ACG 2071Module 2: Statement of Cash FlowsPurpose of the Statement of Cash Flows- Reports a firm’s major cash inflows and outflows for a period.- Provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet financial obligations, and pay dividends.- One of the basic financial statements.Importance of Cash Flows- We look more favorably at a company that is financing its expenditures with cash from operations than one that does it by selling its assets- Whether company has enough cash to pays its existing debts as they mature.Reporting Cash FlowsThree types of activities:Cash Flows from Operating ActivitiesInclude those transactions and events that determine net income.- Cash inflows includeo Cash from saleso Cash from credit collectionso Cash from interest income- Cash outflows includeo Cash to pay billso Cash to pay for merchandiseo Cash to pay taxesCash Flows from Investing ActivitiesGenerally include those transactions and events that affect long-term assets.- Purchase and sale of short-term investments - Lending and collecting money for notes receivable- Cash inflowso From selling securitieso From selling noteso From collecting principal on loansCreated by: Prof M. MariFall, 2007Page 1 of 10ACG 2071Module 2: Statement of Cash Flowso From selling assets- Cash outflowso To make loans to otherso To purchase securitieso To purchase assets Cash Flows from Financing ActivitiesInclude those transactions and events that affect long-term liabilities and equity- Obtaining cash from issuing debts and repaying the amounts borrowed- Receiving cash from or distributing cash to owners- Cash inflowso Received monies from loans issuedo Received monies from stock soldo Received monies from bonds issued- Cash outflowso Paid on principal of loanso Purchased treasury stocko Redeemed bondsNoncash Investing and FinancingWhen important investing and financing activities do not affect cash receipts or payments, they are still disclosed.- Exchange of stocks for bondsThe sum of the three sections should equal the change in cash from the prior year to the current year.Format of the Statement of Cash FlowsCompany NameCreated by: Prof M. MariFall, 2007Page 2 of 10ACG 2071Module 2: Statement of Cash FlowsStatement of Cash FlowsFor period endedCash flows from operating activities:Cash inflows -Cash outflowsNet cash provided by operating activities $$$$Cash flows from investing activities:Cash inflows -Cash outflowsNet cash provided by operating activities $$$$Cash flows from financing activities:Cash inflows -Cash outflowsNet cash provided by operating activities $$$$Net increase (decrease) in cash $$$Cash balance at beg of period $$$Cash balance at end of period $$$Two methods of Preparing the Statement- Direct Method – requires an analysis of the cash account- Indirect Method – requires analysis of the financial statementsIndirect Method:- Stepso Find the differences in the Balance Sheet account balances for lastyear and this yearJONES COMPANYCOMPARATIVE BALANCE SHEETFor period ended December 31, 2005 and 2006Created by: Prof M. MariFall, 2007Page 3 of 10ACG 2071Module 2: Statement of Cash Flows2006 2005 DIFFERENCECASH $140,350 $95,900 $44,450TRADE RECEIVABLES $95,300 $102,300 -$7,000INVENTORIES $165,200 $157,900 $7,300PREPAID EXP $6,240 $5,860 $380INVESTMENTS $35,700 $84,700 -$49,000LAND $75,000 $90,000 -$15,000BUILDING $375,000 $260,000 $115,000ACCUM DEP -$71,300 -$58,300 -$13,000MACHINERY $428,300 $428,300 $0ACCUM DEP -$148,500 -$138,000 -$10,500PATENTS $58,000 $65,000 -$7,000 TOTAL $1,159,290 $1,093,660 $65,630ACCOUNTS PAY $43,500 $46,700 -$3,200ACCRUED EXP $14,000 $12,500 $1,500INCOME TAX PAY $7,900 $8,400 -$500DIV PAYABLE $14,000 $10,000 $4,000MORTGAGE $40,000 $0 $40,000BOND $150,000 $250,000 -$100,000COMMON STOCK $450,000 $375,000 $75,000PAID IN CAPITAL $66,250 $41,250 $25,000RETAINED EARNINGS $373,640 $349,810 $23,830$1,159,290 $1,093,660 $65,630o Analyze the income statementJONES COINCOME STATEMENTFor period ended December 31, 2006Created by: Prof M. MariFall, 2007Page 4 of 10ACG 2071Module 2: Statement of Cash FlowsSALES $1,180,000COST OF MERCHANDISE $790,000GROSS PROFIT $390,000OPERATING EXPENSES DEPRECIATION $23,500 does not reduce cash flows PATENT AMORTIZATION $7,000 does not reduce cash flows OTHER OPERATING $196,000 TOTAL $223,500INCOME FROM OPERATIONS $163,500OTHER INCOME GAIN ON SALE OF INVESTMENTS $11,000not part of operating activitiesbut included in net incomeOTHER EXPENSES INTEREST EXPENSE $26,000 -$15,000INCOME BEFORE TAXES $148,500INCOME TAX $50,000NET INCOME $98,500cash flows from operations but needs to be adjustedo Analyze the General Ledger accountsOTHER SUPPLEMENTAL DATALand costing $15,000 was sold for $15,000A mortgage note was issued for $40,000Building costing $115,000 constructed2,500 shares of common stock were issued at 40 in exchange for bonds payableCash dividends declared were $74,670Begin with operating section by starting with net income- Add any items that are included in net income that are not part of operations.o Such as gains or losses on sale of investments, depreciation, and amortization.- Follow by changes in current assets and current liabilitieso Decreases in current assets increases cash flows since assets are used instead of purchasing new onesCreated by: Prof M. MariFall, 2007Page 5 of 10ACG 2071Module 2: Statement of Cash Flowso Increases in current liabilities increase cash flows since we incur debt instead of payingo Increases in current assets decrease cash flows since monies are used to buy assetso Decreases in current liabilities decrease cash flows since monies are used to pay billso Current assets Accounts receivable Merchandise inventory Prepaid expenseso Current liabilities Accounts payable Accrued expenses Salaries payable Income taxes payableJones CompanyStatement of Cash FlowsFor period ended December 31, 2006Net cash flows from operations:Net income from operations $98,500.00ADD: Depreciation $23,500.00Patent amortization $7,000.00Decrease in trade receivables $7,000.00Increase in accrued exp $1,500.00$39,000.00DEDUCT:Increase in inventories $7,300.00Increase in prepaid exp $380.00Decrease in accounts pay $3,200.00Decrease in income tax $500.00Gain on sale of investments $11,000.00-$22,380.00Net cash flows from operations $115,120.00Note that the majority of the information came from the balance sheet or the income