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MODUL PERKULIAHAN

BAHASA
INGGRIS
AKUNTASI

Modul Standar untuk


digunakan dalam
Perkuliahan di Universitas
Mercu Buana

Fakultas Program Studi Tatap Muka Kode MK Disusun Oleh

06
Fakultas Ekonomi Akuntansi MK90026 Juwarti Hafsah, SS, M.Si.

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0 Juwarti Hafsah, SS, M.Si
Pusat Bahan Ajar dan eLearning
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Abstract Kompetensi
Cash Flow Statement Students are able to comprehend and
analyze the content ofa Cash Flow
Statement

What Is a Cash Flow Statement?

Complementing the balance sheet and income statement, the cash flow statement (CFS) – a mandatory
part of a company's financial reports since 1987 – records the amount of cash and cash
equivalents entering and leaving a company. The CFS allows investors to understand how a company's
operations are running, where its money is coming from, and how it is being spent. Here you will learn
how the CFS is structured, and how to use it as part of your analysis of a company. (Also check out
our tutorial, An Introduction To Fundamental Analysis.)

The Structure of the CFS

The cash flow statement is distinct from the income statement and balance sheet because it does not
include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore,
cash is not the same as net income, which on the income statement and balance sheet, includes cash
sales and sales made on credit. (For background reading, see Analyze Cash Flow The Easy Way.)

Cash flow is determined by looking at three components by which cash enters and leaves a company:
core operations, investing and financing,

Operations

Measuring the cash inflows and outflows caused by core business operations, the operations
component of cash flow reflects how much cash is generated from a company's products or services.
Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts
payable are reflected in cash from operations.

Cash flow is calculated by making certain adjustments to net income by adding or subtracting
differences in revenue, expenses and credit transactions (appearing on the balance sheet and income
statement) resulting from transactions that occur from one period to the next. These adjustments are
made because non-cash items are calculated into net income (income statement) and
total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items,
many items have to be re-evaluated when calculating cash flow from operations.

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Pusat Bahan Ajar dan eLearning
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For example, depreciation is not really a cash expense; it is an amount that is deducted from the total
value of an asset that has previously been accounted for. That is why it is added back into net sales for
calculating cash flow. The only time income from an asset is accounted for in CFS calculations is
when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period to the next must also
be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the
company from customers paying off their credit accounts – the amount by which AR has decreased is
then added to net sales. If accounts receivable increases from one accounting period to the next, the
amount of the increase must be deducted from net sales because, although the amounts represented in
AR are revenue, they are not cash.

An increase in inventory, on the other hand, signals that a company has spent more money to purchase
more raw materials. If the inventory was paid with cash, the increase in the value of inventory is
deducted from net sales. A decrease in inventory would be added to net sales. If inventory was
purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount
of the increase from one year to the other would be added to net sales.

The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has
been paid off, then the difference in the value owed from one year to the next has to be subtracted
from net income. If there is an amount that is still owed, then any differences will have to be added to
net earnings. (For more insight, see Operating Cash Flow: Better Than Net Income?)

Investing

Changes in equipment, assets, or investments relate to cash from investing. Usually, cash changes
from investing are a "cash out" item, because cash is used to buy new equipment, buildings, or short-
term assets such as marketable securities. However, when a company divests of an asset, the
transaction is considered "cash in" for calculating cash from investing.

Financing

Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from
financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if
a company issues a bond to the public, the company receives cash financing; however, when interest is
paid to bondholders, the company is reducing its cash.

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Pusat Bahan Ajar dan eLearning
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Analyzing an Example of a CFS
Let's take a look at this CFS sample:

From this CFS, we can see that the cash flow for FY 2017 was $1,522,000. The bulk of the positive
cash flow stems from cash earned from operations, which is a good sign for investors. It means that
core operations are generating business and that there is enough money to buy new inventory. The
purchasing of new equipment shows that the company has cash to invest in inventory for growth.
Finally, the amount of cash available to the company should ease investors' minds regarding the notes
payable, as cash is plentiful to cover that future loan expense.

Of course, not all cash flow statements look this healthy, or exhibit a positive cash flow; but a negative
cash flow should not automatically raise a red flag without further analysis. Sometimes, a negative
cash flow is the result of a company's decision to expand its business at a certain point in time, which
would be a good thing for the future. This is why analyzing changes in cash flow from one period to
the next gives the investor a better idea of how the company is performing, and whether or not a
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company may be on the brink of bankruptcy or success. (For information on cash flow accounting,
see Cash Flow On Steroids: Why Companies Cheat.)

