Matakuliah
Tahun
: V0282 - Manajemen Akuntansi Hotel
: 2009 - 2010
The Statement of Cash Flows
Chapter 5
Chapter Outline
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Understanding Cash Flows
The Purpose of the Statement of Cash Flows
Sources and Uses of Funds
Creating the Statement of Cash Flows
Statement of Cash Flows Analysis
Learning Outcomes
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State the reason cash flows are critical to the operation
of a successful business.
Identify sources and uses of funds to assist in the
creation of a statement of cash flows.
Create a statement of cash flows using an income
statement and two balance sheets.
Analyze a statement of cash flows to better manage the
cash flows of your own business.
Understanding Cash Flows
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Assume, for example, that you have income from a
variety of sources.
These sources may include money paid to you from a
job, income from parents or other family members, and
interest you may earn on savings accounts.
In addition, you have living and school expenses that
must be paid.
You know that you must have enough money on hand
to pay your bills as they become due.
Having access to cash at the right time (versus having
the right amount of cash) is important to individuals. It is
also critically important to businesses.
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The Purpose of the Statement of Cash
Flows
The statement of cash flow shows (SCF) shows all
sources and uses of funds from operating, investing,
and financing activities of a business.
The SCF is designed to report a business’s inflows and
outflows of money affecting the cash position as well as
its beginning and ending cash and cash equivalents
balances for each accounting period.
The cash inflows and outflows of a business are of
significant importance to a business’s owners,
investors, lenders, creditors, and managers.
The Purpose of the Statement of Cash
Flows
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Cash on a balance sheet is considered to be a current
asset.
Cash, in this case, refers to currency, checks on hand,
and deposits in banks.
Cash is not synonymous with the term “revenue” or
“sales.”
Cash equivalents are short-term, temporary
investments such as treasury bills, certificates of
deposit, or commercial paper that can be quickly and
easily converted to cash.
Sources and Uses of Funds
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Sources represent inflows and uses represent outflows
of funds for the hospitality business.
When comparing assets from last period’s balance
sheet to this period’s balance sheet, decreases in
assets represent sources of funds and increases in
assets represent uses of funds.
Accumulated depreciation behaves in an opposite
manner to the other assets.
This is because depreciation is a contra asset account.
Figure 5.1 Sources and Uses of Funds for Assets
Assets
Current Assets
Cash
Marketable Securities
Net Receivables
Inventories
Prepaid Expenses
Investments
Property and Equipment
Land
Building
Furnishings and Equipment
Accumulated Depreciation
Other Assets
Increases
Decreases
Use
Use
Use
Use
Use
Use
Source
Source
Source
Source
Source
Source
Use
Use
Use
Source
Use
Source
Source
Source
Use
Source
Sources and Uses of Funds
•
Alternatively, increases in liabilities and owners’ equity
represent sources of funds and decreases in liabilities
and owners’ equity represent uses of funds.
Figure 5.2 Sources and Uses of Funds for Liabilities and Owners’ Equity
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable
Notes Payable
Other Current Liabilities
Long-Term Liabilities
Long-Term Debt
Owners’ Equity
Common Stock
Paid in Capital
Retained Earnings
Increases
Decreases
Source
Source
Source
Use
Use
Use
Source
Use
Source
Source
Source
Use
Use
Use
Sources and Uses of Funds
Figure 5.3 Trick for Remembering Sources and Uses of Funds
Sources
↓ Assets*
↑ Liabilities
↑ Owners’ Equity
Uses
↑ Assets*
↓ Liabilities
↓ Owners’ Equity
*Remember that depreciation is a contra asset
account and behaves oppositely of all other assets,
so ↑ in depreciation is a source and ↓ of depreciation
is a use.
•
•
Up arrows represent “increases” and down arrows represent
“decreases.”
Assets in each column have opposite arrows from liabilities and
owners’ equity. Also, arrows in the left column are opposite of
those in the right column.
Sources and Uses of Funds
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If you can remember only one, you can remember all
the rest. Once you have that arrow correct, then you
can remember the directions of the other arrows. Be
careful, though!
If you get your one example backwards, then ALL of the
others are wrong! Memorize this “trick”; it will help you
immensely!
You can now put numbers to your sources and uses of
funds.
These numbers will show you increases and decreases
as shown in Figure 5.4.
Steps to Calculate Sources and Uses of
Funds
1. Draw the chart shown in Figure 5.3 to help you identify
sources and uses of funds.
2. Draw up arrows ↑ and down arrows ↓ next to the balance
sheets to indicate increases and decreases in the accounts
from 2009 to 2010.
