Bring in Income Statement and Balance Sheet here

rouleaupromiseSecurity

Nov 5, 2013 (4 years and 9 days ago)

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1


In the prior modules you have conquered the Income Statement, the Balance Sheet and the
Statement of Owners’ Equity. In this module we are going to work on the Statement of Cash
Flows.


The Statement of Cash Flows completes the financial statements which a company prepares
and makes available to creditors and shareholders. It is closely linked to the Income
Statement and the Balance Sheet. Its purpose is to explain where the cash that t
he company
had flow through its doors came from and went. I think if we are shareholders of a company, it
is good to see from the Income Statement that our company made X dollars, but, as Jerry
Maguire said, “Show me the Money!!!”.


It is possible for a
very profitable company to have cash problems. Sometimes a small
growing company can grow itself into bankruptcy just because it doesn’t have the money to
support the growth!!



On the following page
s

are the Balance Sheet and the Income Statement for
Bob
katz, Inc.

From these two financial statements we will build a Cash Flow Statement.


Suppose you are a shareholder in
Bobkatz
, Inc.


Bring in Income Statement and Balance Sheet here


You
will
note that they made
$119,000 last year, but their cash only in
creased by $20,000.
Does the bucket have a hole in it
? O
r is something else going on
?

The Statement of Cash
Flow will help us determine what cash came in and what cash went out.






2


To prepare the Cash Flow Statement we need the Balance Sheet
at the

end of
the last two
years and the income statement for the current year. We also need to know some other
information about some of the transactions that went on during the year.


Bobkatz

is a business to business company and all sales are on credit. Th
e sale terms are net
30. N
o Fixed Assets were sold during the year and all the Fixed Asset
s that were purchased
were purchased for cash. The common stock was sold for $31,000 and a dividend of $
12
,000
was paid during the year. Some of these facts you co
uld have figured out by yourself. For
instance you could have figured the dividend by comparing the change in Retained Earnings
with the Net Income for the year.


The
Cash Flow Statement is divided into four
Sections
-


Cash flows from operating activities


Cash
f
low
s

f
rom
i
n
vesting
a
ctivities


Cash
f
low
s

f
rom
f
inancing
a
ctivities


Supplemental

i
nformation




We will discuss each of the sections as we create them. We will start with the
Cash flows from
operating activities
. If more cash is used by the operating activities than is generated by them,
then
the Section is called Cash flows from
Operating Activities.








3


Cash Flow provided or used by the operating activities of the business. In this section the
cash provide
d by and used by the company in the generation of income is presented. In a
company the money making operations are closely tied to the working capital (current assets
and current liabilities of the business.) For instances, most sales are on credit an so

the
amount of cash received from the customers is a direct product of the sales and the changes
in the Accounts Receivable balance.

One could argue that this is the most important section
of the Cash Flow Statement because if a company can’t generate fu
nds from its operations
over the long term, it will be bankrupt.







Bobkatz
, Inc.




Statement of Cash Flows



For the Year Ended December 31, 2015


Cash flows from operating activities


There are two
methods of presenting the
cash flow statement
-

the
Direct

Method

and the
Indirect

Method
. Most of the world uses the
Direct

Method
, while the US uses primarily the
Indirect

Method
. The International Financial Reporting System (IFRS) requires the Direct
method.


Because most of you are working for, or
will work for US based companies
, and because the
US has not adopted this provision of IFRS yet, we will prepare the cash flow statement using
the Indirect method.


I
n
the

Cash flows from operating activities

section we are presenting the cash that came
into our business and that went out from our normal profit making activities. In essence we
turn the
accrual

based
Income Statement

into a
cash

based
I
ncome
S
tatement
.


To begin this transformation from the accrual to the cash based statements, we begin with
Net
Income.




4


Bobkatz
, Inc.




Statement of Cash Flows



For the Year Ended December 31, 2015


Cash flows from operating activities

Have Net Income fly in here


Net Income







$119,000


Now we begin
convertin

the accrual net income to a cash net income.

We add a section right under the Net Income called
Adjustments
t
o

r
econcile
n
et
i
ncome to
n
et
c
ash
p
rovided by
o
perations
.



Bobkatz
, Inc.




Statement of Cash Flows



For the Year Ended December 31, 2015


Cash flows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:





Our first of these
reconciling items
is
depreciation expense and
amortization

expense
.
Remember that depreciation and amortization are the allocation of money spent

in prior
periods. (Money spent in the current period which would be depreciated or amortized is
included in the next section of the cash flow statement. Since this is an allocation of money
paid out in prior periods, it does not involve cash in the curr
ent period.




R
emember the journal entry:



Depreciation Expense




20,000




Accumulated Depreciation



20,000


To record deprec
iation expenses

for the year




And this does not involve
cash,




5


So we add it back to the Net Income (I am going to
stop putting the header for the statement
until we get to the end).






Cash flows from operating activities


Net Income







$119,000


Adju
stments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000


(If you think about it, you would not have any Depreciation Expense on an Income Statement
that was based on what
cash came in and what cash went out since Depreciation Expense is
not a Cash expense).




















