Cash Flow Statement Dr Craig Ruff Department of

Cash Flow Statement Dr. Craig Ruff Department of Finance J. Mack Robinson College of Business Georgia State University © 2014 Craig Ruff 1

Remember Derrick? In last video, we had this simple way of analyzing Derrick’s cash flow change from Jan 30 th to Feb 30 th. Starting Cash (Feb 1) Produced 30, 000 packages to sell Produced 10, 000 packages to add into inventory Cash In Ending Cash (Feb 30) © 2014 Craig Ruff $240, 000 -$120, 000 -$40, 000 $100, 000 $180, 000 2

Remember Derrick? Now lets link this change in the cash to Derrick’s February ‘income statement’… Starting Cash (Feb 1) Produced 30, 000 packages to sell Produced 10, 000 packages to add into inventory Cash In Ending Cash (Feb 30) © 2014 Craig Ruff $240, 000 -$120, 000 -$40, 000 $100, 000 $180, 000 Sales - COGS “Income” 150, 000 -120, 000 3

Remember Derrick? Now bring in Derrick’s February ‘income statement’… Starting Cash (Feb 1) Produced 30, 000 packages to sell Produced 10, 000 packages to add into inventory Cash In Ending Cash (Feb 30) © 2014 Craig Ruff $240, 000 -$120, 000 -$40, 000 $100, 000 $180, 000 That $120, 000 is reflected there… Sales - COGS “Income” 150, 000 -120, 000 30, 000 4

Remember Derrick? Now bring in Derrick’s February ‘income statement’… Starting Cash (Feb 1) Produced 30, 000 packages to sell Produced 10, 000 packages to add into inventory Cash In Ending Cash (Feb 30) $240, 000 -$120, 000 -$40, 000 $100, 000 $180, 000 There is a disconnect: only $100, 000 of that $150, 000 was cash in the door. Sales - COGS “Income” © 2014 Craig Ruff 150, 000 -120, 000 30, 000 5

Remember Derrick? Now bring in Derrick’s February ‘income statement’… Starting Cash (Feb 1) Produced 30, 000 packages to sell Produced 10, 000 packages to add into inventory Cash In Ending Cash (Feb 30) $240, 000 -$120, 000 -$40, 000 $100, 000 $180, 000 The income statement does not reflect this increase in inventory, as that was just a balance sheet effect. The cost of inventory does not go to the income statement until it is sold and subtracted through the cost of goods sold. Sales - COGS “Income” © 2014 Craig Ruff 150, 000 -120, 000 30, 000 6

For reference, here is the January 30 th balance sheet… Balance Sheet: January 30 Cash 240, 000 Common Stock 400, 000 A/R 100, 000 Retained Earnings 20, 000 80, 000 Total Liab. And Equity 420, 000 Inv. Total Assets © 2014 Craig Ruff 420, 000 7

For reference, here is the February 30 th balance sheet… Balance Sheet: February 30 Cash 180, 000 Common Stock 400, 000 A/R 150, 000 Retained Earnings 50, 000 Inv. 120, 000 Total Liab. And Equity 450, 000 Total Assets © 2014 Craig Ruff 450, 000 8

Think about how the indirect cash flow statement will pick this up. Income $30, 000 Increase in AR from Jan 30 to Feb 30 -$50, 000 Increase in Inventory from Jan 30 to Feb 30 -$40, 000 SUM © 2014 Craig Ruff -$60, 000 9

Compare the cash flow statement to the actual change in cash… Income $30, 000 Increase in AR from Jan 30 to Feb 30 -$50, 000 Increase in Inventory from Jan 30 to Feb 30 -$40, 000 SUM -$60, 000 Cash on Jan 30 Cash on Feb 30 Actual Change AR and inventory are operational accounts. © 2014 Craig Ruff $240, 000 $180, 000 -$60, 000 The actual change in cash is easy to calculate. The cash flow statement is designed to tell a story. 10

