Chapter 3 Cash Flow Statement

MANAGEMENT ACCOUNTING (BMS-III)

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MEANING
A Cash flow statement of statement of changes in cash position between the beginning and end of the period. A cash flow statement shows the various sources of cash inflow and uses of cash outflow during a period thus explaining the changes in cash position of the business

PURPOSES OF THE STATEMENT OF CASH FLOWS

1. Predict future cash flows 2. Evaluate management decisions 3. Determine the ability to pay dividends to stockholders and payments to creditors 4. Show the relationship of net income to the businesss cash flows

WHAT IS CASH?
Cash

on hand Cash in the bank Cash equivalents - highly liquid, shortterm investments that can be converted into cash with little delay
Money-market

investments U.S. Government Treasury bills

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OPERATING, INVESTING, AND FINANCING ACTIVITIES

Operating activities create revenues, expenses, gains, and losses. Investing activities increase and decrease long-term assets. Financing activities obtain cash from investors and creditors.

DIFFERENCES BETWEEN THE CASH FLOW & FUND FLOW STATEMENT

CASH FLOW STATEMENT FUNDFLOW STATEMENT
1.

1.

2.

3. 4.

5.

CFS is based on cash which is one element of the working capital A CFS records the cash inflows & Cash Outflows. CFS is mandatory in India CFS has to be presented as per AS-3 a statutory format as given by ICAI. CFS contains opening and closing balances of cash and cash equivalents.

2.

3.

4.

5.

A FFS is based on the concept of working capital A FFS indicates the sources from which funds have been generated and the uses to which they are put. FFS is not mandatory in India There is no mandatory format of FFS in India FFS does not contain any opening and closing balance

DIFFERENCES BETWEEN THE CASH FLOW & FUND FLOW STATEMENT

CASH FLOW STATEMENT FUNDFLOW STATEMENT
6.

6.

7.

8.

9.

10.

CFS is used for estimating the firms short-term liquidity position CFS considers only the actual movement of cash & cash equivalents In CFS all working capital items are considered under Cash from Operations In CFS Cash from operations or cash lost due to operations are calculated A CFS is used as a tool of financial analysis which is used by the management of short term financial analysis and cash planning purpose

7.

8.

9.

10.

A FFS is used for long term planning A FFS considers the movement of funds on accrual basis In FFS all working capital items are taken to the schedule of changes in working capital statement. In FFS funds from operations or Funds lost due to operations are calculated. A FFS is useful in planning intermediate and long term Financing purposes.

TWO FORMATS FOR OPERATING ACTIVITIES

Direct

method: Cash receipts from operating

revenues and cash payments for operating express are calculated and shown in the cash flow statement The difference between the total csh receipts and total cash payments resulting from operating activities. For eq,
i. ii.

iii.
iv. v.

vi.

Cash sales of goods and services Cash recived from debtors Cash payments for purchase of inventories Cash payments to creditors Cash payment for wages, salaries and other operating expenses Cash payments of income tax,etc.

OPERATING ACTIVITIES INDIRECT METHOD

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation/amortization expense + Loss on sale of long-term assets Investing Activities - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities Net cash provided by operating activities

DEPRECIATION, DEPLETION, AMORTIZATION

Sales CGS Gross Profit Depreciation Net Income $ $ 10,000 3500 6500 4000 2,500

Depreciation, Depletion and Amortization are not Cash transactions, thus Are ADDED back to Net Income.
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GAIN OR LOSS FROM LONG-TERM ASSETS

Changes to Long-term Assets

Purchase
Effect

or Sale

Cash (Whats the journal entry?)

They appear in the Investing Section But... When Sold Are Reported on the Income Statement

Thus,
Add

we need to reverse their effect

back the Loss Subtract out the Gain

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LONG-TERM ASSETS
Sales CGS Gross Profit Loss on Sale of Equipment Depreciation Net Income $ $ 10,000 3,500 6,500 575 4,000 1,925

Entry for Sale of Equipment: Cash A/D - Depreication Loss on Sale Equipment Debit Credit 4,500 1,500 575 6,575

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OPERATING ACTIVITIES FROM INDIRECT METHOD

Changes in current assets and current liability accounts

Increase in another current asset decreases cash Purchase of Inventory for cash Decrease in another current asset increases cash Collections of Accounts Receivable Decrease in a current liability decreases cash Payment of Accounts Payable Increase in a current liability increases cash Non-Cash Expense (Accrued Expense)

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INCREASE IN CURRENT ASSETS DECREASES CASH

Sales CGS Gross Profit Loss on Sale of Equipment Depreciation Net Income $ $ 10,000 3,500 6,500 575 4,000 1,925

So $2,500 in Sales are NOT cash Any increase in Current Assets either uses cash
Increase Inventory Decrease Cash

Sales Journal Entries: Cash Sales Accounts Receivable Sales Debit Credit 7,500 7,500 2,500 2500

Or is increased by a non-cash transaction

Accounts Receivable
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DECREASE IN CURRENT ASSETS INCREASES CASH

If A/R decreases that means we collected Cash

That

cash needs to be added back to Net Income

If Inventory, Supplies or other current assets decrease that means we debited an expense but did not credit Cash
So

we add back those decreases to Net Income

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DECREASE IN CURRENT LIABILITIES DECREASES CASH

How is Accounts Payable decreased?