6


Now let’s look at the Balance Sheet again




Balance sheet flows in here











Look closely at the current assets and current liabilities









Highlight Current Assets and Current Liabilities here




Notice how closely related the Current Assets and Current Liabilities are to the income
statement
. Sales

are directly related to
Accounts Receivable
,
Cost of Goods Sold

is directly
related to
Invento
ry

and
Accounts Payable

and so forth. In fact, we can finish the
Cash
Flow From Operating Activities

by simply detailing the changes in these accounts

from last
year to this year
. For instance
in
Bobkatz
,

the
Accounts Receivable

increased by $30,000

from

2014 to 2015
. That means that the cash received from sales was $30,000 less than the
amount of th
e sales for 2015
.

Because of this,
we adjust the reported accrual

basis
net
income by reducing it by $30,000 when we
convert

it to a cash basis.


7


Cash fl
ows from operating activities



Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable





(30,000)


T
he simplest way to complete the Operating Section of the Cash Flow Statement is to simply
go through the Current Assets and Current Liabilities noting the effect of changes in these
accounts

on the
Income Statement

when translating it to a
Cash Flow Statement
.
Next we
look at the change in
Inventories
. Our inventory decreased by $10,000. This means that our
Cost of Goods Sold

used more inventory than was purchased during the year. We
add this
change back to the Net Income
-


Cash flows from operating activities



Net Income







$119,000



Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)




Decrease in
i
nventory









10,000





We have finished the
Current Assets

section for
Bobkatz

and move on to the
Current
Liabilities
.
Note that if we had other
Current Assets

such as
P
repaids

and so forth, we
would analyze and report them the same way.
In fact at this point we have noticed a trend
-

f
or
Current Assets
, an increase from the first year to the
second y
ear causes an increase in the
Operating Cash Flows and a decrease cause a subtraction. We will find the relationship is just
the opposite in
Current Liabilities
.



The next area of the Balance Sheet we focus on is the
Current Liabilities
.





8


Bring in
Balance Sheet here with Current Liabilities highlighted







Specifically, we are again analyzing the differences in the balances for the different accounts
for 2014 and 2015. We start with the change in
Accounts Payable
.

From 2014 to 2015, the
Account
s Payable increased by $3,000. We can interpret this as meaning we paid $3,000 less
for our purchases of inventory than we expensed through
Cost of Goods Sold
. (The
Inventory and Accounts Payable accounts are both linked to Cost of Goods Sold. In the Di
rect
Method of presenting cash flows they are presented as one item,
Cash Paid for
M
erchandise
. In the
Indirect

presentation, which we are using here, we break them up into
two different adjustments. This tends to be a bit confusing, but works.)


Cash fl
ows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)


Decrease in
i
nventory









10,000





Increase

in
a
ccounts
p
ayable





3,000


Note that since the

Current Liability
increased, we used less cash for the related expense
than is reported on the
Income Statement.








9


We continue on down the
Current Liabilities

to
Taxes Payable
.
Taxes Payable decreased
from 2014 to 2015 by $2,600 ($8,000
-

$5,400). This decrease means

that we paid $2,600
more in cash for our taxes than the
Tax Expense

we recognized for the year.


Cash flows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome



to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)


Decrease in
i
nventory









10,000




Increase

in
a
ccounts
p
ayable





3,000







Decrease

in
t
axes
p
ayable






(2,600)


Our analysis continues to Salaries and Wages Payable. These increased by $2,000 ($4,000
-

$6,000).
The implication of this increase is that we paid $2,000 less in
Salary and Wage
Expense

than was recognized on the
Income Statement
.



Cash flows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)


Decrease in
i
nventory









10,000




Increase

in
a
ccounts
p
ayable





3,000






Decrease

in
t
axes
p
ayable






(2,600)






Increase in
s
alaries and
w
ages
p
ayable




2,000









10


Fin
ally we are at
Interest Payable
. Since t
he Interest Payable decreased by $400, we paid
$400 more in interest than we recognized as
Interest Expense
.


Cash flows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)


Decrease in
i
nventory









10,000




Increase

in
a
ccounts
p
ayable





3,000






Decrease

in
t
axes
p
ayable






(2,600)


Increase in salaries and wages payable




2,000






Decrease in
i
nterest
p
ayable


(400)


The last category in the
Current Liabilities

Section


Current Portion of Long
-
term Debt

is
related to the Financing Activities of the business and does not affect Operating Cash Flow.

If there were other Current Li
abilities present on our Balance Sheets, we could analyze and
adjust our Cash Flow Statement the same. Note that for Current Liabilities, increases in the
liabilities are treated as increases in cash and decreases in the balances are treated as
decreases
in cash.

We now total our
Cash flows from operating activities
.


Bobkatz
, Inc.




Statement of Cash Flows



For the Year Ended December 31, 2015


Cash flows from operating activities


Net Income







$119,000


Adjustments

to
r
econcile
n
et
i
ncome


to
n
et
c
ash
p
rovided by
operating activities:




Depreciation
e
xpense







20,000



Increase

in
n
et
a
ccounts
r
eceivable






(30,000)


Decrease in
i
nventory









10,000




Increase

in
a
ccounts
p
ayable





3,000






Decrease

in
t
axes
p
ayable






(2,600)


Increase in salaries and wages payable




2,000






Decrease in
i
nterest
p
a
yable



(400)


Net Cash Provided by Operating Activities 121,000



11




This finishes the
Cash flows from operating activities

Module. We will complete the
Cash Flow Statement in the next Module.