Positive Cashflow? Liquidity, dividends? Need financing? Invested money, got financing? Purpose of the Statement of Cash Flows Information about the cash receipts and cash payments of during the accounting period.
+ _ Operating Activities • Inflows from: • Interest and dividends received. • Sales to customers. Cash Flows from Operating Activities • Outflowsto: • Suppliers of merchandise and services. • Employees. • Lenders for interest. • Governments for taxes.
Inflows from: Selling investments and plant assets. Collecting of principal on loans. + _ Investing Activities Cash Flows from Investing Activities • Outflows to: • Purchase of investments and plant assets. • Make loans (giving loans to somebody).
Inflows from: Short-term and long-term borrowing. Owners (for example, from issuing stock). + _ Financing Activities Cash Flows from Financing Activities • Outflows to: • Make payments on borrowed funds. • Owners for dividends.
Let’s look at the indirect methodthat is used by over 97% of all companies.
Indirect Method – Cash Flows from Operating Activities Changes in current assets and current liabilities as shown on the following table. Cash Flows from Operating Activities Net Income + Losses and - Gains + Noncash expenses such as depreciation
Indirect Method Use this table when adjusting Net Income to Operating Cash Flows.
Joyce, Inc. has prepared the Balance Sheet as of March 31, 2013, and March 31, 2014. The Income Statement for the year ended 3/31/14 has also been prepared. Joyce needs help preparing the Statement of Cash Flows using the indirect method. Indirect Method
Indirect Method The $8,000 gain was the result of selling land costing $32,000 for $40,000 cash during the period.
Indirect Method Joyce issued $50,000 of common stock to settle the $50,000 note payable.
Indirect Method With the indirect method, always start with the net income or net loss for the period.
Indirect Method Accounts receivable decreased. 3/31/143/31/13 $23,000 - $40,000 = $(17,000)
Indirect Method Accounts payable increased. 3/31/143/31/13 $38,000 - $27,000 = $11,000
Indirect Method Inventory increased. 3/31/143/31/13 $350,000 - $300,000 = $50,000
Indirect Method Salaries payable decreased. 3/31/143/31/13 $ 9,000 - $14,000 = $(5,000)
Indirect Method Add back non-cash expenses.
Indirect Method Subtract gains.
Indirect Method The operating cash flows amount comes from the schedule just prepared.
Indirect Method Land originally costing $32,000 was sold for $40,000.
Indirect Method Dividends of $20,000 were paid to owners during the year.
Indirect Method Compute the net change in cash for the period.
Indirect Method Complete the Statement of Cash Flows by reconciling beginning cash to ending cash.
Indirect Method Note that the ending cash amount ties back to Joyce’s Balance Sheet at 3/31/14.
Indirect Method In addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity.
Managing Cash Flows Cash Budgets are used by management to plan and forecast future cash flows.
Using a Spreadsheet The ending cash balance of one month becomes the beginning cash balance of the next month.
Using a Spreadsheet Financing is needed in June because the company must maintain a minimum cash balance of $10,000.