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Lecture 9

COMMERCE 1AA3 Lecture Notes - Lecture 9: Cash Flow Statement, Operating Cash Flow, Accrual

Course Code
Aadil Merali Juma

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Chapter 10- Statement of Cash Flows
The Purpose of the Statement of Cash Flows:
To provide information about cash receipts, cash payments, and the net change in
cash resulting from the operating, investing, and financing activities of a company
during a specific period.
You can have a negative cash flow and positive revenue when people aren’t paying you
fast enough and if you aren’t selling your inventory fast enough
A company’s balance sheet reports its cash position at a specific position at a specific
date, and its balance sheets from consecutive financial periods show whether its cash
balance icnreased or decreased over the interim period. But the balance sheet doesn’t
tell us what caused the cash balance to change. The income statement reports a
company’s revenues, expenses, and net income, but because it is prepared on an
accrual basis, it provides limited information about how cash f lows were affected by the
company’s business activities during the reporting period. To gain insight into how a
company’s cash flows affected cash position during a reporting period, we need another
financial statement: the statement of cash flows.
This statement includes detailes about a company’s cash receipts and cash
distrursements from operating, investing, and financing activities and permits a user to
determine exactly what caused the company’s cash balance to icnrease or decrease
during the period. Because the statement describes cash flow activities during
aparticular fiscal period and not a specific point in time, it is dated the same way as the
income statement and the statement of changes in shareholder’s equity.
Income statement, balance sheet, and statement of retained earningd are prepared on
the accrual basis, and can be prepared from the accounts on the trial balance. The SCF is
prepared on the cash basis, and it CANNOT be prepared from the accounts on the trial
Timing of the Financial Statements

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The general format of the cash flow statement is organized around the three activities
of operating, investing, and financing.
o Operating: mainly related income statement items, current assets, and current
liabilities, revenues. Transaction affecting A/R and A/R are also operating
activities create revenue, expenses, gains and losses (interest
payment/expense is operating) operating is the most important activity.
Operating cash flow is your salary essentially. This activity is most sustainable
and show a great indication of how healthy a company is.
o Investing: mainly related to long-term assets and investments
o Financing: mainly related to long-term liabilities and owner’s equity
Cash flows from investing and financing activities are straightforward.
Relationship to Balance Sheet
The cash flow statement is prepared differently from other basic financial statements.
o First, because the statement requires detailed information concerning the
changes in account balances that occurred between two periods of time, an
adjusted trial balance does not provide the data necessary for the statement.
o Second, the cash flow statement deals with cash receipts and payment. The
accrual concept is not used in the preparation of a cash flow statement.
Sources for Preparing the Statement
Comparative balance sheet you need 2 balance sheets, one from last year and one
from this year.
Current income statement
Additional information
Cash from Operating Activities
Cash from operating activities results from converting net income from the accrual basis
to the cash basis
Cash from operating activities can be calculated using one of two methods:
o The indirect method- you need to know how to create the operating activity
using this method.

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o The direct method calculations will be given to you in this course. Generate
the direct statement of cash flows using information in the balance sheet and
income statement.
o Both methods give the same result
Indirect Method: Calculations
The indirect method begins with net income, then adjusts that number to calculate
operating cash flows
The idea behind the indirect method is converting net income from the accrual basis
to the cash basis by making certain adjustments.
These adjustments are for items that affect accrual income but not cash income, and
items that affect cash income but not accrual income.
Depreciation decreases net income
Do we pay cash for depreciation? No, which means that depreciation is NOT a cash
Therefore, depreciation REDUCES ACFRUAL INCOME but has NO EFFECT ON CASH
To convert accrual income into cash income, depreciation must be (added/subtracted) to/from
accrual income Add
A company provided services for cash $50,000. Depreciation expense is $10,000. What is net
income for this company?
Revenue: 50,000
Depreciation (10,000)
Income 40,000
What is the cash income for the company?
1) Cash Flow Template: Operating
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