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Cash Inflow Cash collected from customers Interest and dividends received Sale proceeds from trading securities Operating Cash Flow
Cash Outflow Cash paid to employees and suppliers Cash paid for other expenses Acquisition of trading securities Interest paid Taxes paid
Operating cash outflows exclude these income statement items: Depreciation and amortization (and other noncash items) Gains or losses on disposal of PP&E
Cash Inflow Sale proceeds from fixed assets Sale proceeds from debt and equity investments Principal received from loans made to others
Cash Outflow Acquisition of fixed assets Investing Cash Flow Acquisition of debt and equity investments Loans made to others
Cash Inflow Principal amounts of debt issued Proceeds from issuing stock Financing Cash Flow
Cash Outflow Principal paid on debt Payments to reacquire stock Dividends paid to shareholders
IRFS: Interest and dividends received are reported as operating or investing activities Dividends paid to the companys SHDs and interest paid on the companys debt are reported as operating or financing activities.
financing transaction.
Example
Consider a company sells land that was held for
Examples
Example 1 A company recorded the following in Year 1: Proceeds from issuance of long term debt $300,000 Purchase of equipment $200,000 Loss on sale of equipment $70,000 Proceeds from sale of equipment $120,000 Equity in earnings of affiliate $10,000 On the Year 1 cash flow statement, the company would report net cash flow from investing activities closest to: A. -$150,000 B. -$80,000 C. $200,000 D. $300,000
CC : Contributed Capital AOCI: Accumulated Other Comprehensive Income RE: Retained Earnings
Direct Method
Each line item of the accrual-based income statement is converted into cash receipts or cash payments. Begins with cash inflows from customer and then deducts cash outflows for purchases, operating expenses, interest and taxes. Example:
Indirect Method
Net income is converted to operating cash flow by making adjustments for transactions that affect net income but are not cash transactions. The starting point is net income
Example:
Direct
Examples
Points to Remember
CFO is calculated differently, but the result is the same under both methods The calculation of CFI and CFF is identical under both methods There is an inverse relationship between changes in assets and changes in cash flows. There is a direct relationship between changes in liabilities and changes in cash flow.
Step 4: Add and subtract changes to balance sheet operating accounts as follows:
Increases in operating assets accounts (uses of cash) are subtracted, while decreases (sources of cash) are added. Increases in the operating liability accounts (sources of cash) are added, while decreases (use of cash) are subtracted.
Triple Y Corporation Cash Flow Statement (Percent of revenues) Year 20X9 20X8 20X7 Net Income 13.40% 13.40% 13.50% Depreciation 4.00% 3.90% 3.90% Accounts Receivable -0.60% -0.60% -0.50% Inventory -10.30% -9.20% -8.80% Prepaid expenses 0.20% -0.20% 0.10% Accrued liabilities 5.50% 5.50% 5.60% Operating Cash Flow 12.20% 12.80% 13.80% Cash from sale of fixed assets 0.70% 0.70% 0.70% Purchase of plant and equipment -12.30% -12.00% -11.70% Investing Cash Flow -11.60% -11.30% -11.00% Sale of Bonds 2.60% 2.50% 2.60% Cash Dividends -2.10% -2.10% -2.10% Financing cash flow 0.50% 0.40% 0.50% Total cash flow 1.10% 1.90% 3.30%
Homework
Cash Flow and Life Cycle Phase