CASH FLOW ANALYSIS

Monique Flores ~ Mariel de Lara ~ Jae Young Manabat

Learning objectives
Describe the nature and purposes of the Statement of Cash Flows
Define cash and cash equivalents
State the general rules for determining whether transactions should
be classified as operating, investing or financing activities
Describe the content and form of Statement of Cash Flows
Explain the differences between the direct method and indirect
method
Compute the net cash flow provided by operating activities using
the direct and indirect method
Prepare the Statement of Cash Flows using both visual inspection
method and worksheet method

CONTENT AND FORM OF THE
STATEMENT OF CASH FLOWS
A. Net cash provided or used by:
Operating Activities
Investing Activities
Financing Activities

B. Net effect of those inflows and outflows
on Cash and Cash Equivalents
Reporting Requirement #1
Report cash flows from operating activities
using either:
Direct Method
Indirect Method
Direct Method
In reporting the cash flows from operating activities
enterprises are encouraged to report major classes
of gross receipts and gross cash payments and the
net cash flow from operating activities.
Under the direct method, for this example, you would then report
the following in the cash flows from operating activities section of
the cash flow statement:
Cash Inflows from Operating Activities
Cash receipts from customers
Interest and dividends collected
Other operating receipts
Cash Outflows for Operating Activities
Cash payments to suppliers
Cash paid for operating expenses
Interest paid
Other operating payments
Taxes paid
Equals net cash provided by (used in) operating activities

Cash receipts from customers:
Net sales per the income statement
Plus beginning balance in accounts receivable
Minus ending balance in accounts receivable
Plus ending balance in deferred revenue
Minus beginning balance in deferred revenue
Equals cash receipts from customers

Interest and Dividends Collected
Interest revenue and dividend income per income
statement
Plus beginning balance in interest receivable
Minus ending balance in interest receivable
Plus amortization of premium on investment in bonds
or
Minus amortization of discount on investment in bonds
Equals interest and dividends collected

Other operating receipts
Other revenues per income statement
Plus ending balance in unearned revenues
Minus beginning balance in unearned revenues
Minus gains on disposal of assets and liabilities
Minus investment income (equity method)
Equals cash inflows from other operating receipts
Cash payments to suppliers:
Cost of goods sold
Plus ending inventory
Minus beginning inventory
Plus beginning balance in accounts payable to
vendors
Minus ending balance in accounts payable to
vendors
Equals cash payments for inventory
Cash paid for operating expenses:
Operating expenses per income statement
Minus depreciation expenses, depletion and
amortization
Plus ending balance in prepaid expenses
Minus ending balance in prepaid expenses
Plus beginning balance in accrued expenses
Minus ending balance in accrued expenses
Equals cash paid for operating expenses

Interest paid:
Interest expense per the income statement
Plus beginning balance in interest payable
Minus ending balance in interest payable
Plus amortization of premium on bonds payable
or
Minus amortization of discount on bonds payable
Equals interest paid
Other operating payments:
Other expenses per income statement
Minus losses on disposal of assets and liabilities
Minus investment loss (equity method)
Equals other operating payments
Taxes paid:
Tax expense per the income statement
Plus beginning balance in taxes payable
Minus ending balance in taxes payable
Plus beginning balance in deferred tax liability
or
Minus ending balance in deferred tax liability
Equals taxes paid
Indirect Method
In preparing the cash flows from operating activities
section under the indirect method, you start with net income
per the income statement, reverse out entries to income and
expense accounts that do not involve a cash movement, and
show the change in net working capital.

Entries that affect net income but do not represent cash
flows could include income you have earned but not yet
received, amortization of prepaid expenses, accrued
expenses, and depreciation or amortization. Under this
method you are basically analyzing your income and expense
accounts, and working capital.
The following is an example of how the indirect method would
be presented on the cash flow statement:
Net income after taxes
PLUS
A decrease in current assets would be shown as a positive figure, because
other current assets were converted into cash.
An increase in current liabilities (excluding short-term debt which would
be reported in the financing activities section) would be shown as a
positive figure since more liabilities mean that less cash was spent.
Depreciation, depletion and amortization expense
Amortization of discount on bonds payable
Amortization of premium on investment in bonds
Increased in deferred income taxes
Loss (net) on disposal of assets or liabilities
Investment loss under the equity method
Interest expense
Income taxes



Continuation
MINUS
An increase in current assets (excluding cash and cash
equivalents) would be shown as a negative figure because cash
was spent or converted into other current assets, thereby
reducing the cash balance.
A decrease in current liabilities would be shown as a negative
figure, because cash was spent in order to reduce liabilities.
Amortization of premium on bond payable
Amortization of Discount on investment in bonds
Decrease in deferred income taxes
Gain (net) on disposal of assets or liabilities
Investment income under the equity method

EQUALS
Net Cash Flow From Operations
LESS
Interest paid
Income Taxes Paid
Net Cash From Operating Activities
Example:
The Menschken Company reported net income of $150,000 for the
current year. Depreciation recorded on buildings and equipment
amounted to $65,000 for the year. Balances of the current asset
and current liability accounts at the beginning and end of the year
are as follows:
End of Year Beginning of Year
Cash $20,000 $15,000
Accounts receivable 19,000 32,000
Inventories 50,000 65,000
Accounts payable 12,000 18,000
Instructions
Prepare the cash flows from the operating activities section of the
statement of cash flows using the indirect method.

Solution:
Net income $150,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation expense 65,000
Decrease in accounts receivable 13,000
Decrease in inventories 15,000
Decrease in accounts payable (6,000)
Net cash provided by operating activities $237,000


Example:
Assume the indirect method is used to compute cash flows from operations. For
each item listed below, indicate the effect on net income in arriving at cash flows
from operations by choosing one of the following code letters.
Code
Cash Flows From Operating Activities
Add to Net Income A
Deduct from Net Income D
1. Increase in accounts receivable
2. Increase in inventory
3. Decrease in prepaid expenses
4. Decrease in accounts payable
5. Increase in accrued liabilities
6. Increase in income taxes payable
7. Depreciation expense
8. Loss on sale of investment
9. Gain on disposal of equipment
10. Amortization expense
Solution:
1. D
2. D
3. A
4. D
5. A
6. A
7. A
8. A
9. D
10.A

Reporting Requirement #2
Report separately major classes of receipts
and payments arising from investing and
financing activities
Reporting Requirement #3
Cash flows arising from the following operating,
investing or financing activities may be reported on a
net basis:
Cash receipts and payments on behalf of customers when
the cash flows reflect the activities of the customer rather
than those of the entity
Cash receipts and payments for items in which the turnover
is quick, the amounts are large and the maturities are short

Reporting Requirement #4
Cash flows arising from each of the following
activities of a financial institution may be reported on
a net basis:
Cash receipts and payments for the acceptance and
repayment of deposits with a fixed maturity date
Placement of deposits with and withdrawal of deposits
from other financial institutions
Cash advances and loans made to customers and the
repayment of those advances and loans

Reporting Requirement #5
Cash flows arising from transactions in a
foreign currency that should be recorded
in an entitys functional currency
Reporting Requirement #6
Cash flows from interest and dividends
received and paid should each be disclosed
separately.
Reporting Requirement #7
Cash flows arising from taxes on income
shall be separately disclosed and shall be
classified as cash flows from operating
activities.