3. Calculate the difference in each account from 2009 to 2010.
4. Place the difference in each account under the appropriate
Sources or Uses column. Do not calculate subtotals and
totals.
5. Add the numbers in the Sources column and then add the
number in the Uses column.
6. The totals in each column should equal each other. If they
do, you have identified the correct sources and uses of
funds, and you are finished!
7. If the totals in each column do not equal each other,
calculate the difference between the columns and divide by
Figure 5.4 Sources and Uses of Funds for Blue Lagoon Water Park Resort
Blue Lagoon Water Park Resort
Balance Sheets
December 31, 2009 and 2010
2009
2010
Sources
Uses
Assets
Current Assets
Cash
Marketable Securities
Net Receivables
Inventories
Total Current Assets
2,370,800
4,109,600
1,655,300
897,200
9,032,900
2,314,750
3,309,600
1,053,950
1,497,200
8,175,500
↓
↓
↓
↑
4,223,500
5,023,500
↑
7,712,550
22,290,500
5,063,655
3,408,900
31,657,805
588,800
45,503,005
7,712,550
22,290,500
7,289,000
4,668,900
32,623,150
669,800
46,491,950
↑
↑
↑
81,000
2,038,100
2,104,255
1,814,600
5,956,955
1,438,100
1,319,900
1,264,600
4,022,600
↓
↓
↓
600,000
784,355
550,000
Long-Term Liabilities
Long-Term Debt
Total Liabilities
13,821,750
19,778,705
14,577,400
18,600,000
↑
755,650
Owners’ Equity
Common Stock
Paid in Capital
Retained Earnings
Total Owners’ Equity
2,925,000
17,850,100
4,949,200
25,724,300
3,000,000
18,775,100
6,116,850
27,891,950
↑
↑
↑
75,000
925,000
1,167,650
Total Liabilities and Owners’ Equity
45,503,005
46,491,950
Investments
Property and Equipment
Land
Building
Furnishings and Equipment
Less Accumulated Depreciation
Net Property and Equipment
Other Assets
Total Assets
56,050
800,000
601,350
600,000
800,000
2,225,345
1,260,000
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable
Notes Payable
Other Current Liabilities
Total Current Liabilities
Total Sources and Uses of Funds
5,640,700
5,640,700
Creating the Statement of Cash Flows
•
The statement of cash flows should be prepared just as
often as you prepare your income statement and
balance sheet. In order to build a statement of cash
flows, you will need the following:
– Income statement for this year, including a statement of retained
earnings
– Balance sheet from last year
– Balance sheet from this year
Creating the Statement of Cash Flows
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The format of a SCF consists of the following:
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–
–
–
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Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net changes in cash
Supplementary schedules
Figure 5.5 is an example of the standard format used to
prepare a statement of cash flows.
Figure 5.5 Statement of Cash Flows Format
Cash Provided (inflow) or Used (outflow) by:
Operating activities
$XXX
Investing activities
$XXX
Financing activities
$XXX
Net increase (decrease) in cash
$XXX
Cash at beginning of the accounting period
$XXX
Cash at the end of the accounting period
$XXX
Supplementary Schedule of Noncash Investing
and Financing Activities
$XXX
Supplementary Disclosure of Cash Flow
Information
Cash paid during the year for:
Interest
$XXX
Income taxes
$XXX
Cash Flow from Operating Activities
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Cash flow from operating activities is the result of all of
the transactions and events that normally make up a
business’s day to day activities.
These include cash generated from selling goods or
providing services, as well as income from items such
as interest and dividends.
Operating activities will also include cash payments for
items such as inventory, payroll, taxes, interest, utilities,
and rent.
Cash Flow from Operating Activities
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The net amount of cash provided (or used) by operating
activities is a key figure on a statement of cash flows
because it shows cash flows that managers can control
the most.
The first step in creating a statement of cash flows is to
develop a summary of cash inflows and outflows
resulting from operating activities, using information
provided on the income statement including sales,
expenses, and thus, net income.
Cash Flow from Operating Activities
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There are two methods that are used in calculating and
reporting the amount of cash flow from operating
activities on the statement of cash flows: the indirect
method and the direct method.
Although both produce identical results, the indirect
method is more popular because it more easily
reconciles the difference between net income and the
net cash flow provided by operations.
Cash Flow from Operating Activities
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When using the indirect method, you start with the
figure for net income (taken from your income
statement) and then adjust this amount up or down to
account for any income statement entries that do not
actually provide or use cash.
The accrual income statement must be converted to a
cash basis in order to report cash flow from operating
activities.
