Financial Accounting

Statement of Cash Flows

Ale ornani
IES FSV, UK

Content
Recap
Case Studies

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Cash Flow Analysis: Chemalite, Inc.

Statements of Cash Flows: Three Examples

Recap (1)
Statement of Cash Flow
SCF summarizes cash inflows and outflows in an accounting
period classified into operating, investing and financing.
The operating part describes the flow of cash related to the
day-to-day business.
The investing section describes transactions related to noncurrent assets involving cash.

The financing section provides information about change in

borrowings and owners equity that affected cash
total cash flow (CF) over the year equals to the change in cash on
the balance sheet, i.e.
casht - casht1 = + CFOt + CFIt + CFFt
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Recap (2)
Preparation of SCF
1. consider IS figures either as a lump sum (indirect method) or item by item
(direct method)
2. calculate changes of all BS accounts except for cash (accrual adjustments) and
decide if they are cash inflows or outflows
3. categorize the flows by operating financing and investing activities

Indirect Method

The indirect method describes why change in cash position is different from
net income, in other words, it reconciles net income and cash flow.
Direct Method
The direct method ignores the Income Statement and directly describes
changes in cash position
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Case study
Cash Flow Analysis:
Chemalite, Inc.
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Case study Cash Flow Analysis: Chemalite

To prepare for the March meeting, Alexander asked his
accountant to provide him with the expected financial
statements for the year ending December 31, 1992. Exhibit 1
reproduces the report that he received from the accountant. In
addition to this report, the accountant provided the notes:

Prepare a proforma statement of cash flows for 1992 using

the indirect method.
Prepare a proforma statement of cash flows for 1992 using
the direct method.
What are the main sources and uses of cash revealed by
your analysis?
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Case study Cash Flow Analysis: Chemalite

The land and building for the new production facility will cost $850,000, of
which $250,000 corresponds to the land. The facility will be operating at the
beginning of July, its expected life is 10 years, and it will be depreciated using
the straight line method for accounting purposes and an accelerated method for
tax purposes.
The seller of the facility will pass title on June 30 and receive half of the
purchase price in cash and the other half in three equal annual installments
beginning June 30, 1994.
The company will replace the machines that we purchased in June last year. The
selling price of the old machines is estimated to be $215,500. The new
machines will cost $520,000. These cash transactions will take place in late June
and the expected life of the new machines is 10 years.
Starting in July we will also buy insurance for the building, inventories, and
business disruption. The cost of the insurance is $97,500 cash and it will be in
force from July 92 to December 93.
As you told me, one of our shareholders needs to sell his shares due to personal
problems. I have assumed that the company will repurchase his 20,000 shares at
$1.30 per share.
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Case study Cash Flow Analysis: Chemalite

Balance Sheet as at December 31, 1991 and 1992
December 31, 1991
(Actual)
Assets
Cash
$113,000
Accounts receivable
69,500
Inventories-raw materials
55,000
Inventories-finished goods

Prepaid insurance

Property, plant and equipment

212,500
Accumulated depreciation
(10,625)
Land

Patent
100,000
Total assets
$539,375
Liabilities and Owners' Equity
Taxes payable
Short term debt
Deferred income taxes
Notes payable (10%
Long-term debt (10%)
Dividends payable
Common stock
Retained earnings
Treasury stock
Total liabilities and owners' equity

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10,900

10,000
500,000
18,475

$539,375

December 31, 1992

(Pro-forma)

$9,490
139,530
75,450
104,680a
65,000
1,120,000
(56,000)
250,000
75,000
$1,783,150

(103,510)
70,030
20,450
104,680
65,000
907,500
(45,375)
250,000
(25,000)
1,243,775

9,950
200,000
26,730
425,000
510,000
12,000
500,000
125,470
(26,000)
$1,783,150

(950)
200,000
26,730
425,000
510,000
2,000

106,995
(26,000)
1,243,775

Case study Cash Flow Analysis: Chemalite

Indirect method - Solution
Indirect Method
Net Income
Depreciation and amortization
Provision for deffered taxes
Gain on sales of equipment
Net changes in:
Accounts receivable
Inventories
Prepaid expenses
Taxes payable
Net cash provided by operating activities
Cash flow from investing activities
Capital expenditures for P&E
Proceeds from sale of equipment
Net cash used in investing activities
Cash flow from investing activities
Proceeds from issuance of long term debt
Proceeds from issuance of short term debt
Dividends paid
Purchase of treasury stock
Net cash used in financing activities

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$118,995
86,625
26,730
(24,250)
(70,030)
(120,130)
(65,000)
(950)
($48,010)
(945,000)
215,500
($729,500)

