FABM_CSF.pptx Cash flow statement direct

Fundamental of accountancy business management

1. Cash Flow Statement What is a Cash Flow Statement? a. A specific list of the manager’s expenses. b. A document that lists all the transactions of the business. c. A list that shows the money goes out of but not in a business. d. A report that shows how money moves through an organization

2. Learning Competency: Discuss the components and structure of a Cash Flow Statement (CFS) and its preparation. Cash Flow Statement

3. Specific Objectives: 1. Define Cash Flow Satement 2 . Discuss the components and structure of a CFS

4. After completing the module on the Statement of Financial Position (SFP), Statement of Comprehensive Income (SCI), Statement of Changes in Equity (SCE), we will now look into another financial statement that describes the movement of cash in a company, the Cash Flow Statement

5. Cash is one of the most important resource of an organization. Without cash, it would be very hard for a business to survive, because cash is essential for its operation and growth.

6. There are many ways in which a business earns and spends its cash. 1. A business earns cash through: (INFLOWS) • Sales of products or service • Loan or credit card proceeds • Asset sales • Owner investments

7. 2. A business spends cash through: (OUTFLOWS) • Business expenditures •Owner withdrawals • Loan or credit card principal payments • Asset purchases

8. These inflows and outflows are classified into three main group of business activity A. Operating Activities B. Investing Activities C. Financing Activities

9. These are transactions that relate to how a business earns money on a day-to-day basis. Primarily, cash inflows are made every time customers buy their products or avail of their services; cash outflows are made when the business pay employees, utilities, suppliers, taxes, and other sales and business expenditure activities A. Operating Activities

10. B. Investing Activities Investing activities come from the sale (receipts) and purchase (payments) of non-current assets, businesses, and securities used for the maintenance of and additions to support/expand the company’s operation and competitiveness in the future

11. -the cash inflows (receipts) and outflows (payments) from financing activities come from entering into loans to avail more cash or to pay long-term debts; owner’s additional investments and withdrawals; issuing stocks and paying out dividends and similar Transactions C. Financing Activities

12. Naturally, it is desirable for a business to be generating a big portion of its cash inflow from operating activities, as this would mean positive sign in terms of growth in sale of goods and services. Without which, investing and financing for the growth of the business will not be feasible. Notice that not all transactions involve cash, like making a sale or purchase on account (no cash receipts/payments made at the time of the transaction), and thus, have no impa ct on cash flow. To analyze a company’s cash flow, the focus will be on transactions involving actual exchanges of cash

13. 1. Payment of Bank Loan 6. Owner’s Drawings Operating 2. Collection from Customers 7.Payment of Accounts’ payable 3. Purchase of Supplies 8. Estimated Doubtful Accounts 4. Proceeds from Sale of truck 9. Payment of Tax 5. Payment of Worker’s salaries

14. Aside from learning how to classify transactions into the three main components of a business activity, you have to understand that each transaction also brings corresponding effects on these three main business components. That is why, you also have to analyze the behavior of each transaction. Remember the normal balances of accounts discussed in FABM1? Cash is an asset and the normal balance for assets is debit. Therefore, transactions that debit cash adds to the company’s cash balance while transactions where cash is credited would mean making payments and decreases cash

15. Direct Approach

16. Prepare A Cash Flows Statement – ABC Merchandise Cash Sales - 25,000 Collection of Receivables – 15,000 Refund to Customers - 500 Refund from Suppliers - 1000 Payment to Suppliers – 4,000 Payment of Expenses - 5,000 Supplies Bought - 500 Cash Purchases of Merchandise - 600 Freight-In - 500 Acquisition of Equipment - 5,000 Initial Investment/Capital – 4,000 Drawings/Withdrawals – 3,000 Cash Beginning – 10,000

17. Cash From Operating Activities The  operating activities  on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services. These operating activities might include: Receipts from sales of goods and services Interest payments Income tax payments Payments made to suppliers of goods and services used in production Salary and wage payments to employees Rent payments Any other type of operating expenses

18. Cash From Investing Activities Investing activities  include any sources and uses of cash from a company’s investments. Purchases or sales of assets, loans made to vendors or received from customers, or any payments related to  mergers and acquisitions (M&A)  are included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

19. Cash From Financing Activities Cash from financing activities includes the sources of cash from investors and banks, as well as the way cash is paid to shareholders. This includes any dividends, payments for  stock repurchases , and repayment of debt principal (loans) that are made by the company.

20. How to Prepare a Cash Flow Statement 1 . Gather Financial Statements Before you begin, collect the necessary financial statements: Income statement: Provides information on revenues, expenses, and net income. Balance sheet: Shows the company’s assets, liabilities, and equity at the beginning and end of the period. 2. Determine the Reporting Period Identify the period for which you are preparing the cash flow statement. This could be monthly, quarterly, or annually.

21. 3 . Choose the Method Decide whether you will use the direct method or the indirect method to prepare the CFS. Direct Method:  The direct method involves listing all cash receipts and payments during the reporting period. Indirect Method:  The indirect method starts with net income and adjusts for changes in non-cash transactions.

22. 4. Prepare the Statement Cash Flow from Operating Activities Direct Method: List cash receipts: Include cash collected from customers. List cash payments: Include cash paid to suppliers, employees, interest paid, and income taxes paid. Calculate net cash flow from operating activities: Subtract total cash payments from total cash receipts.

23. Indirect Method: Start with net income: Obtain this from the income statement. Adjust for non-cash items: Add back depreciation and amortization. Adjust for changes in working capital: Account for changes in accounts receivable, inventory, accounts payable, and other working capital accounts. Calculate net cash flow from operating activities: Combine the adjusted net income with changes in working capital .

24. Cash Flow from Investing Activities Identify cash transactions for investments: Include cash spent on purchasing fixed assets, cash received from selling assets, and cash spent on or received from investing in securities. Calculate net cash flow from investing activities: Subtract cash payments for investments from cash receipts from sales of investments. Cash Flow from Financing Activities Identify cash transactions for financing: Include cash received from issuing stock or debt and cash spent on repaying debt or buying back stock. Calculate net cash flow from financing activities: Subtract cash payments for financing activities from cash receipts from financing activities.

25. 5 . Combine All Sections Add the net cash flows from operating, investing, and financing activities to determine the overall change in cash and cash equivalents for the period. 6 . Reconcile with Beginning Cash Add the change in cash to the beginning cash balance to arrive at the ending cash balance, ensuring it matches the cash balance reported on the balance sheet.

26. What Is the Cash Flow Formula? There are two methods of calculating cash flow: the direct method and the indirect method. Direct Cash Flow Method The   direct method   adds up all of the cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries. This method of CFS is  easier for very small businesses  that use the  cash basis  accounting method.

27. Indirect Cash Flow Method With the  indirect method , cash flow is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s assets and liabilities on the balance sheet from one period to the next. Therefore, the accountant will identify any increases and decreases to asset and liability accounts that need to be added back to or removed from the net income figure, in order to identify an accurate cash inflow or outflow.

28. Prepare A Cash Flow Statement – XYZ Marketing For the month of October 30, 2023 Collection of Receivables – 15,000 Refund to Customers - 500 Refund from Suppliers - 1000 Cash Payment of Interest – 5,000 Rent Expense – 10,000 Supplies Expense – 15,000 Utilities Expense - 5,000 Cash Sales - 70,000 Cash Purchases of Merchandise - 800 Sale of Equipment – 20,000 Payment of Dividends - Freight-In - 1,000 Acquisition of Equipment - 10,000 Initial Investment/Capital – 9,000 Drawings/Withdrawals – 2,000 Cash Beginning – 20,000