Statement of Cash Flows

The statement of cash flows highlights the activities that impact cash flows and affect the overall cash balance.

Activities on the statement of cash flows fall into one of the following three categories:

·         Operating activities: Cash flows listed as the result of operating activities relate to receipts and disbursements that arose in connection with the central activity of the organization.

·         Investing Activities: Investing activities report cash flows created by events that (1) are separate from the central or daily operations of the business and (2) involve an asset.

·         Financing Activities: Like investing activities, the third section of this statement—cash flows from financing activities—is unrelated to daily business operations but, here, the transactions relate to either a liability or a stockholders’ equity balance.

(Hoyle and Skender, Financial Accounting, Section 3.4)

There are two methods of presenting a Statement of Cash Flows:

·         Direct Method: (also called the income statement method) reports cash receipts and cash disbursements from operating activities. The difference between these two amounts in the net cash flow from operating activates. In other words, the direct method deducts from operating cash receipts the operating cash disbursements. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement.

·         Indirect Method: (or reconciliation method) starts with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn't affected cash.

    Depreciation: Depreciation must be added back into net income on the statement of cash flows when using the indirect method.

    Increase in Inventory: The net change in inventory must be subtracted from net income on the statement of cash flows when using the indirect method.

     Increase in Accounts Receivable: The net change in accounts receivable must be subtracted from net income on the statement of cash flows when using the indirect method.

     Increase in Accounts Payable: The net change in accounts payable must be added to net income on the statement of cash flows when using the indirect method.

     Increase in Other Current Liabilities: The net change in other current liabilities must be added to net income on the statement of cash flows when using the indirect method.

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Free Cash Flow: Free cash flow (FCF) represents the cash that a company generates after expending the money required to maintain or expand its asset base.

(Free Cash Flow) = (cash flow from operations) – (capital expenditures)

http://www.investopedia.com/terms/f/freecashflow.asp#ixzz2ByE1APkI

Example (Indirect Method):

Metropolitan Manufacturing Company, Inc.

Net Income	$156,000
Depreciation	56,000
Increase in Inventory	(298,000)
Increase in Accounts Receivables	(40,000)
Increase in Accounts Payable	110,000
Increase in Other Current Liabilities	39,000
Cash Flow Provided By (Used For) Operations	$23,000
Capital Expenditures	$(34,000)
Sale of Investments	3,000
Cash Flow Provided By (Used For) Investments	$(31,000)
Increase in Bank Debt	$130,000
Decrease in Long-Term Debt	(50,000)
Payment of Dividends	(46,000)
Cash Flow Provided By (Used For) Financing	$34,000
Net Cash Increase	$26,000
Add: Beginning Cash Balance	107,000
Cash at End of Year	$133,000

(Fields, The Essentials of Finance and Accounting for Nonfinancial Managers, Page 72)