Statement of Cash Flows

Statement of Cash Flows

Statement of Cash Flows

THE CASH BASIS FUNDS STATEMENT

SOURCES OF CASH

1) Operating income - is usually the largest and most frequent source of cash provided a business is profitable. When revenues exceed expenses, cash flow increases. When expenses exceed revenues, cash flow decreases.

2) Issuance of capital stock or long-term debt.

3) The sale of noncurrent assets such as equipment, land, buildings, patents, etc.

CASH PROVIDED BY OPERATIONS

CONVERSION OF NET INCOME FROM A ACCRUAL BASIS TO A CASH BASIS

1) The following items should be added to net income: depreciation expenses, increases in current liabilities, decreases in current assets, and the amortization of bond discount or intangible assets.

2) The following items should be subtracted from net income: amortization of bond premium, increases in current assets, and decreases in current liabilities.

WORKING CAPITAL FUNDS STATEMENT

SOURCES OF WORKING CAPITAL

1) Operating income - when revenues exceed expenses.

2) The issuance of long-term debt.

Example: Issued a $50,000 bond due to mature in ten years.

3) The issuance of capital stock.

Example: 10,000 shares of $100 par preferred stock are sold to

shareholders for $105 a share.

4) The sale of noncurrent assets. Example: building, land, bonds,

equipment, etc.

WORKING CAPITAL FUNDS STATEMENT

USES OF WORKING CAPITAL

1) The declaration of cash dividends.

Example: The board of directors issues a declaration that all

common shareholders will receive $0.50 for each share held.

2) The retirement of long-term debt.

Example: Full payment is made to bondholders at maturity.

3) The purchase of noncurrent assets. Example: equipment, land,

buildings, etc.

WORKING CAPITAL FUNDS STATEMENT

WORKING CAPITAL IS NOT AFFECTED BY THE FOLLOWING TRANSACTIONS

1) Those that are only between current asset accounts.

Example: Cash is used to purchase inventory.

2) Those that are only between current liability accounts.

Example: A 90 day note is drawn up for a trade receivable.

3) Those that are only between current asset and current

liability accounts.

Example: A cash payment is made to reduce accounts payable.