Cash Flow
Key Things to Know
Cash Flow Statement: Shows what the Company does with their cash
Reconciles cash basis to accrual basis
Used to determine:
- the company’s ability to generate future cash flows
- the company’s ability to repay debt
- how much cash was spent investing in assets
- how much cash was received from borrowing
Cash Equivalents: Short term, highly liquid – CDs, 3 month treasury, money market
Treated the same as cash on the cash flow statement
The cash flow statement is separated into three sections:
Operating Activities: Relates to the production and delivery of goods/services:
Net Income (revenues less expenses)
Show Non-cash revenues and expenses separately
Changes in current assets and current liabilities
Investing Activities: Long term assets - investments, p/p/e, intangibles
- purchases and sales of long-term assets
Financing Activities: Long term liabilities and Owner’s equity
- borrow and repay debt
- pay dividends to shareholders
- issue stock
- repurchase treasury stock
**** For Investing and Financing Activities only the cash received or paid
from the transaction is reported on the cash flow statement
Cash from operating activities can be reported using the direct method or the indirect method. Investing and financing activities are reported the same under both methods.
Format of the Direct Method:
Cash received from:
customers – selling goods and services
dividend income – from investments
interest income – from investments
Total cash received:
- Cash paid for:
purchases of goods (inventory) and services
salaries and wages to employees
income taxes to the government
interest expense to lenders
other cash expenses
Total cash paid:
= Cash flow from operating activities
Format of the Indirect Method:
Net Income
+ - Non cash revenues (-) and expenses(+) gains(-) and losses (+)
+ - changes in current assets and liabilities
= Cash flow from operating activities
Preparing the Cash Flow Statement using the Indirect Method:
Net Income
+ - Adjustments for Noncash Items - add expenses and losses
- subtract revenues and gains
+ - Change in Current Assets and Liabilities
Assets: increase from prior year – subtract
decrease from prior year- add **assets and liabilities
are opposite
Liabilities: increase from prior year – add
decrease from prior year – subtract
______________________________________
= Cash from operating activities
Preparing the Cash Flow Statement using the Direct Method:
Collected from customers:
Sales or other revenue
+ beginning receivable
- ending receivable
= Cash collected from customers
Collected from investments – dividend and interest income:
Dividend/Interest Income
+ beginning receivable
- ending receivable
= Cash collected from dividends/interest
Paid to suppliers:
Cost of Goods Sold
- Beginning Inventory
+ Ending Inventory
+ Beginning A/P
- Ending A/P
= Cash Paid to Suppliers
Paid for all other expenses:
Expense
+ Beginning matching payable
- Ending matching payable
= Cash Paid for expense
Expense
- Beginning matching asset
+ ending matching asset
= Cash paid for expense
Always: + Beginning – Ending, except when matching an asset with an expense
Noncash Activities: Trade an asset for another asset or liability
A transaction where no cash is involved
This is not reported in the cash flow statement and is listed at the bottom of the statement
