Cash Flow Statment-26122010

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CASH FLOW STATEMENT

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How and when do we record income?Example – a grocery store. We take food grains on credit andpay him at the end of the month.Distorts the data when actually grains were soldA machinery is useful for a long time but we pay upfront

So its important how do we record income in our financialaccounts




So why is cash so important?Example of same grocery store – what if we are not able topay the bills?Even though records show that income is earned but cash isnot received.

So income turning into cash is very importantExample of Temptation Foods Ltd. – high income andnegative cash




How to show income for which cashhas not yet been received?

Asset - Something of a value to you, something which cangive you future benefits. Eg: Knowledge☺

Grocery store owner records uncollected income asreceivables

– ,will give us benefits then like buying a car or going for amovie




How do we measure cash-flow?1st year of business – say sold goods of worth Rs. 100 out of which Rs. 50 were sold on credit.At the end of the year – Income recorded will be Rs. 100.Assets recorded will be Rs. 50 receivables and cash Rs. 50.

us cas ow w e s. .




Three types of cash-flowOperating cash flow – cash generated by doing the business.Eg:- when we get cash by selling a productInvesting cash flow – cash transactions related to buying andselling of long term assets. Eg:- cash given to buy a

Financing cash flow – cash transactions related to financing(capital structure) the business. Eg:- Loan taken to start abusiness




U.S. GAAP Cash Flow

Classifications




Operating Activities

InflowsInflowsInflowsInflows OutflowsOutflowsOutflowsOutflows

Cash collected formcustomers

Cash paid to employeesand suppliers

receivedSale proceeds from tradingsecurities

expensesAcquisition of tradingsecuritiesInterest paidTaxes paid




Investing Activities


Sale proceeds from fixedassets

Acquisition of fixed assetsAcquisition of debt and

equity investmentsPrincipal received fromloans made to others

Loans made to others




Financing Activities


Principal amounts of debtissued

Principal paid on debtPayments to reacquire

stock

Dividends paid toshareholders




Methods of presenting a cash flow

Direct MethodDirect MethodDirect MethodDirect Method Indirect methodIndirect methodIndirect methodIndirect method

Each line item of theaccrual-based incomestatement is converted into

Net income is converted tooperating cash flow bymakin ad ustments for

cash receipts or cashpayments

transactions that affect netincome but are not cashtransactions




Revenues

Profit & Loss AccountProfit & Loss AccountProfit & Loss AccountProfit & Loss Account Balance SheetBalance SheetBalance SheetBalance Sheet

Sales = Rs. 100 Receivables at the beginningof the year = Rs. 20Receivables at the end of the year = Rs. 50

Cash collected from sales = Sales – (Change inreceivables) = 100 – ( 50 - 20 ) = Rs. 70




Accounting for Inventory


Cost of goods sold = Rs. 50 Inventory at the beginning of the year = Rs. 20Inventor at the end of the

year = Rs. 40

Purchases = Cost of goods sold + ( change in inventory)= 50 + (40 – 20) = Rs. 70




Cash paid to suppliers


Purchases = Rs. 70 Payables at the beginning of the year = Rs. 20Pa ables at the end of the ear

= Rs. 40

Cash paid to the suppliers = Purchases – (change inpayables) = 70 – ( 40 – 20 ) = Rs. 50




Final report

Accrual basisAccrual basisAccrual basisAccrual basis Cash basisCash basisCash basisCash basis

Sales = Rs. 100Cost of goods sold = Rs.

Cash sales = Rs. 70Cash purchases = Rs. 50

Other expenses = Rs. 15Interest paid = Rs. 15Taxes paid = Rs. 5

Net income = Rs. 15

.Interest paid = Rs. 15Taxes paid = Rs. 5

Cash flow from operations= Rs. = Rs. -15




ConclusionThis example shows why cash flow calculations are veryimportant – even though net income is positive, cash flowsare negativeDirect method directly helps us compare sales to cash sales,

quality of numbersPositive cash flow from operations shows that business isdoing well and its self sustainable




Question 1Which of the following would not appear in the operatingactivities section of the statement of cash flows?

[1] A. Cash collected from customers for goods and services

benefits, etc.[3] C. Cash payments for income taxes[4] D. Cash payments made on borrowings (repaying the

amounts of borrowed).




Question 2Which of the following items has become increasinglyimportant as an analytical tool to determine the financialhealth of a business?

[2] B. cash flow from operations[3] C. cash flow from investing and financing activities.




Question 3Which of the following transactions would increase the netcash flow from operating activities?

[1] A. The collection of an account receivable from a

[2] B. The issuance of capital stock for cash at a price abovepar.[3] C. The purchase of a delivery truck by issuing a note

payable.[4] D. The sale of equipment for cash at a gain.




Question 4177 Since the payment of dividends is often made on aregular quarterly basis, dividends payments are classified asan operating cash flow. True or false?

True




Question 5Successful companies usually generate the largest percentageof their cash inflows (sources) in the long run from:

[1] A. operating activities.

[3] C. gains on the sale of plant assets.




Question 6The president of the company you plan to work for needs someadvice. She wants to know how it is possible for the company to

make money (net income) during the year and yet have the cashbalance decline. After reviewing the statement of cash flows,which of the following would most likely explain this situation?

. e company ncurre a s gn can amoun o e ur ngthe year[2] B. Inventory levels decreased significantly from the beginningto the end of the year[3] C. There were a large number of December expenses incurred

which have not yet been paid[4] D. The company purchased a significant amount of plant assetsduring the year




Question 7If inventory increased by $5,000, accounts payable decreasedby $8,000, and the cost of goods sold was $125,000, the cashpayment for purchases was $ ______.


Cash Flow Statment-26122010

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