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Certified Public Accountant

Cash Flow Statement

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The statement of cash flows provides answers to questions such as the following:

A) Where did the funds go?

B) Why was it possible to pay dividends despite a net loss?

C) What were additions to or dispositions of property?

D) What was the amount money borrowed or capital stock issued during the year?

E) Why was money borrowed during the year?

Only this statement shows where the funds came from during the year and how they were used. It shows changes between the beginning and ending balance sheets and changes summarized by the income statement. The financing and investing activities are stated on a basis of cash changes or working capital changes (current assets less current liabilities)

A) Operating activities: The statement begins with cash flow provided by operations or cash flows from operating activities. The transactions below are added or subtracted from net income (loss) for the year

I) Examples of transactions that must be shown although they did not affect cash or working capital are:

1) Purchase of assets in exchange for assets

2) Issue stock for property

3) Debt converted into stock

4) Depreciation and amortization

5) Non cash interests and losses

6) Loss on sale of equipment

7) Cumulative effect of a change in accounting principle

8) Restructuring charges

9) (Gains) losses from extraordinary events

II) Examples of transactions that must be shown for increases and decreases in assets and liabilities are as follows:

1) Increase in accounts receivable, inventory, prepaid expenses are subtracted

2) Increases in accrued liabilities, accounts payable are added

The opposite of the above is added or subtracted depending on whether they are assets or liabilities.

B) Cash flow from investing activities-This section shows the following:

1) Additions to property and plants

2) Acquisition of businesses

3) Proceeds on disposal of assets

C) Cash flow from financing activities- This section shows the following:

1) Proceeds from debt

2) Debt payment of principal

3) Debt financing cost

D) Increases and decrease of cash- This section shows the following:

1) Net Increase (decreases) in cash

2) Cash at the beginning of the year

3) Cash at the end of the year

Let us “see-saw the numbers” for cash flow

Operating activity = Investing activity+ Financing activity+ net change in cash

22 equal 3 Plus 18 Plus 1

Operating activity -Investing activity - Financing activity =net change in cash

22 Less 3 Less 18 equal 1

You don’t need a college degree to “see saw” in the numbers in the above equations in checking your investment company’s cash flow statement. Let’s try an example below:

Cash flows from operating activities:

Net income 1

Adjustments to reconciles net income:

Depreciation and amortization 13

Non-cash interest 3

Restructure charges 5

Net cash provided 22

Cash flows from investing activities:

Proceeds from asset sale 3

Cash flows from Financing activities:

Principal payment on debt 18

Net increase in cash 1

Note: if there was a beginning cash balance it would be added to cash increase

to arrive at ending cash balance

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