Cash Flow from Operating Activities
•
The two most common items on the income statement
that may need to be adjusted from an accrual basis to a
cash basis are
– Depreciation, and
– Gains/losses from a sale of investments/equipment.
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Depreciation is a method of allocating the cost of a fixed
asset over the useful life of the asset.
More important, however, depreciation is subtracted
from the income statement primarily to lower income,
and thus lower taxes.
Cash Flow from Operating Activities
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In order to adjust net income to reflect actual cash,
then, depreciation must be added back.
A gain on a sale of an investment/equipment occurs
when the original cost of the investment/equipment is
lower than the price at which it is sold at a later date.
Conversely, a loss on a sale of an
investment/equipment occurs when the original cost of
the investment/equipment is higher than the price at
which it is sold at a later date.
go figure!
Assume Archie McNally had, for $150,000, purchased some land to expand his
business. Five years later he sold the land for $100,000. The difference
between the purchase price and the selling price is $50,000 ($150,000 $100,000).
Purchase Price
$150,000
Selling Price
- $100,000
Loss On Sale
= $50,000
Archie lost money on the deal. Therefore, he can subtract the loss of $50,000
from his income statement to reduce his taxes. However, just like depreciation,
he did not write a check for “loss” to anyone, and therefore, his cash is still there!
In order to adjust net income to reflect actual cash on his statement of cash
flows, the $50,000 loss would be added back. In addition, the $100,000 of land
that he sold would be shown on the investing activity portion of the statement of
cash flows. Alternatively, a gain on the sale would result in an addition to his
income statement. A gain, then, would have to be subtracted from net income on
the statement of cash flows.
Cash Flow from Operating Activities
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The remaining adjustments to net income when
calculating cash flow from operating activities come from
the sources and uses of funds calculated from the
balance sheets.
Sources of funds are shown as a positive number on the
statement of cash flows and uses of funds are shown as
a negative number of the statement of cash flows.
In general, the sources and uses of funds used for cash
flow from operating activities will come from current
assets and current liabilities.
The exceptions to this are marketable securities, which
belongs in investing activities, and notes payable (shortterm debt), which belongs in financing activities.
Cash Flow from Investing Activities
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An investment can be understood simply as the
acquisition of an asset for the purpose of increasing
future financial return or benefits.
Cash flow from investing activities summarizes this part
of a business’s action.
A business’s investing activities include those
transactions and events involving the purchase and
sale of marketable securities, investments, land,
buildings, equipment, and other assets not generally
purchased for resale.
Cash Flow from Investing Activities
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The cash flow from investing activities comes from the
sources and uses of funds that you calculated from your
balance sheets.
Sources of funds are shown as a positive number on the
statement of cash flows and uses of funds are shown as
a negative number of the statement of cash flows.
In general, the sources and uses of funds used for cash
flow from investing activities will come from long-term
assets (investments, property and equipment, and other
assets).
The exception to this is marketable securities, which is a
current asset that belongs in investing activities.
Cash Flow from Financing Activities
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The third and final of the three cash inflow and outflow
activity summaries that make up a complete SCF
relates to the financing activities of a business.
Cash flow from financing activities refers to a variety
actions including:
– Obtaining resources (funds) from the owners of a business (e.g.
by selling company stocks)
– Providing owners with a return of their original investment
amount (e.g. payment of dividends)
– Borrowing money
– Repaying borrowed money
Cash Flow from Financing Activities
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Although repayments of loans are considered a
financing activity, interest paid and interest received are
classified as operating activities (as part of the income
statement).
Cash payments made to reduce the principal (the
amount borrowed) of a loan would be considered cash
flow related to a financing activity, while any interest
paid to secure the loan would be considered an
operating expense.
Loans, notes, and mortgages are all examples of
financing activities that affect cash flows.
Cash Flow from Financing Activities
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The cash flow from financing activities comes from the
sources and uses of funds calculated from the balance
sheets.
Sources of funds are shown as a positive number on the
statement of cash flows and uses of funds are shown as
a negative number of the statement of cash flows.
In general, the sources and uses of funds needed for
cash flow from financing activities come from long-term
debt and equity.
The exception to this is notes payable (short-term debt),
which is a current liability that belongs in financing
activities.
Cash Flow from Financing Activities
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Also, dividends paid must be recorded in financing
activities because that is a cash outflow from net
income.
Additions and subtractions to the statement of cash
flows are shown in Figure 5.9.
With the exceptions noted, operating activities are
developed using current assets and current liabilities,
investing activities are developed using long-term
assets, and financing activities are developed using
long-term debt and owners’ equity.
