Csah Flow Statement

Cash Flow Statement : 

1-36 Cash Flow Statement based on cash accounting amount of net income in a period is usually different than the amount of increase in cash in the same period reports the effects of the activities – investing, financing, operations –of an entity on its cash flow and ties the three activities of a business together cash includes cash and cash equivalents Cash equivalents: treasury bills maturing in 90 days or less; investment funds; foreign currency on hand; checking account and free savings account

Cash Flow Statement : 

2-36 Cash Flow Statement explains the reasons for a change in cash. classifies the reasons for the change as an operating, investing or financing activity. reconciles net income with cash flow from operations. firms could prepare the cash flow statement direcRs.y from the cash account. most, however, find it more efficient to prepare the cash flow statement from the balance sheet and income statement

Activities : 

3-36 Activities 1. Operations -- cash flows related to selling goods and services; that is, the principle business of the firm. 2. Investing -- cash flows related to the acquisition or sale of non-current assets. 3. Financing -- long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

External Uses of CFS : 

4-36 External Uses of CFS To assess the ability of a firm to manage cash flows To assess the ability of a firm to generate cash through its operations To assess the company’s ability to meet its obligations and its dividend policy To provide information about the effectiveness of the firm to convert its revenues to cash To provide information to estimate or anticipate the company’s need for additional financing

Internal Uses of CFS : 

5-36 Internal Uses of CFS Along side with cash budget CFS is used: To assess liquidity Determine if short-term financing is necessary To determine dividend policy Decide to distribute; or increase or decrease To evaluate the investment and financing decisions

Cash flow from operating activities : 

6-36 Cash flow from operating activities Examples (IAS No.7): cash received from customers through sale of goods or services performed; cash received from non-operating activities such as dividends from investments, interest revenue, commissions, and fees; cash payments to suppliers or employees; cash payments for taxes and other expenses; In effect, the income statement is changed from accrual basis to cash basis

Investing Activities : 

7-36 Investing Activities Examples of investing activities include (IAS No.7): cash payments to acquire property, plant, and equipment (PPE), other tangible or intangible assets, and other long-term assets; cash received from sales of assets that are not held for the regular trading purposes such as sale of building; marketable securities such as trading and available for sale securities, and investments; loans extended to other companies; and collection of such loans; cash received from sale of, and paid for purchases of derivative instruments;

Financing Activities : 

8-36 Financing Activities Examples of financing activities are (IAS No.7): cash received from issuing share capital; cash payments to shareholders to redeem existing shares- treasury stock; cash proceeds from issuing bonds, loans, notes, mortgages and other short or long-term borrowings; cash repayment of loans and other borrowings; and cash payments to shareholders as dividends.

Components of the Cash Flow Statement : 

9-36 Components of the Cash Flow Statement Cash received from sale of goods and services Cash paid for operating goods and services cash flow from operations Operations - = Cash received from sales of investments and longterm assets Cash paid to purchase long-term investments cash flow from investing Investing - = Cash received from issue of debt or capital stock Cash paid for dividends and to repay debt or to buy treasury stock cash flow from financing Financing - = Net change in cash for the period = + or - + or - cash inflows cash outflows

Classification of Cash in-flows and outflows : 

10-36 Classification of Cash in-flows and outflows From sales of goods and services to customers From receipt of interest or dividends From sale of trading securities Operating Activities To pay wages To purchase inventory To pay expenses To pay interest To pay taxes To purchase trading sec. From sale of PPE and other longterm assets From sale of short or longterm securities From collection of loans Investing Activities To purchase PPE and other longterm assets To purchase longterm securities To make loans From sale of common or preferred stock From issuance of short or long term debt Financing Activities To acquire preferred or common stock To repay debt To pay dividends

Format of the Cash Flow Statement : 

11-36 Format of the Cash Flow Statement Name of the Company Cash Flow Statement For the period … Cash from operating activities A Cash from investing activities B Cash from financing activities C Net Change in Cash D = (A+B+C) increase or (decrease) + Beginning Cash balance CB, from the beginning balance sheet Ending Cash balance =CB + D should equal to ending cash balance in the ending balance sheet Non-cash Investing and Financing Activities

Determination of Cash Flows From Operating Activities : 

12-36 Determination of Cash Flows From Operating Activities Direct Method Income Statement items are converted to cash flows individually Indirect Method Net income or loss is adjusted for accruals such as accounts receivable and payable, and for non-cash expenses such as depreciation reconciliation of the accrual based and cash based accounting

Comparison of Methods : 

13-36 Comparison of Methods Direct method of presentation calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers. The indirect method calculates cash flow from operations by adjusting net income for non-cash revenues and expenses. Most firms present their cash flows using the indirect method. Only operating activities section is different between the methods, investing and financing sections are the same.