Tying the CFS with the Balance Sheet and Income Statement

As we have already discussed, the cash flow statement is derived from the income statement and the
balance sheet. Net earnings from the income statement is the figure from which the information on the
CFS is deduced. As for the balance sheet, the net cash flow in the CFS from one year to the next
should equal the increase or decrease of cash between the two consecutive balance sheets that apply to
the period that the cash flow statement covers. (For example, if you are calculating a cash flow for the
year 2016, the balance sheets from the years 2015 and 2016 should be used.)

The Bottom Line

A company can use a cash flow statement to predict future cash flow, which helps with matters in
budgeting. For investors, the cash flow reflects a company's financial health: basically, the more cash
available for business operations, the better. However, this is not a hard and fast rule. Sometimes a
negative cash flow results from a company's growth strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what
some people consider the most important aspect of a company – how much cash it generates and,
particularly, how much of that cash stems from core operations.

The statement of cash flows is one of the financial statements issued by a business, and describes
the cash flows into and out of the organization. Its particular focus is on the types of activities that
create and use cash, which are operations, investments, and financing. Though the statement of
cash flows is generally considered less critical than the income statement and balance sheet , it can
be used to discern trends in business performance that are not readily apparent in the rest of the
financial statements. It is especially useful when there is a divergence between the amount of
profits reported and the amount of net cash flow generated by operations.

There can be significant differences between the results shown in the income statement and the
cash flows in this statement, for the following reasons:

 There are timing differences between the recordation of a transaction and when the related
cash is actually expended or received.
 Management may be using aggressive revenue recognition to report revenue for which
cash receipts are still some time in the future.

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 The business may be asset intensive, and so requires large capital investments that do not
appear in the income statement, except on a delayed basis as depreciation.

Many investors feel that the statement of cash flows is the most transparent of the financial
statements (i.e., most difficult to fudge), and so they tend to rely upon it more than the other
financial statements to discern the true performance of a business.

Cash flows in the statement are divided into the following three areas:

 Operating activities. These constitute the revenue-generating activities of a business.


Examples of operating activities are cash received and disbursed for product sales,
royalties, commissions, fines, lawsuits, supplier and lender invoices, and payroll.
 Investing activities. These constitute payments made to acquire long-term assets, as well
as cash received from their sale. Examples of investing activities are the purchase of fixed
assets and the purchase or sale of securities issued by other entities.

 Financing activities. These constitute activities that will alter the equity or borrowings of
a business. Examples are the sale of company shares, the repurchase of shares, and
dividend payments.

There are two ways in which to present the statement of cash flows, which are the direct
method and the indirect method . The direct method requires an organization to present cash flow
information that is directly associated with the items triggering cash flows, such as:

 Cash collected from customers


 Interest and dividends received

 Cash paid to employees

 Cash paid to suppliers

 Interest paid

 Income taxes paid

Few organization collect information as required for the direct method, so they instead use the
indirect method. Under the indirect approach, the statement begins with the net income or loss
reported on the company's income statement, and then makes a series of adjustments to this figure
to arrive at the amount of net cash provided by operating activities. These adjustments typically
include the following:

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 Depreciation and amortization
 Provision for losses on accounts receivable

 Gain or loss on sale of assets

 Change in receivables

 Change in inventory

 Change in payables

Similar Terms

The statement of cash flows is also known as the cash flow statement.

HOW IT WORKS (EXAMPLE):

A cash flow statement typically breaks out a company's cash sources and uses for the period into three
categories: cash flow from operating activities, cash flow from investing activities, and cash flow from
financing activities. It is important to note that cash flow is not the same as net income, which includes
transactions that did not involve actual transfers of money (depreciation is common example of a
noncash expense that is included in net income calculations but not in cash flow calculations).

Cash flow from operating activities are generally calculated according to the following formula:

Cash Flows from Operations = Net income + Noncash Expenses + Changes in Working Capital

Because working capital is a component of cash flow from operations, investors should be aware that
companies can influence cash flow by lengthening the time they take to pay the bills (thus preserving
their cash), shortening the time it takes to collect what’s owed to them (thus accelerating the receipt of
cash), and putting off buying inventory (again thus preserving cash).

Cash flow from investing activities primarily reflect the company's purchases or sales of capital assets
(that is, assets with a useful life of more than one year that appear on the balance sheet). It is important
to note that companies have some leeway about what items are or are not considered capital
expenditures, and the investor should be aware of this when comparing the cash flow of different
companies.

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Cash flow from financing activities typically reflect the company's purchase or sale of stockand any
proceeds from or payments on debt financing. The measure varies with the different capital
structures, dividend policies, or debt terms companies may have.

