The McGraw-Hill Companies, Inc.

, 2002
McGraw-Hill/Irwin
Slide
13-1
STATEMENT OF CASH
FLOWS
Chapter
13
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-2
Provides information about the cash receipts
and cash payments of a business entity
during the accounting period.
Helps investors with questions about the
companys:
Ability to generate positive cash flows.
Ability to meet its obligations and to pay
dividends.
Need for external financing.
Investing and financing transactions for the
period.
Purpose of the Statement of Cash
Flows
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-3
Company Name
Statement of Cash Flows
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activities $ #####
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash provided (used) by investing activities #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activities #####
Net increase (decrease) in Cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-4
The Statement of Cash Flows must
include the following three sections:
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Classification of Cash Flows
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-5
Outflows to:
Suppliers of merchandise
and services.
Employees.
Lenders for interest.
Governments for taxes.
Inflows from:
Sales to customers.
Interest and dividends
received.
Cash
Flows
from
Operating
Activities
+
_
Operating Activities
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-6
Cash
Flows
from
Investing
Activities
+
_
Inflows from:
Selling investments and plant
assets.
Collecting of principal on loans.
Outflows to:
Payments to acquire
investments and plant assets.
Purchase debt or equity
investments.
Make loans.
Investing Activities
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-7
+
_
Inflows from:
Short-term and long-term
borrowing.
Owners (for example, from
issuing stock).
Outflows to:
Repayments of borrowed
funds.
Owners for dividends.
Purchase treasury stock.
Financing Activities
Cash
Flows
from
Financing
Activities
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-8
Cash
Equivalents
Cash
Currency
Short-term, highly liquid investments.
Readily convertible into cash.
So near maturity that market value is unaffected by
interest rate changes.
Cash and Cash Equivalents
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-9
Company Name
Statement of Cash Flows
Period Covered
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activities $ #####
Cash flows from investing activities:
[List of individual inflows and outflows]
Net cash provided (used) by investing activities #####
Cash flows from financing activities:
[List of individual inflows and outflows]
Net cash provided (used) by financing activities #####
Net increase (decrease) in Cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
The operating
cash flows section
can be prepared
using either the
direct method or
the indirect
method.
Lets look at
the Direct
Method for
preparing the
Statement of
Cash Flows.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-10
Accrual basis revenue includes sales that
did not result in cash inflows.
Can be computed as:
Cash Received from
Customers
Decrease in
receivables
Increase in
receivables
+

=

=

Net Sales
Direct Method
Cash Received from Customers
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-11
+

=

=

The A/R balance was $80,000 on 12/31/02 and
$110,000 on 12/31/03. If accrual sales revenue
for 2003 was $900,000, what was cash basis
revenue?
Decrease in
receivables
Increase in
receivables
Net Sales
$900,000
Direct Method
Cash Received from Customers
Cash Received from
Customers
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-12
Cash Received from
Customers = $870,000
Decrease in
receivables
$30,000
Increase in
receivables

=

Net Sales
$900,000
The A/R balance was $80,000 on 12/31/02 and
$110,000 on 12/31/03. If accrual sales revenue
for 2003 was $900,000, what was cash basis
revenue?
Direct Method
Cash Received from Customers
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-13
Now that we
understand the
process, lets look at
some simplified
formulas for
computing direct
method cash flows.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-14
Interest
Received
=
Interest
Revenue
{
+ Decrease in
interest receivable
- Increase in interest
receivable
Dividends
Received
=
Dividends
Revenue
{
+ Decrease in
dividends receivable
- Increase in dividends
receivable
Direct Method
Interest and Dividends Received
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-15
Step 1





Step 2
Purchases = COGS
{
+ Increase in inventory
- Decrease in inventory
Cash paid for
merchandise
= Purchases
{
+ Decrease in A/P
- Increase in A/P
Direct Method
Cash Paid for Merchandise
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-16
How much did Lug Lite pay for inventory in
2003?