510,000
200,000
(10,000)
(26,000)
$674,000

Case study Cash Flow Analysis: Chemalite

Income Statement for the years ended Dec. 31, 1991 and 1992
December 31, 1991
(Actual)
Sales
Material
Labor
Rent
Utilities
Depreciation
Gross margin
Advertising
Research and development
Insurance
Amortization of patent
Selling and administration expenses
Gain on sale of equipment
Interest expense
Prototypes
Legal fees
Income before taxes
Income taxes
Net income

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$754,500
(195,000)
(275,000)
(50,000)
(30,000)
(10,625)
193,875
(22,500)

(25,000)
(75,000)

(750)
(23,750)
(7,500)
39,375
(10,900)
$28475

December 31, 1992

(Pro-forma)
$1,886,250
(452,700)
(660,000)
(25,000)
(82,000)
(61,625)
604,925
(70,000)
(63,250)
(32,500)
(25,000)
(195,750)
24,250
(58,750)

183,925
(64,930)
$118,995

Case study Cash Flow Analysis: Chemalite

Direct method - Solution
Direct Method
Received from:
Customers
Paid to suppliers:
Material
Labor
Finished goods inventory
Rent
Utilities
Advertising
R&D
Insurance
S & A Expenses
Interest
Income tax
Net cash provided by operating activities

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$1,816,220
(473,150)
(660,000)
(99,680)
(25,000)
(82,000)
(70,000)
(63,250)
(97,500)
(195,750)
(58,750)
(39,150)
($48,010)

Case study
Statements of Cash Flows:
Three Examples

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Case study Statements of Cash Flows: Three Examples

Exhibits 1, 2 and 3 contain cash-flow statements from

three companies. Each cash-flow statement has three
years of data. Examine the contents of these cashflow statements carefully.
Based on the evidence in the Statement of Cash
Flows alone, what is your assessment of the
financial strength of this business? Why?

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Case study Statements of Cash Flows: Three Examples

For each of the years on the Statement of Cash Flows:
What were the firms major sources of cash? Its major uses of cash?
Was cash flow from operations1 greater than or less than net income? Explain in
detail the major reasons for the difference between these two figures.

Did the cash flow from operations cover both the capital expenditures and the
firms dividend payments, if any?
If it did, how did the firm invest its excess cash?
If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
Were the working capital (current asset and current liability) accounts other than
cash and cash equivalents primarily sources of cash, or users of cash?
What was the trend in: Net income, CFO, Capex

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Case study Statements of Cash Flows: Three Examples

Alpha Corporation
Year Ended June 30,
2004
2003
2002
Operating Activities
Loss from continuing operations
Depreciation
Amortization of capitalized software
Gain from sale of investments and other assets
Restructuring and other unusual items, net
Changes in other accounts affecting operations
Accounts Receivable
Inventory
Other current assets
Accounts payable and other current liabilities
Other
Net cash provided by continuing operations
Net cash provided by (used in) discontinued operations
Net cash provided by operating activities

(377.9)
168.4
41.4
(16.6)
135.5

(623.5)
220.1
58.2
(119.0)
384.1

(320.6)
263.4
39.1
-125.3

160.8
80.2
17.0
(91.3)
2.8
120.3
4.9
125.2

73.4
100.9
(1.2)
(21.3)
14.1
85.8
3.5
89.3

(45.2)
(3.0)
(13.0)
41.0
(10.5)
76.5
(29.7)
46.8

(129.7)
157.0
25.3
(27.8)
(6.0)
18.8

(174.4)
242.0
407.3
(43.1)
(13.0)
418.8

(303.6)
94.1
-(59.5)
14.2
(254.8)

(2.6)
44.4
(126.5)
5.0
(0.3)
-(80.0)
(0.1)
64.1
169.1
233.2

(222.6)
167.7
(544.8)
8.7
(0.6)
(7.2)
(598.8)
1.1
89.6
258.7
169.1

(139.8)
305.0
(91.7)
17.5
(18.8)
(26.0)
(325.8)
(3.9)
113.9
144.8
258.7

Investing Activities
Investment in depreciable assets
Proceeds from disposal of depreciable and other assets
Proceeds from the sale of discontinued operations
Investment in capitalized software
Other
Net cash provided by (used in) investing activities
Financing Activities
(Decrease) increase in short-term borrowings
Proceeds from long-term debt
Payments of long-term debt
Proceeds from sale of Class B common stock
Purchase of treasury stock
Dividends paid
Net cash provided by (used in) financing activities
Effect of changes in foreign exchange rates
Increase (decrease) in cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year

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Case study Statements of Cash Flows: Three Examples

