from or repaid to owners and creditors.
2009
 Noncash Transactions
• There are investing and financing
activities that do not affect cash.
• Significant transactions should be
disclosed separately.
• These transactions do not affect the
statement of cash flows.

2009
 Operating Activities Section
• Simple concept: difference between
cash received and cash disbursed.
• Two methods to report operating
activities:
– Direct Method- shows cash receipts and
payments for a period of time. This
method is more straight forward.
– Indirect Method- involves reconciling net
income to a cash basis. It shows how
noncash flows affect net income.
2009
 Direct Method
• This method reports directly the major
classes of operating cash receipts and
payments of an entity during a period.
• Accrual basis revenues and expenses
must be converted to equivalent cash
receipts and payments.
• The amount of cash actually collected
or paid is determined.
2009
 Indirect Method
The indirect method makes the
following adjustments to net
income::
• Adjustments for receivables and other current operating
assets.
• Adjustments for payables and other current liabilities.
• Adjustments for depreciation and other noncash items.
• Adjustments for gains and losses.

2009
 Operating Activities
Cash
Cash Inflow
Inflow Cash
Cash Outflow
Outflow
•• Cash
Cash receipt
receipt of
of •• Inventory
Inventory
sales
sales payments
payments
•• Collection
Collection of
of •• Interest
Interest
receivables
receivables payments
payments
•• Interest
Interest revenue
revenue •• Wages
Wages
•• Utilities
Utilities
2009
•• Rent
Rent
 Investing Activities
Cash
Cash Inflow
Inflow Cash
Cash Outflow
Outflow
•• Sale
Sale of
of plant
plant •• Purchase
Purchase ofof plant
plant
assets
assets assets
assets
•• Sale
Sale of
of securities,
securities, •• Purchase
Purchase ofof securities,
securities,
other
other other
other than
than trading
trading
than
than trading
trading securities
securities
securities
securities •• Making
Making ofof loans
loans with
with
•• Collection
Collection of
of other
other entities
entities
principal
principal on
on loans
loans
2009
 Financing Activities

Cash
Cash Inflow
Inflow Cash
Cash Outflow
Outflow
•• Issuance
Issuance of
of •• Dividend
Dividend
own
own stock
stock payments
payments
•• Borrowings
Borrowings •• Repaying
Repaying
using
using long
long principal
principal on
on
term
term debt
debt borrowing
borrowing
instrument.
instrument. •• Treasury
Treasury Stock
Stock
purchase
purchase
2009
 General Format of a Cash Flow
Statement
Cash Provided by (Used for):
Operating Activities $XXX
Investing Activities XXX
Financing Activities XXX
Net Increase (Decrease) in Cash $XXX
Cash—Beginning of Year XXX
Cash—End of Year $XXX

2009