a. $900,000
b. $923,000
c. $947,000
d. $877,000
Inventory, 1/1/03 130,000 $ A/P, 1/1/03 23,000 $
Inventory, 12/31/03 165,000 $ A/P, 12/31/03 35,000 $
COGS, 12/31/03 900,000 $
Direct Method
Cash Paid for Merchandise
Purchases for 2003 were $935,000.
Purchases = $900,000 + $35,000
Cash Paid for Merchandise in 2003
was $923,000.
Cash Paid = $935,000 - $12,000
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-17
After deducting depreciation and other
noncash expenses, the cash paid for
expenses is affected by
(1) whether the expense was prepaid, and
(2) whether the expense was accrued.
Cash Paid for
Expenses
= Expenses
+ Increase in
prepaid expenses
- Decrease in
prepaid expenses
+ Decrease in
accrued liabilities
- Increase in
accrued liabilities
{ {
Direct Method
Cash Payments for Expenses
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-18
Now, lets
prepare a direct
method
Statement of
Cash Flows for
Grate Big
Company.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-19
Grate Big Company
Comparative Balance Sheets - Assets
December 31,
2002 2003
Cash 60,000 $ 70,370 $
Accounts Receivable, net 27,000 35,000
Inventory 230,000 200,000
Trading Securities - 25,000
Equipment, net 500,000 425,000
Investment in Tiny Co. 100,000 130,000
Total Assets 917,000 $ 885,370 $
Direct Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-20
Grate Big Company
Comparative Balance Sheets - Liabilities and Equity
December 31,
2002 2003
Accounts Payable 15,000 $ 12,000 $
Salaries Payable 7,000 5,000
Interest Payable 11,950 7,350
Income Tax Payable 20,000 17,000
Notes Payable, Bob's Bank 70,000 60,000
Bonds Payable 250,000 150,000
Premium on Bonds Payable 5,000 4,000
Common Stock 450,000 500,000
Retained Earnings 88,050 130,020
Total Liabilities and Equity 917,000 $ 885,370 $
Direct Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-21
Grate Big Company
Income Statement Amounts
For the Year Ending December 31, 2003
Sales Revenues 800,000 $
Cost of Goods Sold 560,000
Depreciation Expense 5,000
Interest Expense 28,050
Income Tax Expense 27,980
Salary Expense 80,000
Other Expenses 71,000
Amortization of Bond Premium 1,000
Gain on Sale of Equipment 3,000
Extraordinary Loss 30,000
Equity in Investee Income 40,000
Net Income 41,970 $
Direct Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-22
Direct Method - Example
Additional Information
Trading Securities were purchased during 2003
at a cost of $25,000.
Equipment with a book value of $40,000 was
sold during the year for $43,000.
Equipment with a book value of $30,000 was
destroyed during a freak flood in 2003. There
was no insurance.
Grate Big holds a 25% investment in Tiny Co.
and accounts for it using the Equity Method.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-23
Direct Method - Example
Additional Information
Grate Bigs tax rate is 40%.
The Notes Payable to Bobs Bank carry a 12%
rate. The payments are due on the first day of
each month.
The Bonds Payable carry a 9% rate. Interest is
payable semiannually on July 1 & Jan. 1.
Grate Big sold stock during 2001 for $50,000.
Grate Big received $10,000 dividends from Tiny
Co.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-24
Salary Expense 80,000 $
2000
Add: Decrease in Salary Payable 2,000
Cash Paid to Employees 82,000 $
Sales Revenues 800,000 $
Less: Increase in A/R (8,000)
Cash Received from Customers 792,000 $
Direct Method - Example
Cash Received from Customers





Cash Paid to Employees
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-25
Interest Expense 28,050 $
2000
Add: Decrease in Interest Payable 4,600
Cash Paid for Interest 32,650 $
Cost of Goods Sold 560,000 $
Add : Decrease in A/P 3,000
Less: Decrease in Inventory (30,000)
Cash Paid for Inventory 533,000 $
Direct Method - Example
Cash Paid for Inventory





Cash Paid for Interest
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-26
Income Tax Expense 27,980 $
2000
Add: Decrease in Taxes Payable 3,000
Cash Paid for Taxes 30,980 $
Add : Dividends from Tiny Co. 10,000 $
Less: Purchase of Trading Securities (25,000)
Less: Other Operating Expenses (71,000)
Cash Flow from Other Sources (86,000) $
Direct Method - Example
Cash Paid for Taxes





