Cash Flow Statement

Key Things To Know

Cash Flow Statement:

Reports 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
cash was paid/received related to investing in assets
cash was received/repaid related to debt

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)
Reports Non-cash revenues and expenses separately
Changes in current assets and current liabilities

Investing Activities:
Relates to long-term assets (investments, PPE, intangibles)
Purchases and sales of long-term assets

Financing Activities:
Relates to long-term liabilities and owner’s equity

Borrow and repay debt
Pay dividends to shareholders
Issue stock
Repurchase treasury stock

Investing and Financing Activities report only the cash received or paid

Indirect or Direct Methods:
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
+ – Adjustments for Noncash Items
add expenses and losses
subtract revenues and gains

+ – Change in Current Assets and Liabilities

Current Assets:
subtract increases from prior year
add decrease from prior year

Current Liabilities:
add increases from prior year
subtract decreases from prior year
___________________________
= 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