Chp 22: STATEMENT OF CASH FLOW

Free Cash Flows (p. 1459): net operating cash flows reduced by the capital expenditures needed to sustain current level of operations.
For the year ended…..
Three sections: show source and uses of cash.

1. Operating cash flows are associated with the day-to-day activities (I/S) and working capital (B/S): current assets and current liabilities with exceptions (ex: dividend payable and short term loans)
Direct method: start with IS item and adjust for change in related working capital. IS item +/- change in related NWC
Sales + decrease in AR OR Sales - increase in AR
Purchases = CGS + increase in inventory OR CGS - decrease in inventory
Paid? = Purchases + decrease in AP OR Purchases - increase in AP
Operating, interest or income tax expense + decrease in related payable OR – increase in related payable + increase in related prepaids OR - decrease in related prepaids

Indirect method: Start with net income/loss and reconcile to cash flow:
Add back non-cash expenses (depreciation/amortization), paper/unrealized losses (goodwill impairment loss); discount amortization (add back as cash < interest expense in net income). Decreases in current assets and increases in current liabilities Subtract paper/unrealized gains; equity income; increases in current assets and decreases in current liabilities. Subtract premium amortization as cash > interest expense in net income

2. Investing cash flows are associated with long-term assets.
Look at the changes in each long-term asset: Beg + purchase – sold = end
Accumulated depreciation/amortization:
Beg + depreciation/amortization expense – sold = end

3. Financing cash flows are caused by long-term debt (some current liabilities ex: dividend payable and short term loans) and equity Look at the changes in each long-term liability and equity item: Beg + new loan/shares – paid off loan or retired shares = end
Retained earnings:
Beg + net income – net loss – dividends +/- capital transactions = end

Non-cash transactions are excluded and disclosed in the notes
Bottom of statement: net increase or decrease for year (change in cash balance on B/S), which is added/subtracted to the beginning cash plus cash equivalent less bank overdrafts to equal ending cash plus cash equivalent less bank overdrafts.
Differences between IFRS and ASPE: IFRS provides a choice (p. 1428)
Dividends paid: classify under financing (ASPE) or operating
Interest paid: classify under operating (ASPE) or in financing
Dividends & interest received: classify under operating (ASPE) or investing

Question 2.

John John Ltd.’s (JJ) comparative balance sheet appears below:

JOHN JOHN LTD.
Balance Sheet
(000s)

Year 3 Year 2
Assets
Cash $ 101 $ 82
Accounts receivable 60 80
Inventory 130 100
Prepaid insurance 25 15
Long-term investments 140 150
Land 600 500
Buildings 400 300
Equipment 500 400
Accumulated depreciation (300) (400)
Total