Debit

Accounts Payable $1,000 Credit Cash $1,000

Same for all other Payables

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INCREASE IN CURRENT LIABILITIES INCREASES CASH

Sales CGS Gross Profit Salary Expense Loss on Sale of Equipment Depreciation Net Income $ $ 10,000 3,500 6,500 1,000 575 4,000 925

When Payables Increase

They

Salary Expense Journal Entries: Debit Salary Expense Cash Salary Expense Salary Payable 875 875 125 125 Credit

create an Expense But the expense is a non-cash expense

So, Add back to Net Income

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THE INDIRECT METHOD: OPERATING ACTIVITIES

Positive Items

Net income Depreciation/amortization Loss on sale of long-term assets Decreases in current assets other than cash Increases in current liabilities Negative Items Net loss Gain on sale of long-term assets Increases in current assets other than cash Decreases in current liabilities
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THE INDIRECT METHOD: INVESTING ACTIVITIES

Positive Items Sale of plant assets Sale of investments that are not cash equivalents Collections of loans receivable

Negative Items Acquisition of plant assets Purchase of investments that are not cash equivalents Making loans to others
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THE INDIRECT METHOD: FINANCING ACTIVITIES

Positive Items Issuing stock Selling treasury stock Borrowing money

Negative Items Payment of dividends Purchase of treasury stock Payment of principal amounts of debts
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Cash Flow Statement An Example

ACG 2021 FINANCIAL ACCOUNTING

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COMPARATIVE BALANCE SHEETS

Anchor Corporation December 31
(In thousands) Assets Current: Cash Accounts receivable Interest receivable Inventory Prepaid expenses Long-term receivable Plant assets, net Total 20x2
$ 22 93 3 135 8 11 453 $725

20x1 Inc/dec)
$ 42 80 1 138 7 219 $487 $ (20) 13 2 (3) 1 11 234 $238
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COMPARATIVE BALANCE SHEETS

Anchor Corporation December 31
(In thousands) Liabilities Current: Accounts payable Salary payable Accrued liabilities Long-term debt Stockholders equity Common stock Retained earnings Total 20x2
$ 91 34 1 160

20x1 Inc/dec)
$ 57 $ 34 6 (2) 3 (2) 77 83

359 110 $725

258 101 86 24 $487 $238

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INCOME STATEMENT
Anchor Corporation Year Ended December 31, 20x2 (In thousands) Revenues and gains: Sales revenue $284 Interest revenue 12 Dividend revenue 9 Gain on sale of plant assets 8 Total revenues and gains $313
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INCOME STATEMENT
Anchor Corporation Year Ended December 31, 20x2 (In thousands) Expenses: Cost of goods sold $150 Salary and wage expense 56 Depreciation expense 18 Other operating expense 17 Interest expense 16 Income tax expense 15 Total expenses $272
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INCOME STATEMENT
Anchor Corporation Year Ended December 31, 20x2 (In thousands) Total revenues and gains $313 Total expenses 272 Net income $ 41

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STATEMENT OF CASH FLOWS: OPERATING ACTIVITIES

Depreciation does not affect Sales of long-term assets are Statement of Cash Flows (Indirect Method) cash, but it decreases net investing Year Ended December 31, 20x2 (In remove gains from income add it back in. Activities thousands) Cash flows from operatingnet income. activities:

Net Income Adjustments to reconcile net income to net cash provided by operating activities: A Depreciation B Gain on sale of plant

$41

18 (8)

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STATEMENT OF CASH FLOWS: OPERATING ACTIVITIES

Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

C Increase in accounts receivable (13) C Increase in interest receivable (2) C Decrease in inventory 3 C Increase in prepaid expenses (1) C Increase in accounts payable 34 C Decrease is salary payable (2) C Decrease in accrued liabilities (2) 27 Net cash provided by operating activities $68
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CHANGES IN CURRENT ASSET AND CURRENT LIABILITY ACCOUNTS C

1. An increase in a current asset other than cash indicates a decrease in cash. 2. A decrease in a current asset other than cash indicates an increase in cash. 3. A decrease in a current liability indicates a decrease in cash. 4. An increase in a current liability indicates an increase in cash.
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STATEMENT OF CASH FLOWS: INVESTING ACTIVITIES

Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

Cash flows from investing activities: Acquisition of plant assets $(306) Loan to another company (11) Proceeds from sale of plant assets 62 Net cash used for investing activities $(255)

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STATEMENT OF CASH FLOWS: FINANCING ACTIVITIES

Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

Cash flows from financing activities: Proceeds from issuance of common stock Proceeds from issuance of long-term debt Payment of long-term debt Payment of dividends Net cash provided by financing activities

$101 94 (11) (17) $167

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STATEMENT OF CASH FLOWS

Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands) Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities Net decrease in cash Cash balance, December 31, 20x1 Cash balance, December 31, 20x2 $ 68 (255) 167 $ (20) 42 $ 22

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NONCASH INVESTING AND FINANCING ACTIVITIES

Suppose Anchor Corporation issued Common stock valued at $300,000 to acquire a warehouse. Warehouse Building Common Stock 300,000 300,000

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NONCASH INVESTING AND FINANCING ACTIVITIES

Noncash Investing and Financing Activities: Acquisition of building by issuing common stock Acquisition of land by issuing note payable Payment of long-term debt by issuing common stock Total noncash investing and financing activities

$300 70 100

$470