Figure 5.9 General Additions and Subtractions to the Statement of Cash Flows
Operating activities
Net income
+/- Depreciation
+/- Losses/gains from the sale of investments/equipment
+/- Current assets (except marketable securities)
+/- Current liabilities (except notes payable)
Investing activities
+/- Marketable securities
+/- Investments
+/- Property and equipment
+/- Other assets
Financing activities
+/- Notes payable
+/- Long-term debt
+/- Common stocks and paid in capital
+/- Dividends paid
Net Changes in Cash
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•
Net changes in cash represent all cash inflows minus
cash outflows from operating, investing, and financing
activities.
This net change in cash must equal the difference
between the cash account at the beginning of the
accounting period and the cash account at the end of
the accounting period.
go figure!
For example, assume Rolando (from earlier in this chapter) prepared his
statement of cash flows, which resulted in the following:
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities
Net decrease in cash
Cash at the beginning of the period
Cash at the end of the period
($ 150,000)
$ 100,000
+$ 25,000
=($ 25,000)
$625,000
$600,000
Notice that his net decrease in cash ($25,000) equals the difference between his
cash at the beginning and the ending of the period,
$625,000 - $600,000 = $25,000
Supplementary Schedules
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•
Any noncash investing and financing transactions
undertaken by a company should be reported in a
Supplementary Schedule of Noncash Investing and
Finance Activities that is attached as a supplement to
the SCF.
Also included in the statement of cash flows is the
Supplementary Disclosure of Cash Flow Information,
which reports cash paid during the year for interest and
income taxes.
Statement of Cash Flows Summary
•
A complete SCF should include:
– A summary of cash inflows and outflows resulting from
operating activities
– A summary of cash inflows and outflows resulting from investing
activities
– A summary of cash inflows and outflows resulting from financing
activities
– Net changes in cash from the beginning to the ending of the
accounting period
– A supplementary schedule of noncash investing and financing
activities (if applicable)
– A supplementary disclosure of cash flow information
Statement of Cash Flows Example
•
For a complete illustration of building a Statement of
Cash Flows for the Blue Lagoon Water Park Resort,
see Figures 5.10, 5.11, and 5.12.
Figure 5.10 Condensed Income Statement and Statement of Retained Earnings
Blue Lagoon Water Park Resort
Condensed Income Statement and Statement of Retained Earnings
For the Period: January 1 through December 31, 2010
Income Statement
Revenue
25,201,800
Cost of Sales
Payroll and Related Expenses
Other Expenses
Gross Operating Profit
2,854,080
8,877,600
5,934,240
7,535,880
Rent, Property Taxes, and Insurance
Depreciation and Amortization
Net Operating Income
Interest
Income Before Income Taxes
Income Taxes
Net Income
1,760,400
1,260,000
4,515,480
1,272,000
3,243,480
1,297,390
1,946,090
Statement of Retained Earnings
Retained Earnings, December 31, 2009
Net Income for 2010
Subtotal
Cash Dividends Paid in 2010
Retained Earnings, December 31, 2010
4,949,200
1,946,090
6,895,290
778,440
6,116,850
Figure 5.11 Balance Sheets (With Sources and Uses of Funds)
Blue Lagoon Water Park Resort
Balance Sheets
December 31, 2009 and 2010
2009
2010
Sources
Uses
Assets
Current Assets
Cash
Marketable Securities
Net Receivables
Inventories
Total Current Assets
2,370,800
4,109,600
1,655,300
897,200
9,032,900
2,314,750
3,309,600
1,053,950
1,497,200
8,175,500
↓
↓
↓
↑
4,223,500
5,023,500
↑
7,712,550
22,290,500
5,063,655
3,408,900
31,657,805
588,800
45,503,005
7,712,550
22,290,500
7,289,000
4,668,900
32,623,150
669,800
46,491,950
↑
↑
↑
81,000
2,038,100
2,104,255
1,814,600
5,956,955
1,438,100
1,319,900
1,264,600
4,022,600
↓
↓
↓
600,000
784,355
550,000
Long-Term Liabilities
Long-Term Debt
Total Liabilities
13,821,750
19,778,705
14,577,400
18,600,000
↑
755,650
Owners’ Equity
Common Stock
Paid in Capital
Retained Earnings
Total Owners’ Equity
2,925,000
17,850,100
4,949,200
25,724,300
3,000,000
18,775,100
6,116,850
27,891,950
↑
↑
↑
75,000
925,000
1,167,650
Total Liabilities and Owners’ Equity
45,503,005
46,491,950
Investments
Property and Equipment
Land
Building
Furnishings and Equipment
Less Accumulated Depreciation
