Marley's Cash Flow
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Transcript of Marley's Cash Flow
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Objectives:1. Describe the purpose of the Cash Flow Statement (how it meets
GAAP’s Objectives of Financial Reporting)
2. Prepare a Statement of Cash flows under both the Direct andIndirect Method.
3. Differentiate between Net Income and Cash from Operations(CFO) and use it to assess a company’s ability to generate future Cash Flows (CFO)
4. Evaluate the company’s quality of earnings by comparing andreconciling net income to cash
5. Determine whether a company is expanding or contracting using the “Investing” section of the Cash Flow Statement
6. Evaluate the company’s financing activity – are they relying oninternal or external financing , and debt or equity financing?
7. Assess a company’s need for external financing and its ability to
pay its debts and dividends
Cash Flow Statement Learning Objectives
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• What is included in “cash”? • The cash flow statement provides
information for a period of time about: – cash receipts (cash inflows) – uses of cash (cash outflows)
• Inflows and outflows are reported for: – operating – investing – financing activities – Summing to the net increase/decrease in cash over
the period
The Cash Flow Statement
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Cash is King
• Remember the 2nd Objective of FinancialReporting: to “Provide Information that is useful inassessing future ________ flows”. (see the House of GAAP from our first class, and repeated on the next slide)
• A good place to start predicting future cash flowsis the company’s historical cash flows.
• The Statement of Cash Flows provides information
about the cash receipts and cash disbursementsduring a specific time period, the same time periodcovered by the income statement.
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HOUSE OF GAAPGAAP’s Objective is to provide Financial Information that is:
1. Useful in investment & credit decisions2. Useful in assessing future ______ flows
3. About the enterprise resources (assets), claims (liabilities& owners’ equity) to resources, and _________ in them
Qualitative CharacteristicsRelevancePredictive or Feedback Value
TimelinessReliability
Comparability
Consistency
Elements AssetsLiabilities
Stockholders’ Equity Other Comprehensive Income
Revenues
Expenses
Assumptions
Economic EntityGoing ConcernMonetary Unit
Periodicity
Principles
Historical CostRevenue Recognition
Matching
Full Disclosure
Constraints
Cost/BenefitMateriality
Industry Practice
Conservatism
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Highlighting Balance Sheet Changes
• The 3rd Objective of Financial Reporting is to “Provide Information about the enterpriseresources (assets), claims (liabilities & owners’ equity) to resources, and _________ in them” (see the House of GAAP Prior slide and first class)
• The Cash Flow Statement also highlights how theBalance Sheet Accounts have changed.
Changes in Balance Sheet Accounts: Located in Cash Flow Statement
1. Most Current Assets and CurrentLiabilities (working capital accts) Operating Section
2. Most Long-term Assets Investing Section
3. Most Non-operating Liabilities
Stockholder’s Equity accounts
Financing Section
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Using the Statement of Cash Flows
In addition to reporting the changes to each currentoperating asset & liability (accounts receivable, inventory,accounts payable) the Statement of Cash Flows also helps:
• assess a company’s ability to generate positive future
cash flows from operations,• reconcile differences between net income and the change
in the cash balance.
• monitor a company’s investment in property, plant and
equipment – is it more or less than their depreciationexpense? Is the company expanding or contracting?
• assess a company’s need for external financing, source of external financing (debt or equity) and its ability to payits debts and dividends.
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The Three Sections of the
Cash Flow Statement
• Operating - cash inflows and outflows resulting formactivities that are central to the day-to-day operation of the business. Cash flows from Revenue and Expenses.
• Investing - cash inflows and outflows from the saleor purchase of property, plant & equipment, investmentin other companies and loans to other companies.(Changes in non-current and/or non-operating assets)
• Financing - cash inflows and outflows from the sale
or re-purchase of the companies stock, borrowing or repaying interest bearing debt, and paying dividends tostockholders. (Changes in Non-operating liabilities andshareholders’ equity)
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Decision Tree to determine Reporting on theCash Flow Statement
Operating – changes to all current & operating accountsStart with accrual accounting income andadjust it to get cash from operations
Net Income (accrual basis)1. Adjustments to go from Accrual to Cash
a. Changes to all Current & Operating Assetsb. Changes to all Current & Operating Liabilitiesc. Non Cash Expenses
2. Adjustments for non-operating gains and lossesNet Cash Provided (Used) by Operations
Non-Operating – changes to all non-current and/or non-operating accounts
Investing – non-current &/or non-operating ASSETS
Financing – interest bearing debt and non-current &/or non-operating Liabilities & Stockholders’ Equity accts
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The changes to Current Operating Assets & Liabilities are needed to
Convert Accrual Accounting Incometo Cash from Operations
Sales $98,000
Cost of Goods Sold 72,000Gross Profit 26,000
Operating Expenses 14,000Income before Taxes $12,000
Income Tax Expense 4,000Net Income $ 8,000
Adjustments (to convert Accrual Net income)
+-Cash From Operations
Taxes PayableEnd of Year Beg of the Year
$5,000 $ 3,000
How did the increase in TaxesPayable affect Cash fromOperations?