Other Operating Cash Flows
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-27
Cash Received from Customers 792,000 $
Cash Paid to Employees (82,000)
Cash Paid for Inventory (533,000)
Cash Paid for Interest (32,650)
Cash Paid for Taxes (30,980)
Cash Paid to Other Sources (86,000)
Cash From Operating Activities 27,370 $
Direct Method - Example
Cash Flows From Operating Activities
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-28
Grate Big Company
Statement of Cash Flows
For the Period Ending December 31, 2003
I. Operating Cash Flows 27,370 $
II. Investing Cash Flows
Proceeds from sale of Equipment 43,000
III. Financing Cash Flows
Proceeds from sale of Stock 50,000 $
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period 10,370 $
Add: Beginning Cash Balance 60,000
Ending Cash Balance 70,370 $
Equipment with a book value of
$40,000 was sold for $43,000.
Notes Payable decreased from
$70,000 to $60,000 during 2003.
Bonds Payable decreased from
$250,000 to $150,000 during 2003.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-29
Grate Big Company
Statement of Cash Flows
For the Period Ending December 31, 2003
I. Operating Cash Flows 27,370 $
II. Investing Cash Flows
Proceeds from sale of Equipment 43,000
III. Financing Cash Flows
Proceeds from sale of Stock 50,000 $
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period 10,370 $
Add: Beginning Cash Balance 60,000
Ending Cash Balance 70,370 $
Notice that the Ending
Cash Balance per the
Statement of Cash Flows
agrees with the 12/31/03
Cash balance on the
Balance Sheet.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-30
Lets look at the
Indirect Method
that is used by
over 97% of all
companies.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-31
Net
Income
Cash Flows
from Operating
Activities
Indirect Method
Changes in current assets and current
liabilities as shown on the following table.
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-32
Use this table when adjusting Net Income
to Operating Cash Flows.
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Indirect Method
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-33
Lets prepare a
complete
Statement of
Cash Flows
using the
Indirect Method.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-34
Joes Place has prepared the Balance Sheet
as of March 31, 2003, and March 31, 2002.
The Income Statement for the year ended
3/31/03 has also been prepared. Joe
needs help preparing the Statement of
Cash Flows.
Joes
Place
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-35
Joe's Place
Income Statement
For the Year Ending 3/31/03
Revenues 727,000 $
Operating Expenses (748,000)
Depreciation Expense (6,000)
Gain on Sale of Land 8,000
Net Loss (19,000) $
The $8,000 gain was the
result of selling land
costing $32,000 for $40,000
during the period.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-36
Joe's Place
Balance Sheets
3/31/02 3/31/03
Assets
Cash 90,000 $ 62,000 $
Accounts Receivable 40,000 23,000
Inventory 300,000 350,000
Land 112,000 80,000
Equipment, net 45,000 39,000
Total Assets 587,000 $ 554,000 $
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-37
Joe's Place
Balance Sheets (cont.)
3/31/02 3/31/03
Liabilities
Accounts Payable 27,000 $ 38,000 $
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities 91,000 $ 47,000 $
Owners' Equity
Common Stock 450,000 $ 500,000 $
Retained Earnings 46,000 7,000
Total Owners' Equity 496,000 $ 507,000 $
Total Liabilities and OE 587,000 $ 554,000 $
Joes Place issued $50,000
of no par common stock to
settle the $50,000 note
payable.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-38
Joe's Place
Balance Sheets (cont.)
3/31/02 3/31/03
Liabilities
Accounts Payable 27,000 $ 38,000 $
Salaries Payable 14,000 9,000
Long-Term Note Payable 50,000 -
Total Liabilities 91,000 $ 47,000 $
Owners' Equity
Common Stock 450,000 $ 500,000 $
Retained Earnings 46,000 7,000
Total Owners' Equity 496,000 $ 507,000 $
Total Liabilities and OE 587,000 $ 554,000 $
Ending Retained Earnings
at 3/31/03 was computed
as follows:
Beginning R/E, 3/31/02 46,000 $
Net Loss for 2003 (19,000)
Dividends Paid in 2003 (20,000)
= Ending R/E, 3/31/03 7,000 $
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-39
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
With the indirect method, always
start with the net income or net
loss for the period.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-40
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add/Less: Changes in Current Assets & ?
Current Liabilities
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-41
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Accounts receivable decreased.
3/31/03 3/31/02
$23,000 - $40,000 = $(17,000)
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-42
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Accounts payable increased.
3/31/03 3/31/02
$38,000 - $27,000 = $11,000
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-43