Net Property and Equipment
Other Assets
Total Assets
56,050
800,000
601,350
600,000
800,000
2,225,345
1,260,000
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable
Notes Payable
Other Current Liabilities
Total Current Liabilities
Total Sources and Uses of Funds
5,640,700
5,640,700
Figure 5.12 Statement of Cash Flows
Blue Lagoon Water Park Resort
Statement of Cash Flows
December 31, 2010
Net Cash Flow from Operating Activities
Net Income
Adjustments to reconcile net income to net
cash flow from operating activities
Depreciation
Decrease in Net Receivables
Increase in Inventories
Decrease in Accounts Payable
Decrease in Other Current Liabilities
Net cash flow from operating activities
Net Cash Flow from Investing Activities
Decrease in Marketable Securities
Increase in Investments
Increase in Furnishings and Equipment
Increase in Other Assets
Net cash flow from investing activities
Net Cash Flow from Financing Activities
Decrease in Notes Payable
Increase in Long-Term Debt
Increase in Capital Stock
(Common Stock + Paid in Capital)
Dividends Paid
Net cash flow from financing activities
1,946,090
1,260,000
601,350
(600,000)
(600,000)
(550,000)
800,000
(800,000)
(2,225,345)
(81,000)
(2,306,345)
(784,355)
755,650
1,000,000
(778,440)
192,855
Net decrease in cash during 2010
Cash at the beginning of 2010
Cash at the end of 2010
Supplementary Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest
Income Taxes
111,350
2,057,440
(56,050)
2,370,800
2,314,750
1,272,000
1,297,390
Statement of Cash Flows Analysis
•
•
One way to analyze a statement of cash flows is to first
look at the sources and uses of funds identified by
comparing last year’s balance sheet with this year’s
balance sheet.
By matching “like” dollar amounts of sources and uses
of funds, you can surmise how funds were spent based
on how funds were generated.
Figure 5.13 Comparison of Source and Uses of Funds for the Blue Lagoon Water Park
Resort
Source
Amount
Use
Amount
Marketable securities
$800,000
Investments
$800,000
Net receivables
Capital stock (Common stock
+ paid in capital)
AND depreciation
$601,350
Accounts payable
$600,000
$1,000,000 +
$1,260,000 =
$2,260,000
Furnishings and
equipment
$2,225,345
Notes payable
Inventories AND
Other current
liabilities
$784,355
$600,000 +
$550,000 =
$1,150,000
Long-term debt
Retained earnings (as
increase in net income –
dividends)
$755,650
$1,167,650
Statement of Cash Flows Analysis
•
•
Another method of analyzing the statement of cash
flows is to compare operating, investing, and financing
activities from last year to this year.
The dollar or percentage variance shows changes from
previously experienced levels, and will give you an
indication of whether your numbers are improving,
declining, or staying the same.
Figure 5.14 Cash Flow Summary Comparisons for the Blue Lagoon Water Park
Resort
Last Year
This Year
$ Change
% Change
2,057,440
226,320
12.4%
(3,075,130) (2,306,345)
768,785
25.0%
Net Cash Flow From:
Operating activities
Investing activities
Financing activities
Change in Cash
1,831,120
167,010
192,855
25,845
15.5%
(1,077,000)
(56,050)
1,020,950
94.8%
Statement of Cash Flows Analysis
•
•
•
For many investors and managers, a business’s free
cash flow is an important measure of its economic
health.
Free cash flow is simply the amount of cash a business
generates from its operating activities minus the amount
of cash it must spend on its investment activities and
capital expenditures.
Thus, free cash flow is considered a good measure of a
company’s ability to pay its debts, ensure its growth,
and pay (if applicable) its investors in the form of
dividends.
Statement of Cash Flows Analysis
•
•
A company with a positive free cash flow can grow and
invest its excess cash in its own expansion or
alternative investments.
If a company has a negative free cash flow it will need
to supplement its cash from other sources, such as
borrowing funds or seeking additional investors.
The formula for free cash flow is:
Less
Equals
Net cash provided from operating activities
Cash used to acquire property and equipment
Free Cash Flow
Review of Learning Outcomes
•
•
•
•
State the reason cash flows are critical to the operation
of a successful business.
Identify sources and uses of funds to assist in the
creation of a statement of cash flows.
Create a statement of cash flows using an income
statement and two balance sheets.
Analyze a statement of cash flows to better manage the
cash flows of your own business.