Relationship of Accrual and Cash Basis of Accounting : 

14-36 Relationship of Accrual and Cash Basis of Accounting

Illustration of the Preparation of the Cash Flow Statement : 

15-36 Illustration of the Preparation of the Cash Flow Statement EICC A.Ş Income Statement For the year 2007

EICC A.S. Comparative Balance Sheets- In Rs. : 

16-36 EICC A.S. Comparative Balance Sheets- In Rs.

Illustration-Cash flow statement-EICC : 

17-36 Illustration-Cash flow statement-EICC Additional Information: Company sold equipment with original cost of Rs. 1.500 and book value of Rs. 1.370 for Rs. 1.320. Sold trading securities of Rs. 1.200 with a gain of Rs. 300, and purchased some. Leased equipment in 2007 for Rs. 1.000 as a capital lease. Purchased building and equipment. Declared and paid dividends. Common stock of Rs. 600 par value was issued for Rs. 700 cash. Accounts payable pertain to merchandise suppliers, and accounts receivable to customers.

Steps in Direct Method-CFS operating activities : 

18-36 Steps in Direct Method-CFS operating activities compute collections from customers from other revenues compute payments for operating expenses compute payments for non-operating expenses

Slide 19: 

19-36 Sales Rs. 8.750 Deduct: increase in accounts receivable (1.300) Add: increase in advances from customers 200 Cash collections from customers Rs. 7.650 Cash Collections from Customers

Cash Payments to Suppliers : 

20-36 Cash Payments to Suppliers Cost of Goods Sold Rs. 4.200 Add: increase in inventories 900 Purchases of the period Rs. 5.100 Purchases of the period Rs. 5.100 Deduct: increase in accounts payable 500 Cash payments to suppliers Rs. 4.600

Cash Payments for Operating Expenses : 

21-36 Cash Payments for Operating Expenses Salaries and Wages Expense Rs. 2.000 Deduct: Increase in Salaries and Wages Payable 300 Salaries and Wages Paid Rs. 1.700 Insurance Expense Rs. 900 Deduct: Decrease in Prepaid Insurance 300 Cash paid for Insurance Rs. 600

Cash Flows From Operating Activities : 

22-36 Cash Flows From Operating Activities Cash flows from operating activities: Cash Receipts: Collections from customers Rs. 7.650 Dividend and interest revenue 150 7.800 Cash payments: To suppliers Rs. 4.600 For operating expenses Salaries and wages paid Rs. 1.700 Insurance payments 600 2.300 For non-operating expenses 800 Interest expense 350 For income tax 450 (7.700) Net Cash Provided by Operating Activities Rs. 100

Cash Flows from Investing Activities : 

23-36 Cash Flows from Investing Activities

Cash Flow from Investing Activities : 

24-36 Cash Flow from Investing Activities Cash flow from investing activities: Purchase of building Rs. (300) Sale of equipment 1.320 Purchase of equipment (1.520) Sale of trading securities 1.500 Purchase of trading securities (300) Net Cash flow from investing activities Rs. 700

Cash Flow from Financing Activities : 

25-36 Cash Flow from Financing Activities

Financing Activities : 

26-36 Financing Activities

EICC A.Ş,Cash Flow Statement, For the year 2007- Direct Method : 

27-36 EICC A.Ş,Cash Flow Statement, For the year 2007- Direct Method

Indirect Method : 

28-36 Indirect Method Investigation of Changes in Specific Accounts

Non-cash Expenses : 

29-36 Non-cash Expenses Non-cash expenses, such as depreciation expense, are added back These are not truly sources of cash even though they are associated with cash inflows; rather, this is a reversal of the accrual process that required the expenses to be recognized without regard for the cash flow

Indirect Method- operating activities : 

30-36 Indirect Method- operating activities Net income + noncash expenses: depreciation, amortization, uncollectible account expense,etc + loss on sale of asset + increases in current liabilities + decreases in current assets - gain on sale of asset - decrease in current liabilities - increase in current assets

Indirect Method-Operating : 

31-36 Indirect Method-Operating

Cash Flow from Operating Activities –Indirect Method : 

32-36 Cash Flow from Operating Activities –Indirect Method EICC A.Ş For the year 2007

Uses of Cash Flow Statement Information : 

33-36 Uses of Cash Flow Statement Information pattern of cash flow statements would provide valuable information about the growth stage, and possible strategies of companies predicting financial distress ratios

Cash Flow Statement Patterns : 

34-36 Cash Flow Statement Patterns

Slide 35: 

35-36