Did you spend more or less cashthan is reflected in income taxexpense?
Cash Flow Statementstarts with Net Income
& adjusts it to CFO
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Lansbury Inc. Balance Sheet
December 31, 2010 increase
(decrease) Assets 2010 2009 Cash $ 32,000 $ 20,000 $ 12,000
Accounts Receivable
41,600 21,200 20,400Investments 20,400 32,000 (11,600)
Plant Assets (net) 70,000 81,000 (11,000)
Land 88,000 40,000 48,000
total assets $ 252,000 $ 194,200 $ 57,800
Liabilities and Stockholders's Equity Accounts payable $ 30,000 $ 30,000 $ -
Notes Payable 25,000 41,000 (16,000)
Bonds Payable 30,000 30,000
Common Stock 120,000 100,000 20,000
Retained Earnings 47,000 23,200 23,800
$ 252,000 $ 194,200 $ 57,800
Prepare Statement of Cash Flows
(Indirect using Ch 5 problem 6)
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Computing Cash from Operations Start with Net Income and Adjust it to get Cash from Operations.
Net Income (accrual basis) $32,000
1. Adjustments to go from Accrual to Cash: A. Add back non-cash expenses (Expenses that
reduce net income but do not use up any cash)Depreciation Expense $ 11,000
_____________________________ $______
B. Changes in Operating Assets & LiabilitiesIncrease in Accounts Receivable (20,400)
_____________________________ $______
2. Adjustments for non-operating gains and losses:We want only operating cash so add back non-operating losses which have
reduced net income and subtract out gains from non-operating activitiesLoss on disposition of assets
Gain on sale of Investments ( 3,400)
Net Cash Provided by Operations $ 19,200
Computing Cash from Operations
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LO 2 Identify the major classifications of cash flows.
Typical Company Cash Flow Life Cycle
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1. Calculate each company’s cash balance at the end of the year.
2. Would you prefer to own company A, B or C? Why?
3. Which company would you least like to own? Why?
4. Which companies have net income and which have a net loss?
5. Explain what might cause company C’s net cash from financingactivities to be negative.
6. Explain what might cause company A’s net cash from financingactivities to be positive.
Using the Statement of Cash Flows
Co. A Co. B Co. C
Net cash flow from operating activities (300)$ (400)$ 300$
Net cash provided (used) in investing activities (900) 500 (90)
Net cash provided (used) in financing activities 1,200 (10) (240)
Net increase or decrease in cash for the year
Cash balance beginning of year 150 150 150
Ending Cash Balance
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Summary story from the Cash Flow Statement
2010 2009 2008
Cash provided by Operations 3,919 7,000 3,670
Cash (required) by Investing Activity (14,031) (4,600) (3,650)
Net effect on Cash from issuing (retiring) debt (6,154) (2,339) 2,876Net effect on Cash from issuing (retiring) stock 23,082 141 639
Effect of exchange rate changes on cash (4) 14 -
Net increase (decrease) in Cash $6,812 $216 $3,535
What is Company’s major source of cash?
Is the company relying upon internal or external financing?
Is the Company generating enough cash to pay its debt obligations?
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Format of the Statement of Cash Flows
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Format of the Statement of Cash Flows
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E23-6: Prepare the operating activities section of the statement of
cash flows using the indirect method (Step 2).
Cash flows from operating activities
Net income 90,000$
Adjustment to reconcile net incometo net cash provided by operating activities:
Depreciation expense 60,000
Loss on sale of equipment 26,000
Decrease in accounts receivable 17,000
Increase in accounts payable 10,000
Decrease in income taxes payable (4,500)
Net cash provided by operating activities 198,500
Operating Activities— Indirect Method
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Statement of Cash Flows
Cash flow from operating activitiesNet income (loss) (50,000)$
Adjustment to reconcile net income to cash:
Loss on sale 2,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities
Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
Sale of common stock 330,000 Purchase of company stock (47,000)
Cash from financing activities 283,000
Net Change in Cash 293,000$
O
I
F
The Cash Flow Statement
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LO 7 Identify sources of information for a statement of cash flows.
In Favor of the Indirect Method
Focuses on the differences between net income and
net cash flow from operating activities.
Provides link between the statement of cash flows
and the income statement and balance sheet.
Special Rules Applying to Indirect Methods
Disclose Interest paid.
Disclose Income taxes paid.
Direct Versus Indirect Controversy
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LO 8 Discuss special problems in preparing a statement of cash flows.
2. Accounts receivable, net3. Other working capital changes
4. Net losses
5. Gains
6. Stock options
7. Postretirement benefits
8. Extraordinary items
9. Significant noncash transactions
Special Problems in Statement Preparation