Cash Flow Statement.ppt
- 1. Cash Flow Statement Provides information about cash inflows and outflows Classification of cash flows: -Operating activities -Investing activities -Financing activities 1
- 2. The Statement Helps Evaluate Solvency: Ability to pay debts as they come due Liquidity: Ability to generate adequate amounts of cash for specific purpose 2
- 3. Net Income Vs. Net Cash Flow Net Income: Accrual basis accounting is followed Includes due expenses (salary unpaid), due revenues ( Earned but not received) Excludes prepaid expenses (Insurance paid in advance) and unearned revenue (received in advance) 3
- 4. Net Income Vs. Net Cash Flow Cash Flows: Cash basis accounting is followed Excludes due expenses (salary unpaid), due revenues ( Earned but not received) Includes prepaid expenses (Insurance paid in advance) and unearned revenue (received in advance) 4
- 5. Operating Activities- Cash Inflows Sales of goods or services Interest received Dividend received Other sources not relating to investment and financing activities (rent revenue, insurance settlement etc) 5
- 6. Operating Activities- Cash Outflows Purchase of goods Pay to salary or wage Interest paid (but not dividend paid) Other expenses e.g. advertising, supplies, travel, miscellaneous etc. Other items not relating to investment and financing activities (contribution to charities) 6
- 7. Investing Activities Cash Inflows: Sale of property, plant and equipment Sale of marketable securities Collection of loans Cash Outflows: Purchase of property, plant and equipment Purchase of marketable securities Making of loans 7
- 8. Financing Activities Cash Inflows: Issuing share or stock Issuing debt ( bond, note, mortgage etc) Cash Outflows: Payments of debts Repurchasing stock Paying cash dividends 8
- 9. Approaches of Operating Activities Direct Approach: Converts individual income statement items from accrual to cash basis Indirect Approach: Net income is adjusted to convert to cash basis from accrual basis 9
- 10. CA+LTA=TA CL+LTL=TL OE OA=CA & CL IA=LTA FA=LTL & OE 10
- 11. Indirect Approach: Changes in Balance Sheet Items Operating Section: Changes in Current Assets and Current Liabilities Investing Activities: Changes in Long Term/Fixed Assets Financing Activities: Changes in Long Term Liabilities and Owner’s Equity 11
- 12. Operating Activities: Indirect Approach Net Income +decrease in non-cash assets affecting income (current assets i.e. A/R, Prepaid Expense ) +increase in non-cash liabilities affecting income ( current liabilities i.e. A/P, salary payable, tax payable) + non-cash expenses :depreciation, amortization -increase in non-cash assets affecting income -decrease in non-cash liabilities affecting income =Cash flows from operating activities 12
- 13. Statement of Cash Flows ( Indirect Approach)For the year ended December 31, 2020 Cash flows from operating activities: Net Income + decrease in current assets + increase in current liabilities -Increase in current assets -decrease in current liabilities +Depreciation Cash flow from investing activities: -Purchase of plant and equipment +Proceeds from sale of property -New investment +Proceeds from sale of investment Cash flow from financing activities: +Proceeds from issuance of common stock +Proceeds from issuance of debt -Cash paid for redemption of bonds/ debenture -Dividend paid Net increase (decrease) in cash during the period Add: Beginning balance Cash at hand at the end of the period 13