MUHASEBE II

Cash flows can be defined as cash inflows and cash outflows in a certain period of time. Every company needs cash to pay its bills, business expenses and to pay off scheduled liabilities on time. Cash generally comes from the sources that mentioned below:

• Capital — setting up business, or getting new partners;

• Borrowing — customers, vendors, employees, and financial institutions;

• Conversion of assets to cash — selling inventory, equipment, plant, property or collection of accounts receivable.

Income statement, not cash flow statement, takes into account expenses or revenues whether or not they create cash movements.

Cash outflows from financing activities are:

• For payment of dividends and buying treasury share

• For repayments of loans

Indirect method shows each major class of gross cash receipts and gross cash payments.

Gains and Losses on the Sale of Long Term Assets: Selling out of long term assets such as buildings and lands are investing activities and this create gain or loss. But this gain or loss is included in determining net income. This gain or loss must be removed from net income on the statement of cash flows to avoid double counting. So the total cash receipts from the sale of the long term asset can be reported in the investing section.

In this method, cash flow items and amounts are reported. This method clearly demonstrates cash amounts paid and collected for business activities. This method is easy to apply. This method requires more computations than indirect method. To compute operating cash flows, we use income statement and changes in balance sheet accounts.

To calculate cash collections from customers you will need sales revenue (from income statement) and beginning and ending balance of accounts receivable.

Acquiring a building by issuing common share, acquiring a land by issuing notes payable and retiring notes payable by issuing common share are the examples for non-cash investing and financing activities.

To calculate payments of long term debt you will need balance sheet (New issuances-if known, Beginning and ending balances of Long Term Debt, Notes Payable, Bonds Payable).

The inventory turnover ratio shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. Also, it measures how many times a company sold its total average inventory amount during the year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.

Cash flows can be defined as cash inflows and cash outflows in a certain period of time.

Company (X) has profit,
but there will be some problems to pay liabilities due to
long time wait to collect cash from receivables and to make
sales

Cash flows statement takes into account the
transactions that require cash, related to the
activities whether or not they provide income.

The statement of cash flows reports cash
inflows and outflows related to operating activities,
investment activities and financing activities that
occur in an operating period.

In the statement of cash flows, there are three basic types of cash flow activities. These activities have
a separate section which reports cash inflows and cash outflows in the statement of cash flows. These
activities are:
• Operating activities
• Investing activities
• Financing activities

Operating activities reflects day to
day operations of the business such as cash receipts
form customers for sales of merchandise inventory
and services and cash outflows for purchases of
merchandise inventory or payment of operating expenses.

Cash Flows from Operating Activities (CFO)

Cash inflows
• From customers for the sales of merchandise inventory and services
• For interest and dividend income
Cash outflows
• For the purchase of merchandise inventory and payment of operating
expenses
• For the interest expense and income tax expense

Investing activities affect long term assets such as
Investments in Property, Plant and Equipment (PPE)
assets, and etc. Thus, so investing cash flows is about
cash inflows and cash outflows related with long
term assets.

Financing activities affect the long term liability
and equity accounts. So cash flows from financing
activities is about the firm’s capital structure and
owners of the entity.

Investing activities affect long term assets such as
Investments in Property, Plant and Equipment (PPE)
assets, and etc. Thus, so investing cash flows is about
cash inflows and cash outflows related with long
term assets.

Indirect method starts with net income and reconciles to net cash provided by operating activities.