16:2723-1Statement of Cash FlowsChapter 2323-2OverviewnLike I said in ECON 136A, because of the SCF, users of the financial statements get the best of both worlds!nSCF bridges the gap created by “paper income”resulting from applying an accrual basis of accounting.nReconciles GAAP income to operating cash flows and separately displays cash from investing and financing activities.23-3Illustration(40)(30)(20)(10)-1020304050200120022003200420052006IncomeOperating cash flow sGot any thoughts about the above chart???Like: If the Company is showing all this income, why is the operating cash flow not tracking income?23-4Statement of Cash Flows- summaryThis will mean more later, but a statement of cash flows is an analysis of the change in the balance sheet accounts.nIf you reconcile the change in each of your balance sheet accounts, your SCF will work!!nThe key is presentation- Operating vs. Investing Vs. Financing activities.
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16:2723-5Overview- how it worksCash from operations:nShows the cash provided by operationsnTypical presentation called “indirect” because it reconciles the net income (accrual) to cash from operations.nThink of it as net income, adjusted for non-cash activities, including changes in current assetsCash from investing:nGross!nShows cash from investing activitiesnThink of it as cash from long-term assets, similar to unusual items in the income statement.Cash from financing:nGross!nShows cash from financing activitiesnThink of it as cash from borrowing and equity transactions23-6STATEMENT OF CASH FLOWS EXAMPLE23-7Operating section- Indirect MethodnReconciles net income to cash flows from operations by:nStarts with net income and seeks to reconcile that number to the cash actually generated from operationsnRemoves non-cash items, like depreciation & amortizationnRemoves items which will be presented in the investing and financing sections separatelyni.e remove gains from sales of long-term assetsnShows changes in current assetsnThink about it- if A/R increased $100k, how does this impact cash?23-8Operating section illustrationOpening balance 1,000,000Sales on credit10,000,000Cash sales100,000Collections9,500,000Opening balance 1,000,000Sales on credit10,000,000(10,000,000)Cash sales(100,000)Collections(9,500,000)Ending1,500,000(10,100,000)Change in A/R500,000Net income10,100,000Adjustments to reconcile net income to cash provided by operations:Increase in accounts receivable(500,000)Cash provided by operations9,600,000We collected9,500,000We made cash sales100,0009,600,000LETS CHECK IT- FROM ABOVEAccounts ReceivableNET INCOMEASSUMED ACTIVITY:HOW THE STATEMENT OF CASH FLOWS WOULD APPEAR: