CASH FLOW STATEMENT

In order to prepare a statement of cash flows, you have to look back at the comparative balance sheets for XYZ company. From the two years of balance sheet data and some income statement data, you build your statement of cash flows. In this example, we will assume that net income is $110,500, depreciation is $50,000, and the firm pays out dividends in the amount of $65,000.

Cash Flows From Operations

The Statement of Cash Flows has three sections. The first section is Cash Flows from Operating Activities. Line 1 of this section is Net Income. To net income, add Line 2, which is depreciation. After taking net income and depreciation into account in the section for operating activities, you then consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information from the comparative balance sheets.

Looking at the balance sheets, accounts receivable, line 3, has increased from $170,000 to $200,000 for an increase of $30,000. Since that increase occurred on the asset side of the balance sheet, it is shown as a negative figure. Why? If the firm extended $30,000 more in credit to its customers, then it had $30,000 less to use. Likewise, inventory, line 4, increased by $20,000. Prepaid expenses, line 5, decreased by $10,000. A decrease in asset account, a source of funds to the firm, is a positive number. Cash increased by $35,000 but it is not included in our initial analysis. It will soon become clear why.

Now look at the liabilities section of the balance sheet. Line 6, accounts payable, increased by $35,000. Short-term bank loans didn’t change. Accrued expenses, line 7, such as taxes and wages, decreased by $5,000. Since this is a decrease in a liability account, it is a use of funds to the firm and a negative number.

Line 8 is Net Cash Flows from Operating Activities, the summary of the first section of the Statement of Cash Flows. When you add up the adjustments to net income and depreciation, you get $150,500. The firm is generating a positive net cash flow from its operating activities.

Cash Flows from Investing Activities

The next section of the Statement of Cash Flows is Cash Flows from Investing Activities. Usually, this section includes any long-term investments the firm makes plus any investment in fixed assets, such as plant and equipment. Line 9 shows that the firm invested $30,000 more in long-term investments in 2009. That shows up as a negative number as it was a use of assets. The firm also spent $100,000 for more plant and equipment as stated on line 10.

Line 11 is Net Cash Flows from Investing Activities , the summary of the second section of the Statement of Cash Flows. It is a negative $130,000 since this was the outlay in 2009.

Cash Flows from Financing Activities

The last section of the cash flow statement is Cash Flows from Financing Activities. In this case, you have financed your firm with long-term bank loans that have increased by $50,000 as indicated on Line 12. Dividends to investors in the amount of $65,000 have also been paid, which is a cash outflow and a negative number as stated on line 13. Net Cash Flows from Financing Activities, Line 14, is a negative $15,000.

Net Cash Flows for the Business Firm

Now, we combine the three sections of the cash flow statement to see where the firm is from a cash flow perspective. When you sum the net cash flows from each section (line 15), you get a positive $5,500. This is the net increase in cash flows over the year for the business firm. Looking back at the cash account on the comparative balance sheets, the analysis is correct. Cash has increased by $5,500 from year to year.

Another calculation you will want to make is that of free cash flow.

XYZ Company Statement of Cash Flows

XYZ Company Statement of Cash Flows
1.Net Income $ 110,500
2.Depreciation 50,000
3.Inc in Accts Rec (30,000)
4.Inc in Inventory (20,000)
5.Dec in Prepaid Exp 10,000
6.Inc in Accts Payable 35,000
7.Dec in Accruals (5,000)
8.Net Cash Flows from operating activities $150,500
9.Inc in Investments (30,000
10.Inc in Plant & Equipment (100,000)
11.Net Cash Flows from investing activities (130,000)
12.Inc in LT Bank Loans 50,000
13.Dividends Paid (65,000)
14.Net Cash Flows from financing activities (15,000)
15.Net increase in cash flows $5,500

PROPERTY, PLANT AND EQUIPMENT

Property, Plant and Equipment



Assets of a company having physical existence and expected to be used for a period exceeding one year form a part of property, plant and equipment. Property, plant and equipment are alternatively referred to as tangible fixed assets.

Important components of property, plant and equipment include:

Land and land improvements
Buildings
Plant and machinery
Vehicles
Equipment, etc.
Expenditure incurred on purchase of property, plant and equipment is called capital expenditure. Such an expenditure is capitalized which means it is recorded on the balance sheet instead of writing it off against revenues on income statement. The capitalized cost of an item of property, plant and equipment include:

The invoice price of the plant paid to the supplier.
The freight paid to bring the plant to the installation site.
The installation fees paid to the engineers.
The cost incurred on testing the plant minus related proceeds, etc.
Certain assets have unlimited useful life such as land and they are not depreciated. Other assets such as buildings, vehicles, etc. loose their value over their useful life and are called depreciable fixed assets.

Since fixed assets are used for a period of more than one year, we must have a mechanism to expense out the cost of the fixed assets on some systematic basis. This process of allocation of fixed asset cost over period is called depreciation.

Each fixed asset has some useful life, for example say 2 year in case of a computer. Most assets are scraped but some may have certain value at the end of their life, for example we may expect to get considerable proceeds from selling a vehicle at the end of its useful life, this value at the end of the useful life is of an asset is called its residual value, salvage value or scrap value. We only depreciate that portion of cost which exceeds the salvage value. In other words the depreciable amount is cost minus salvage value.

The depreciation figure appears on the income statement as an expense. For the balance sheet purpose, we maintain a contra-asset account called accumulated depreciation account. As the name suggests, this account holds all the depreciation charged on a particular asset since its acquisition. The fixed assets are presented on balance sheet on cost less accumulated depreciation basis. This cost less accumulated depreciation figure is called net fixed assets.

Bank Reconciliation Statement
Definition: A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.

Definition2:

The process of comparing and reconciling accounting records with the records presented on the bank statement. Sometimes disrepancies between the records might occur due to the timing differences when the data is recorded in the accounting and in the bank books. The purpose of bank reconciliation is to check whether the disrepancies are due to timing rather than error. 

Bank Reconciliation Statement Process

Causes of differences:

 A transaction relating to bank has to be recorded in both the books : Cash
Book and Pass Book but sometimes it happens that a bank transaction is
recorded only in one book and not recorded simultaneously in other book it causes difference in the two balances.



Example:

Overdraft shown by the passbook of Mr. Murli is Rs 20,000. Prepare bank reconciliation statement on dated December 31, 2001

	Bank charges debited as per passbook Rs 500.
	Cheques recorded in the cash book but not sent to the bank for collection Rs 2,500.
	Received a payment directly from customer Rs 4,600.
	Cheque issued but not presented for payment Rs 6,980.
	Interest credited by the bank Rs 100.
	LIC paid by bank Rs 2,500.
	Cheques deposited with the bank but not collected Rs 3,500.