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Analyzing CashFlows
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How did thebusiness fund its
operations?
Did the businessborrow any funds or
repay any loans?
Does the businesshave sufficient cashto pay its debts as
they mature?
Did the businessmake any dividend
payments?
Importance of Cash Flows
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CashCurrency
CashEquivalents
Short-term, highly liquid investments. Readily convertible into cash.
So near maturity that market value is unaffected byinterest rate changes.
Measuring Cash Flows
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The Statement of Cash Flows includesthe following three sections:
Operating Activities
Investing Activities
Financing Activities
Classifying Cash Flows
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Outflows
Salaries and wages. Payments to suppliers.
Taxes and fines.
Other.
Inflows Receipts from customers.
Cash receipts fromroyalties, fees,commissions and otherrevenue.
Other.
Operating Activities
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Inflows disposal of fixed assets
disposal of investments
Other.
Outflows
acquire fixed assets to acquire shares, warrants or
debt instruments of otherenterprises and interest in jointventures
CashFlowsfrom
InvestingActivities
+
_
Investing Activities
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Inflows Issuing its own equity
securities.
Issuing bonds and notes.
Issuing short-term andlong-term liabilities.
Outflows
Dividend/ Interest paid Buy back of Shares
Redemption of PreferenceShares
Redemption of Debentures
Payment of Loan.
CashFlowsfrom
FinancingActivities
+
_
Financing Activities
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Items requiring separate disclosure include: Retirement of debt by issuing equity stock.
Conversion of preferred stock to common stock.
Lease of assets in a capital lease transaction.
Purchase of long-term asset by issuing a note orbond.
Exchange of noncash assets for other noncashassets.
Purchase of noncash assets by issuing equity ordebt.
Noncash Investing andFinancing
Exh.
12.4
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Exh.
12.5
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activites $ #####
Cash flows from investing activities:[List of individual inflows and outflows]
Net cash provided (used) by investing activites #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
Company Name
Statement of Cash Flows
Covered Period
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Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activites $ #####
Cash flows from investing activities:[List of individual inflows and outflows]
Net cash provided (used) by investing activites #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
Company Name
Statement of Cash Flows
Covered Period
Exh.
12.5
There are two acceptable methods to determine CashFlows from Operating Activities:
Direct Method
Indirect Method
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D Cash = D Liabilities + D StockholdersEquity - D Noncash Assets
Derives from . . .
Assets = Liabilities + Stockholders Equity
The changes in cash can be determinedby analyzing the noncash accounts on
the balance sheet.
Analyzing Noncash Accounts
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Lets look at theDirect Methodfor preparing
the Cash Flowsfrom Operating
Activitiessection.
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Can be computed two ways:
Obtained from cash receipts journal.Obtained from accrual sales information.
Exh.
12.12
Cash received
from customers= Sales
{- Increase in A/R
+ Decrease in A/R
Direct MethodCash Received from Customers
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Step 1
Step 2
Exh.
12.13
Purchases = COGS {+ Increase in inventory- Decrease in inventory
Cash paid for
merchandise= Purchases { + Decrease in A/P
- Increase in A/P
Direct MethodCash Paid for Merchandise
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Exh.
12.14
The cash paid for wages and other operatingexpenses is affected by
(1) whether the expense was prepaid, and
(2) whether the expense was accrued.
{ {Cash paid for
wages and
other operating
expenses
=
Wages
and other
operating
expenses
+ Increase in
prepaid expenses
- Decrease in
prepaid expenses
+ Decrease in
accrued liabilities
-Increase in
accrued liabilities
Direct MethodWages and Operating Expenses
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Interest
Taxes
Exh.
12.15
Cash paid
for interest =
Interest
Expense
+ Decrease in
interest payable
- Increase ininterest payable{
Direct MethodCash Paid for Interest and Taxes
Cash paid
for taxes=
Tax
Expense
+ Decrease in
taxes payable
- Increase in
taxes payable
{
t t
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Operating cash flowsare not involved.
They are notdisclosed in the
Statement of CashFlows using the directmethod.
rect et oDepreciation, Amortization, and
Depletion Expense
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Gains and losses do
not appear on theStatement of Cash
Flows using the
Direct Method.
Direct MethodGains and Losses
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Lets look at theIndirect Methodfor preparing
the Cash Flowsfrom Operating
Activitiessection.
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97.5% of all companies use the indirect method.
NetIncome
Cash Flows
fromOperatingActivities
Changes in current assetsand current liabilities.
+ Losses and
- Gains
+ Noncash
expenses such asdepreciation and
amortization.
Indirect Method of ReportingOperating Cash Flows
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Use this table when adjusting Net Incometo Operating Cash Flows.
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Indirect Method of ReportingOperating Cash Flows
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East, Inc. reports $125,000 net income forthe year ended December 31, 2002.
Accounts Receivable increased by $7,500
during the year and Accounts Payableincreased by $10,000.
During 2002, East reported $12,500 of
Depreciation Expense.
What is East, Inc.s Operating
Cash Flow for 2002?
Indirect MethodOperating Activities Example
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Indirect MethodOperating Activities Example
Net income 125,000$
For the indirect
method, start withnet income.
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Indirect MethodOperating Activities Example
Net income 125,000$
Add: Depreciation expense 12,500
Add noncash expensessuch as depreciation,
depletion, amortization,or bad debt expense.
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Indirect MethodOperating Activities Example
Net income 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accounts receivable (7,500)
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
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Indirect MethodOperating Activities Example
Net income 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accounts receivable (7,500)
Add: Increase in accounts payable 10,000
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
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Indirect MethodOperating Activities Example
If we used the Direct Method, we would get the same$140,000 for Cash Provided by Operating Activities.
Net income 125,000$
Add: Depreciation expense 12,500
Deduct: Increase in accounts receivable (7,500)
Add: Increase in accounts payable 10,000
Cash provided by operating activities 140,000$
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End of Chapter 12
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