1st
How can we classify cash flows? (3 sections of the Statement of Cash Flows)
Operating activities- anything that relates to income statement
Investing activities- anything that relates to long term assets
Financing activities- anything that relates to long term liabilities and equity
Two acceptable methods to determine cash flows from operating activities
Direct and Indirect
Which method is more popular among companies? (Give me a rough estimate too)
97.5% of companies use the indirect method
We get cash from this activity from sale of products or providing services and we use this cash to purchase inventory, pay employees, or pay taxes.
Operating Activities
Cash comes in from sale of PPE, collection of principal on loans to other entities. Cash is spent on purchasing PPE, purchasing investments in debit or equity securities, etc.
Investing Activities
** Bonus: 55 points if you can discuss the cash flows from financing activities
Which method do companies favor and why?
Indirect method - easier and less costly, focuses on differences between net income and net cash flow from operating activities
The statement of cash flows is useful because
- ability to generate cash in the future
- ability to pay dividends and meet obligations
- reasons for the differences between net income and net cash provided (used) by operating activities
- the cash investing and financing transactions during the period
A company must convert net income from an accrual basis to a cash basis which can be done through
The indirect method or the direct method
Note that in the investing and financing activities sections, positive numbers indicate cash _____, and negative numbers indicate cash _______
a.) inflows (receipts)
b.) outflows (payments)
Josh’s PhotoPlus reported net income of $73,000 for 2020. Included in the income statement were depreciation expense of $7,000 and a gain on disposal of plant assets of $2,500. Accounts receivable increased $4,000 and accounts payable decreased $3,800. Calculate the net cash provided by operating activities.
Net income $73,000
Depreciation expense 7,000
Gain on Disposal of plant assets (2,500)
Increase in accounts receivable (4,000)
Decrease in accounts payable (3,800)
Net cash provided by operating activities $69,700
Isaiah, Inc. reports $125,000 net income for the
year ended December 31, 2016.
Accounts Receivable increased by $7,500 during
the year and Accounts Payable increased by
$10,000.
During 2016, Isaiah reported $12,500 of
Depreciation Expense.
What is Isaiah Inc's Operating Cash flow for 2016?
For indirect method, start with net income. Add back NONCASH expenses (depreciation, bad debt expense, amortization) Subtract Increase in accounts receivable (this is money you did not yet receive in cash) and ADD increase in accounts payable (cash that will leave you but you currently have).
Net income $125,000
Add: Depreciation expense 12,500
Deduct: Increase in accounts
receivable (7,500)
Add: Increase in accounts payable 10,000
Cash provided by operating
activities 140,000
During its first week, Duffy & Stevenson Company had these transactions.
a.) Issued 100,000 shares of common stock at par for $800,000 cash.
b.) Borrowed $200,000 from Castle Bank, signing a 5-year note bearing 8% interest.
c.) Purchased two semi-trailer trucks for $170,000 cash.
d.) Paid employees $12,000 for salaries and wages.
e.) Collected $20,000 cash for services performed
a.) Financing
b.) Financing
c.) Investing
d.) Operating
e.) Operating