The Cash Flow Statement

http://www.accountingbase.com/CashFlow.html


Prior to 1987, companies were allowed to provide financial on a working capital or cash basis. 


For a while, many accepted that the adding back of depreciation to net income was an appropriate substitute for a cash flow statement, while others, especially creditors chose to use EBITDA (earnings before interest, taxes, depreciation and amortization). 


EBITDA is of course a measurement that maintained wide usage up to the late 1990s, before a string of corporate scandals (led by Enron and Worldcom) removed it from business pages.







The first section is widely regarded as the most important section of the cash flow statement. 


This is so as this section shows whether the company was able to generate cash from its operating activities. 




On the typical cash flow statement, the cash flow from operations section is divided into two sub-sections:

• The first subsection adds back to/minus from net income all non-cash operating items that were subtracted/added in arriving at net income
• The second sub-section calculates the net change in working capital and adds it back to net income.

The following will help you as you prepare your next cash flow statement:

• Financial information thatyou'll need:
•    The most recent income statement
•    The most recent balance sheet
•    The prior period balance sheet
•    Any additional notes pertaining to the transactions of the company during the periods under consideration.

• Note all the non-cash charges that were applied against revenue. The most common of these is Depreciation
• Note all the non-cash income that was added to revenue. A common one is Profit from sale of fixed assets. 
• Compare the two balance sheets. Given the sectional nature of the cash flow statement, you should divide your balance sheets into the three cash flow statement sections.
• Deduct line items (except cash) on the prior period balance sheet from similar line item on the most recent balance sheet.
• 
  
• Use the following rule with changes in assets, liabilities and equity:
•    An increase in an asset - A use of cash
•    An increase in liability - a source of cash
•    An increase in equity - a source of cash

After completing the above, you may first test the accuracy of your calculation by adding the change in cash to the opening cash balance (cash balance from the prior year balance sheet), which should sum to the cash balance on the most recent balance sheet.

 The Sources and Uses Fund report is a convenient and helpful first step that helps to make the preparation of the cash flow statement a little easier.

Sources & Uses of Fund
Current and Fixed Assets
Current Assets:	2002	2001	Sources	Uses
Cash and cash equivalents	$155	$170	-	-
Short-term investments	$80	$70	-	$10
Accounts receivable, net	$250	$190	-	$60
Inventory	$210	$170	-	$40
Prepaid expenses/other assets	$15	$40	$25	-
Total Current Assets	$710	$640	-	-
Fixed Assets:
Property, plant and equipment, net	$1,020	$810	-	$210
Total Assets	$1,730	$1,450	-	-
Liabilities & Shareholder's Equity
Current liabilities:
Accounts payable	$380	$290	$90	-
Accrued expenses	$120	$160	-	$40
Wages Payable	$170	$80	$90	-
Income Tax Payable	$80	$40	$40	-
Total current liabilities	$750	$570	-	-
Long-term liabilities:
Long-term debt	$220	$190	$30	-
Total Liabilities	$970	$760	-	-
Shareholder's equity:
Common Stock	$540	$480	$60	-
Retained Earnings	$220	$210	$10	-
Total stockholders' equity	$760	$690	-	-
Total liabilities & Equity	$1,730	$1,450	-	-
Total Sources & Uses	-	-	$345	$360
Decrease in Cash & Cash equivalents	-	-	$15	-

The Sources and Uses Fund report provides the launching pad (so to speak) for the preparation of the cash flow statement, as it tests the accuracy of the balance sheet and distinguishes the sources of fund (sources) from the use of fund (uses). Of course, before the cash flow statement can be prepared, additional information will be needed. Information will be needed from the income statement, as well as any other information (usually found in the notes to the accounts) that pertains to charges against/addition to income as well as changes to other line items on the balance sheet.

Statement of Cash Flow - Indirect Method
	12/31/02
Net Income	$29,437
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation & Amortization	$6,542
Gain on sale of fixed assets	$2,327
Changes in current assets and current liabilities:
Receivables	$(19,451)
Inventories	$134
Prepaid Expenses	$1,844
Accounts Payable	$4,228
Accrued Wages	$1,093
Curr. portion of L/T debt	($8,676)
Cash provided by operating activities	$17,478
Investing Activities:
Proceeds from sale of fixed assets	$25,144
Capital expenditures	($40,936)
Short term investments	$2,788
Net cash from (used in) investing activities	($13,004)
Financing activities:
Proceeds from long-term debt	$19,011
Payments of dividends	($9,552)
Issue of common stock	$12,021
Exercise of stock options	$6,300
Net cash from (used in) Financing activities	$27,780
Effect of changes in exchange rate on cash	$2,710
Net increase/decrease in cash and cash equivalents	$34,964
Cash & cash equivalents at the beginning of the period	$17,225
Cash & cash equivalents at the end of the period	$52,189

Cash and cash equivalents at the end of the period (as shown on the Cash Flow Statement) should be equaled to the cash and cash equivalents total on the balance sheet for the same accounting period.