WHY IT MATTERS:

No matter how one measures it, cash flow helps companies expand, develop new products, buy
back stock, pay dividends, or reduce debt. This is why some people value cash flow statements more
than just about any other financial statement or measure out there, including earnings per share. Cash
flow relies heavily on the state of a company’s cash from operations, which in turn is heavily
influenced by a company’s net income. Thus, higher revenues, lower overhead, and more efficiency
are big drivers of cash flow.

Without positive cash flow, a company may have to borrow money to do these things, or in worse
cases, it may not stay in business. It is important to note, however, that having negative cash flow for a
time is not always a bad thing. If a company is a net spender of cash for a time because it is building a
second manufacturing plant, for example, this could pay off in the end if the plant generates more
cash. On the other hand, if the company has a negative cash flow because it made a poor acquisition or
other investment, then the long-term benefit might not be there.

Investors often hunt for companies that have high or improving cash flow but low share prices--the
disparity often means the share price will soon increase.

A statement of cash flows contains information about the flows of cash into and out of a company,
and the uses to which the cash is put. The statement is comprised of three sections, in which are
presented the cash flows that occurred during the reporting period relating to the following:

 Cash flows from operating activities


 Cash flows from investing activities

 Cash flows from financing activities

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Pusat Bahan Ajar dan eLearning
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The statement of cash flows is part of the financial statements , and as such is heavily reviewed by
the users of the financial statements.

The most commonly used format for the statement of cash flows is called the indirect method . The
general layout of an indirect method statement of cash flows is shown below, along with an
explanation of the source of the information in the statement. The sources of information
appearing in the table can be used to prepare a cash flow statement.

ABC Company
Statement of Cash Flows (indirect method)
for the year ended 12/31/20X1

Line Item Derivation

Cash flows from operating


activities

Net income From the net income line on the income statement

Adjustments for:

Depreciation and amortization From the corresponding line items in the income statement

Provision for losses on From the change in the allowance for doubtful accounts in
accounts receivable the period

Gain/loss on sale of facility From the gain/loss accounts in the income statement

Increase/decrease in trade Change in trade receivables during the period, from the
receivables balance sheet

Increase/decrease in inventories Change in inventories during the period, from the balance
sheet

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Increase/decrease in trade Change in trade payables during the period, from the
payables balance sheet

Cash generated from operations Summary of the preceding items in this section

Cash flows from investing


activities

Purchase of fixed assets Itemized in the fixed asset accounts during the period

Proceeds from sale of fixed Itemized in the fixed asset accounts during the period
assets

Net cash used in investing Summary of the preceding items in this section
activities

Cash flows from financing


activities

Proceeds from issuance of Net increase in the common stock and additional paid-in
common stock capital accounts during the period

Proceeds from issuance of long- Itemized in the long-term debt account during the period
term debt

Dividends paid Itemized in the retained earnings account during the period

Net cash used in financing Summary of the preceding items in this section
activities

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Net change in cash and cash Summary of all preceding subtotals
equivalents

A less commonly-used format for the statement of cash flows is the direct method. The general
layout of the direct method statement of cash flows is shown below, along with an explanation of
the source of the information in the statement. This information can be used to prepare a cash
flow statement.

ABC Company
Statement of Cash Flows (direct method)
for the year ended 12/31/20X1

Line Item Derivation

Cash flows from operating


activities

Cash receipts from Summary of the cash receipts journal for the period
customers

Cash paid to suppliers Summary of the cash disbursements journal for the period (less
the financing payments noted below)

Cash paid to employees Summary of the payroll journal for the period

Cash generated from Summary of the preceding items in this section


operations

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Interest paid Itemized in the cash disbursements journal

Income taxes paid Itemized in the cash disbursements journal

Net cash from operating Summary of the preceding items in this section
activities

Cash flows from investing


activities

Purchase of fixed assets Itemized in the fixed asset accounts during the period

Proceeds from sale of fixed Itemized in the fixed asset accounts during the period
assets

Net cash used in investing Summary of the preceding items in this section
activities

Cash flows from financing


activities

Proceeds from issuance of Net increase in the common stock and additional paid-in
common stock capital accounts during the period

Proceeds from issuance of Itemized in the long-term debt account during the period
long-term debt

Principal payment under Itemized in the capital leases liability account during the period
capital leases

Dividends paid Itemized in the retained earnings account during the period

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Net cash used in financing Summary of the preceding items in this section
activities

Net change in cash and Summary of all preceding subtotals


cash equivalents

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