A more complicated (and comprehensive) example… Cash Account receivable Inventory Total current assets Gross fixed assets 2010 $1, 000 $5, 200 $12, 400 $18, 600 $64, 600 2011 $1, 800 $4, 200 $13, 500 $19, 500 $74, 800 (Accumulated depreciation) ($10, 200) ($11, 300) Net fixed assets Total assets $54, 400 $73, 000 $63, 500 $83, 000 Notes payable Accounts payable Accruals Total current liabilities Long-term debt Common stock at par Additional paid in capital Retained earnings Total liabilities and equity $1, 000 $1, 700 $900 $3, 600 $23, 800 $7, 000 $18, 200 $20, 400 $73, 000 $1, 400 $3, 100 $600 $5, 100 $27, 900 $8, 000 $19, 000 $23, 000 $83, 000 © 2014 Craig Ruff Additional Data from 2011 Income Statement: Sales in 2011 Net income in 2011 $238, 000 $9, 000 11

Cash Flow from Operations Cash Flow from Investing Cash Flow from Financing © 2014 Craig Ruff NIDD 12

Additional Data from 2011 Income Statement: Sales in 2011 Net income in 2011 $238, 000 $9, 000 Cash Flow from Operations Cash Account receivable Inventory Total current assets Gross fixed assets 2010 $1, 000 $5, 200 $12, 400 $18, 600 $64, 600 2011 $1, 800 $4, 200 $13, 500 $19, 500 $74, 800 (Accumulated depreciation) ($10, 200) ($11, 300) Net fixed assets Total assets $54, 400 $73, 000 $63, 500 $83, 000 Notes payable Accounts payable Accruals Total current liabilities Long-term debt Common stock at par Additional paid in capital Retained earnings Total liabilities and equity $1, 000 $1, 700 $900 $3, 600 $23, 800 $7, 000 $18, 200 $20, 400 $73, 000 $1, 400 $3, 100 $600 $5, 100 $27, 900 $8, 000 $19, 000 $23, 000 $83, 000 Net Income $9, 000 NIDD Depreciation Expense $1, 100 Accts. Rec $1, 000 Inventory -$1, 100 Accts. Pay $1, 400 Accruals -$300 OPERATIONS $11, 100 13

Additional Data from 2011 Income Statement: Sales in 2011 Net income in 2011 $238, 000 $9, 000 Cash Flow from Investing Cash Account receivable Inventory Total current assets Gross fixed assets 2010 $1, 000 $5, 200 $12, 400 $18, 600 $64, 600 2011 $1, 800 $4, 200 $13, 500 $19, 500 $74, 800 (Accumulated depreciation) ($10, 200) ($11, 300) Net fixed assets Total assets $54, 400 $73, 000 $63, 500 $83, 000 Notes payable Accounts payable Accruals Total current liabilities Long-term debt Common stock at par Additional paid in capital Retained earnings Total liabilities and equity $1, 000 $1, 700 $900 $3, 600 $23, 800 $7, 000 $18, 200 $20, 400 $73, 000 $1, 400 $3, 100 $600 $5, 100 $27, 900 $8, 000 $19, 000 $23, 000 $83, 000 Gross Fixed -$10, 200 INVESTING -$10, 200 14

Additional Data from 2011 Income Statement: Sales in 2011 Net income in 2011 $238, 000 $9, 000 Cash Flow from Financing Cash Account receivable Inventory Total current assets Gross fixed assets 2010 $1, 000 $5, 200 $12, 400 $18, 600 $64, 600 2011 $1, 800 $4, 200 $13, 500 $19, 500 $74, 800 (Accumulated depreciation) ($10, 200) ($11, 300) Net fixed assets Total assets $54, 400 $73, 000 $63, 500 $83, 000 Notes payable Accounts payable Accruals Total current liabilities Long-term debt Common stock at par Additional paid in capital Retained earnings Total liabilities and equity $1, 000 $1, 700 $900 $3, 600 $23, 800 $7, 000 $18, 200 $20, 400 $73, 000 $1, 400 $3, 100 $600 $5, 100 $27, 900 $8, 000 $19, 000 $23, 000 $83, 000 Notes Payable $400 Long Term Debt $4, 100 Common Stock at Par $1, 000 Addt. Pd. in Capital Dividends FINANCING $800 NIDD -$6, 400 -$100 15

Cash Flow from Operations OPERATIONS Cash Flow from Investing INVESTING -$10, 200 Cash Flow from Financing FINANCING -$100 SUM $800 Compare to actual change in cash: $1, 800 - $1, 000 = $800 © 2014 Craig Ruff $11, 100 It is the story. 16

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