Preparation of a Cash Flow Statement
The preparation of a cash flow statement is quite complex in that there is a need to call your accountant to do it for you. But let us take a look at how Rosenda, the accountant of Ayala and Associates, Inc., prepares her cash flow. Please take note how the issuance and investment of bonds affect the statement.
Among the two kinds of cash flows (direct and indirect), the direct method is used by Rosenda because it is simpler.
First, analyze what are the transactions of Ayala and group them. In preparing a cash flow, time period is emphasized. Ayala has four kinds of transactions:
1. Operating - include those cash transactions that are involved directly with usual operations (selling, purchasing, expenses, other collections, and other disbursements.) Time period is January 1 to December 31, 2009.
Cash receipts from customers: $3,000
Cash paid to suppliers and employees ($2,000)
Cash generated from operations (sum) $7,500
Bond Interest expense paid ($2,000)
Income taxes paid ($4,000)
Use addition and subtraction:
$3,000 + $7,500 - $2,000 - $2,000 - $4,000 = $2,500 Net cash flow from operating activities
Note: Interest and income taxes paid are involved with operating activities. If they are involved with other activities, they are not included here.
2. Next, group the investing activities:
Bond investment ($100,000)
Proceeds from the sale of equipment: $7,500
Dividends received $3,000 (dividends here are from the investing activities)
Compute: $100,000 - ($7,500 + $3,000) = ($89,500) Net cash flow from investing activities
3. Group the financing activities cash transactions:
Proceeds from Bond Issuance $500,000
Dividends paid: ($2,500)
Compute: $500,000 - 2,500 = $497,500 Net cash flow used in financing activities
4. Other source of cash transactions:
Net increase in cash and cash equivalents: $10,500
Cash and cash equivalents, beginning of year $1,000
Add: $10,500 + 1,000 = $11,500 Cash and cash equivalents, end of year
Adding the four net cash flows, the result will be $422,000
Cash, end of year $11,500
Total Net Cash Ending Balance $422,000
Note: Referring to the cash flow statement, bond interest expense and the investment of bonds reduce the net cash from operations and investing activities respectively because the company is cashing out money while there is an inflow of cash in borrowing. You can see when calculating cash flow, bonds have a huge role.
In the cash flow statement of Ayala and Associates, $422,000 is reported to be the Net Cash Flow for the four sources.