Week 2 Statement of Cash Flows
The Statement of Cash Flows
Here is a typical cash flow statement we will use for illustration:
| Net Income | $347,500 | |
| Changes in Operating Assets and Liabilities: | ||
| Increase in Accounts receivable | $(75,600) | |
| Increase in Finished-goods inventory | $(125,000) | |
| Increase in Prepaid expenses | $(37,000) | |
| Increase in Accounts payable | $83,000 | |
| Increase in Accrued expenses | $25,000 | |
| Decrease in Income tax payable | $(23,000) | |
| Depreciation expense | $89,000 | |
| Total changes in operating assets and liabilities | $63,600 | |
| Cash flow from operations | $283,900 | |
| Investing Activities | ||
| Sale of property, plant, and equipment | $267,000 | |
| Capital expenditures | $(175,000) | |
| Cash flow from investing activities | $92,000 | |
| Financial Activities | ||
| Increase in short-term debt | $27,000 | |
| Long-term borrowing | $112,000 | |
| Issuance of common stock | $50,000 | |
| Cash dividends to stockholders | $(187,000) | |
| Cash flow from financing activities | $2,000 | |
| Increase in cash during year | $377,900 | |
Table: Amalgamated Hat Rack Cash Flow Statement 2016. Updated
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002)
The statement of cash flows shows how much cash flowed in and out of the business during a particular period. Basically the statement of cash flows is developed by adding to earnings available to common stockholders all the cash inflows and outflows that are not shown on the income statement. Most of these are found by comparing balance sheets of two successive dates. The changes in the balance sheet accounts are computed and recorded on the statement of cash flows as follows:
| Use of Funds | Source of Funds |
| An increase in an asset account | A decrease in an asset account |
| A decrease in a liability or equity account | An increase in a liability or equity account |
Observe that the cash flows on the statement are divided into categories (see below). The exact names of these categories may vary slightly (see the statements in your texts for examples), but they will be close to the names below).
- cash flows from operations (that is, the firm’s normal activities)
- cash flows from investments (that is, long-term expenditures)
- cash flows from financing activities (borrowing, issuing stock, paying off debt, and so on)
The cash flow statement can give you a “quick and dirty” look at what a business is doing with its money. For example, where did Main Street Store get most of its money in 2011? (In other words, what was its biggest source of cash?). Reference the text book page 62, exhibit 2-4, or if you are using e-reserves reference page 42.
Answer: Issuing new common stock provided $190,000.
Now, what did Main Street Store spend most of its money on in 2011? (In other words, what was its biggest use of cash?).
Answer: It increased inventory by $170,000.
Conclusion
The main thing Main Street Store did in 2011 was to issue new stock and use the proceeds to buy inventory.
You will do more of this when we continue our study of financial statements in Week 3.
The Statement of Retained Earnings
- The Statement of Retained Earnings reconciles the retained earnings account over the period measured. The impact of income & dividends are presented. We will not focus too much on this particular statement at this point in time.