Beta Corporation
Year Ended December 31,
2004
2003
2002
Cash Flows from Operating Activities
Cash received from customers
Cash paid to suppliers and employees
Interest received
Interest paid
Income taxes paid
Net cash generated by operating activities

83,865
(77,820)
643
(536)
(2,233)
3,919

73,273
(65,480)
355
(1,046)
(102)
7,000

51,110
(46,589)
132
(908)
(75)
3,670

Cash Flows from Investing Activities

Capital expenditures
Marketable securities purchases
Net cash used in investing activities

(6,031)
(8,000)
(14,031)

(4,600)
-(4,600)

(3,650)
-(3,650)

Cash Flows from Financing Activities

Net payments under working capital line of credit
Net payments under equipment line of credit
Principal payments under capital lease obligations
Proceeds (payment) of subordinated debt
Proceeds from the issuance of common stock
Net cash provided by (used in) financing activities
Effect of changes in foreign exchange rates
Increase (decrease) in cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year

--

(2,000)

(860)

(985)
(169)
(5,000)
23,082
16,928
(4)
6,812
5,375
12,187

(126)
(213)
-141
(2,198)
14
216
5,159
5,375

(388)
(276)
4,400
639
3,515
-3,535
1,624
5,159

6,323

5,201

417

99
4,028
208
17
40

47
2,701
324
9
85

98
2,231
68
58
--

(10,837)
(951)
(665)

(613)
(810)
366

(1,550)
1,043
(762)

5,657
(2,404)
12,187

(310)
1,799
5,375

2,067
3,253
5,159

Reconciliation of Net Income to Net Cash Generated

by Operating Activities:
Net income
Adjustments to Reconcile Net income to Net Cash
Consumed by Operating Activities:
Bad debt provision
Depreciation and amortization
Amortization of original issue discount
Loss on disposition of asset
Compensation expense related to stock grants
Changes in Assets and Liabilities
(Increase) in accounts receivable
(Increase) decrease in inventory
(Increase) decrease in deposits and other assets
Increase (decrease) in accounts payable and accrued
expenses
Total adjustments
Net cash generated by operating activities

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Case study Statements of Cash Flows: Three Examples

Gamma Corporation
June29,
2004
Cash Flows from Operating Activities
Net income/(loss)
Adjustments to Reconcile Net income to Net Cash
Provided by Operating Activities:
Depreciation and amortization
Other adjustments to income
(Increase)/decrease in accounts receivable
(Increase)/decrease in inventories
(Increase)/decrease in prepaid expenses
Increase/(decrease) in accounts payable
(Decrease) in taxes
Increase in deferred revenue and customer advances
Increase in restructuring reserve
Increase in other liabilities
Total adjustments
Net cash flows from operating activities
Cash Flows from Investing Activities
Purchase of plant, property and equipment
(Increase) of other assets, net
Purchase of Kienzle business
Net cash flows from investing activities
Net cash flows from operating and investing activities
Cash Flows from Financing Activities
Proceeds from issuance of debt
Payments to retire debt
Purchase of treasury shares
Issuance of treasury shares, including tax benefits
Net cash flows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year

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Year Ended
June 30,
2003

July 1,
2002

(617,427)

74,393

1,072,610

828,560
189,077
105,977
18,616
(47,239)
(17,694)
(105,614)
92,222
593,160
1,263
1,658,328
1,040,901

796,201
92,329
(241,357)
99,743
(90,602)
107,001
(201,560)
69,207
443,544
285,175
1,359,681
1,434,074

686,738
49,702
(373,248)
(62,942)
18,965
30,645
(75,502)
105,847
-26,576
406,781
1,479,391

(737,548) (1,027,625) (1,223,038)

(55,782)
(75,489)
(67,624)
(233,261)
--(1,026,591) (1,103,114) (1,290,662)
14,310
330,960
188,729

14,249
(112,426)
(240,719)
239,653
(99,243)
(84,933)
2,008,983
1,924,050

17,661
(20,896)
(544.8)
296,225
22,759
353,719
1,655,264
2,008,983

40,425
(153,245)
(814,958)
230,733
(697,045)
(508,316)
2,163,580
1,655,264

Case study Statements of Cash Flows: Three Examples

Alpha Corporation is the Wang Corporation. On August

18, 1992, Wang filed bankruptcy protection

Beta Corporation id Proteon Corporation, at that time

rapidly growing high-tech company which had made
IPO in 90s

Gamma Corporation is Digital Equipment Corporation, a

large historically profitable but at that times struggling
producer hardware and software
(in 1998 DEC was acquired by Compaq - manufacturer of PC)
.
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For questions and additional information please

refer to the course website or the email:

ies.fin.acc@gmail.com

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