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Finance for Non-Financial Managers Fifth Edition

Finance for Non-Financial Managers Fifth Edition. Slides prepared by Pierre G. Bergeron University of Ottawa. The Cash Flow Statement. 1. Explain the importance of managing cash flow. 2. Analyze cash flow by comparing two consecutive balance sheets.

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Finance for Non-Financial Managers Fifth Edition

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  1. Finance for Non-Financial ManagersFifth Edition Slides prepared by Pierre G. Bergeron University of Ottawa

  2. The Cash Flow Statement 1. Explain the importance of managing cash flow. 2. Analyze cash flow by comparing two consecutive balance sheets. 3. Explain the basic structure of the cash flow statement 4. Describe the structure of the cash flow statement for not-for-profit organizations. Chapter Objectives Chapter Reference Chapter 3: The Cash Flow Statement

  3. $75,000 or 75% Managers Investing activities $100,000 Investors $25,000 or 25% 1. Importance of Managing Cash Flow Retained earnings Internal inflow Amortization Working capital Operating activities Outflow Financing activities Debt Leasing External inflow Equity Contributions

  4. 2005 $ 20,000 $130,000 200,000 15,000 10,000 1,000 25,000 2,000 ---- ---- $ 17,000 10,000 ---- ---- 10,000 ---- 1,000 3,000 ---- ---- 1,000 $ 31,000 $ 31,000 2. Cash Flow Analysis Inflow Outflow 2006 Balance Sheet Mortgage House Term deposits Automobile Visa account RRSP Savings account Total $150,000 217,000 5,000 20,000 2,000 28,000 3,000

  5. Cash Flow Analysis (Balance Sheets of John Badboy) 2006 2005 Inflow Outflow Assets Cash in bank Term deposits Furniture Car House Trailer Total assets ----- ----- $ 2,000 14,000 10,000 10,000 $ 1,000 2,000 ----- ----- ----- ----- $ 1,000 ------ 14,000 30,000 178,000 10,000 $233,000 $ 2,000 2,000 12,000 16,000 168,000 ------ $200,000 Liabilities MasterCard The Bay Sears Brother-in-law Bank loan Trust company Total liabilities Equity Total liabilities & equity $ 2,000 1,500 2,000 1,000 1,500 20,000 5,000 $ 36,000 ----- ----- ----- ----- ----- ----- ----- $ 36,000 $ 3,000 2,000 3,000 3,000 4,000 120,000 135,000 98,000 $233,000 $ 1,000 500 1,000 2,000 2,500 100,000 107,000 93,000 $200,000

  6. Comparative Balance Sheets (Futurama Ltd.) 2006 2005 Inflow Outflow Assets Current assets Cash Prepaid expenses Accounts receivable Inventory Total current assets Capital assets (at cost) Accumulated amortization Capital assets (net) Total assets Liabilities Current liabilities Accounts payable Notes payable Accrued expenses Current income taxes payable Total current liabilities Long-term debts Common shares Retained earnings Owners’ equity Total liabilities & equity ----- ----- ----- ----- ----- 40,000 $ 20,000 15,000 2,000 10,000 200,000 15,000 50,000 $ 352,000 $ 22,000 60,000 300,000 218,000 600,000 1,340,000 140,000 1,200,000 $1,800,000 $ 195,000 150,000 20,000 80,000 445,000 800,000 300,000 255,000 555,000 $1,800,000 $ 18,000 55,000 280,000 185,000 538,000 1,050,000 100,000 950,000 $1,488,000 $ 175,000 135,000 18,000 70,000 398,000 600,000 285,000 205,000 490,000 $1,488,000 $ 4,000 5,000 20,000 33,000 290,000 ------ ----- ----- ----- ----- ----- ----- ----- $ 352,000 $ 47,500 $ 399,500 $ 97,500 $ 399,500

  7. Futurama Ltd. Income Statement For the year ended December 31, 2006 Sales revenue $2,500,000 Cost of sales 1,900,000 Gross margin 600,000 Operating expenses Salaries $300,000 Rent 50,000 Amortization 40,000 Other expenses 15,000 Total operating expenses 405,000 Income before taxes 195,000 Income taxes 97,500 Net income $ 97,500 Statement of Retained Earnings For the year ended December 31, 2006 Retained earnings: December 31, 2005 $ 205,000 Net earnings for the year $ 97,500 Less: Dividends 47,500 50,000 Retained earnings: December 31, 2006 $ 255,000

  8. Rules to Identify Inflow and Outflow of Cash Inflow of cash Outflow of cash Asset accounts Liability accounts Equity accounts

  9. 2. Financing Activities Payment of dividends $(47,500) Long-term debts 200,000 Common shares 15,000 Total 3. Investing Activities Purchase of capital assets 290,000 Increase in cash $ 4,000 Cash-beginning of year 18,000 Cash-end of year 22,000 3. Cash Flow Statement Futurama Ltd. Cash Flow Statement For the Year Ended December 31, 2006 1. Operating Activities Net income for the year $97,500 Amortization 40,000 Net change in non-cash working capital accounts (11,000) Total IS IS or BS BS + $126,500 SRE BS BS + $167,500 - $290,000 BS BS - $4,000

  10. 4. Cash Flow Statement for NFP Not-For-Profit Organization Cash Flow Statement For the Year Ended December 31, 2006 1. Operating Activities Excess of revenues over expenses Amortization of capital assets Net change in working capital accounts 2. Financing and Investing Activities Purchase of investments Purchase of capital assets Mortgage Contributions of cash endowments 3. Net (decrease) Increase in Cash and Term Deposits Cash and term deposits, beginning of year Cash and term deposits, end of year

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