Download Cash Flow Statement Analysis: Case 1 and Case 2 and more Assignments Financial Statement Analysis in PDF only on Docsity! STATEMENT OF CASH FLOWS EXAMPLE DATA – Modified (Note: Several numbers have been changed from the example from class) Case 1: The opening balance in Accounts Receivable is $30 and in Inventory is $25. During the period, the company has sales of $140 (all on credit) and sells $80 worth of inventory (i.e., inventory which had cost it $80). Also during the period, the company collects $100 of the Accounts Receivable and spends $75 to buy more inventory. Depreciation for the period is $15. Case 2: The opening balance in Accounts Receivable is $30 and in Inventory is $25. During the period, the company has sales of $140 (all on credit) and sells $80 worth of inventory. Also during the period, the company collects $150 of the Accounts Receivable and spends $95 to buy more inventory. Depreciation for the period is $15. STATEMENT OF CASH FLOWS – Solution Template OBJECTIVE: Financial statements are prepared using accrual accounting. When calculating the Net cash flow from operating activities, we are taking the accrual net income figure and adjusting it to give us the cash basis net income amount. In the process, we determine the relevant cash inflows and outflows. The format is as follows (see pg. 3-19): Net income (determined using accrual accounting) $ Add: depreciation expense + Adjust for changes in current assets: Subtract increases in current assets - Add decreases in current assets + Adjust for changes in current liabilities: Add increases in current liabilities + Subtract decreases in current liabilities - ----- Net cash flow from operating activities $ CASE 1 – Solution A/R, Beginning $30 Inventory, Beginning $25 Sales (on credit) $140 Cost of Goods Sold -$80 Collections (cash) -$100 Purchases of Inv. (cash) $75 A/R, Ending $70 Inventory, Ending $20 Increase in A/R $40 Decrease in Inventory -$5 Depreciation $15 Actual Cash Flow: $100 flowed into the company because of the collection of A/R and $75 flowed out because of the purchase of inventory. Therefore, the net cash flow was a $25 cash inflow. Accrual Accounting Net Income: Sales…………………………….. $140 Less: Cost of Goods Sold. -$80 Gross Profit………………….. $60 Less: Depreciation……….. -$15 Net income (accrual)……. $45 Net Cash Flow from Operating Activities: Net income (determined using accrual accounting) $45 Add depreciation expense…………………………….. $15 Subtract Increase in A/R…..…………………………… -$40 Add Decrease in Inventory……….…………………… $5 Net cash flow from operating activities………………. $25 Rationale: Intuitively, think of the following: 1. Depreciation is an allocation of expense; it does not involve a cash flow. For example, if a company spends $100,000 cash for a machine that will last 10 years, it would have a cash outflow of $100,000 in the first year, but would show $1,000 depreciation expense on the Income Statement for each of the ten years. 2. A/R (a) increases for sales made on credit and (b) decreases for cash collections. Therefore, if the balance of A.R increases by $40, this means there must have been $40 more in sales on credit than was collected. Since the amount of sales on credit is used in calculating net income (under accrual accounting), the net income figure is $40 higher than the cash flow. Therefore, subtract $40 from the net income figure to get the cash flow.