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Inventory increased.
3/31/03 3/31/02
$350,000 - $300,000 = $50,000
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-44
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Salaries payable decreased.
3/31/03 3/31/02
$ 9,000 - $14,000 = $(5,000)
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-45
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Add: Depreciation Expense 6,000
Add back non-cash expenses.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-46
Joe's Place
Cash Flows from Operations:
Net Loss (19,000) $
Add: Decrease in Accounts Receivable 17,000
Increase in Accounts Payable 11,000
Subtract: Increase in Inventory (50,000)
Decrease in Salaries Payable (5,000)
Add: Depreciation Expense 6,000
Subtract: Gain on Sale of Land (8,000)
Net cash flow from operations (48,000) $
Subtract gains.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-47
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
The operating cash
flows amount comes
from the schedule
just prepared.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-48
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
Land originally costing $32,000
was sold for $40,000.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-49
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Net Change in Cash for the Period
Beginning Cash Balance
Ending Cash Balance
Dividends of $20,000 were paid to
owners during the year.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-50
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period (28,000) $
Beginning Cash Balance
Ending Cash Balance
Compute the net change in cash
for the period.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-51
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period (28,000) $
Beginning Cash Balance 90,000
Ending Cash Balance 62,000 $
Complete the Statement of Cash
Flows by reconciling beginning
cash to ending cash.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-52
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period (28,000) $
Beginning Cash Balance 90,000
Ending Cash Balance 62,000 $
Joe's Place
Balance Sheets
3/31/02 3/31/03
Assets
Cash 90,000 $ 62,000 $
Note that the ending
cash amount ties
back to the Joes
Place Balance Sheet
at 3/31/03.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-53
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period (28,000) $
Beginning Cash Balance 90,000
Ending Cash Balance 62,000 $
In addition, on the face
of the statement or in a
supplemental
schedule, disclose the
$50,000 noncash
financing activity.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-54
Joe's Place
Statement of Cash Flows
For the Year Ending 3/31/03
Cash Flows from Operating Activities (48,000) $
Cash Flows from Investing Activities
Proceeds from sale of land 40,000
Cash Flows from Financing Activities
Dividends paid to owners (20,000)
Decrease in Cash for the Period (28,000) $
Beginning Cash Balance 90,000
Ending Cash Balance 62,000 $
In addition, cash
interest payments and
cash tax payments
must also be disclosed
separately.
Indirect Method - Example
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-55
Cash Budgets are used by management to plan and
forecast future cash flows.
Force management to coordinate activities.
Provide managers with advance notice of available resources.
Provide targets useful in evaluating performance.
Provide advance warnings of potential cash shortages.
A Cash Budget can be used to:
Managing Cash Flows
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-56
Increase collection of accounts
receivables.
Keep inventory low.
Delay payment of liabilities.
Plan timing of major expenditures.
Invest idle cash.
Managing Cash Flows
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-57
Cash Budgeting
Cash Budget
May June July August
Beginning cash balance 27,500 $ 15,000 $ - $ - $
Add: Cash receipts 3,500
Total available cash 31,000 $
Less: Cash disbursements 16,000
Excess (deficiency) of
available cash over cash
disbursements 15,000 $
Financing needed
Financing repayments -
Ending cash balance
15,000 $
The ending cash balance of one month becomes the
beginning cash balance of the next month.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-58
Cash Budgeting
Cash Budget
May June July August
Beginning cash balance 27,500 $ 15,000 $ 10,000 $ 10,000 $
Add: Cash receipts 3,500 2,000 9,000 14,000
Total available cash 31,000 $ 17,000 $ 19,000 $ 24,000 $
Less: Cash disbursements 16,000 18,000 6,000 8,000
Excess (deficiency) of
available cash over cash
disbursements 15,000 $ (1,000) $ 13,000 $ 16,000 $
Financing needed 11,000 - -
Financing repayments - - 3,000 6,000
Ending cash balance
15,000 $ 10,000 $ 10,000 $ 10,000 $
Financing is needed in June because the company
must maintain a minimum cash balance of $10,000.
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
13-59
End of Chapter 13
Chester, ol
buddy, I wonder if
you could help
me with a little
cash flow
problem Im
having?