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Cash Flow

1) Key Things To Know 5) Medium Test
2) Self Test 6) Hard Test
3) Practice as You Learn 7) Quick Study Sheet
4) Easy Test  



Key Things to Know

Cash Flow Statement:      Shows 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
                                                  -  how much cash was spent investing in assets
                                                  -  how much cash was received from borrowing

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)
                                                        Show Non-cash revenues and expenses separately
                                                        Changes in current assets and current liabilities
            Investing Activities:     Long term assets  - investments,  p/p/e, intangibles
                        - purchases and sales of long-term assets


            Financing Activities:    Long term liabilities and Owner’s equity
                        - borrow and repay debt
                        - pay dividends to shareholders
                        - issue stock
                        - repurchase treasury stock


                  ****  For Investing and Financing Activities only the cash received or paid
                               from the transaction is reported on the cash flow statement


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
            + -  Non cash revenues (-) and expenses(+) gains(-) and losses (+)

            + -  changes in current assets and liabilities
            =    Cash flow from operating activities


Preparing the Cash Flow Statement using the Indirect Method:

            Net Income

    + -    Adjustments for Noncash Items  - add expenses and losses
                                                                     - subtract revenues and gains

   + -     Change in Current Assets and Liabilities

                Assets:   increase from prior year – subtract  
                               decrease from prior year-  add                        **assets and liabilities
                                                                                                                   are opposite
                Liabilities:  increase from prior year  – add
                                   decrease from prior year – subtract
      =    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:
+ Beginning matching payable
-  Ending matching payable
= Cash Paid for expense

-  Beginning matching asset
+ ending matching asset
= Cash paid for expense


Always:   + Beginning – Ending, except when matching an asset with an expense


Noncash Activities:           Trade an asset for another asset or liability
                                             A transaction where no cash is involved
                                             This is not reported in the cash flow statement and is                                              listed at the bottom of the statement                                          







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