7.
Cash flow statement (preparing and interpreting cash flow statements)
Exercise 7.1 - cash flow statement Banner (using the indirect method for stating cash flows
from operations)
BANNER CORPORATION Year 1 Year 2
$M $M
ASSETS
Cash 98 74
A/C's Receivable 72 52
Prepaid expenses 0 12
Investments L/T 2 1
Land 0 140
Buildings 0 400
" Depreciation 0 -22
Equipment 0 136
" Depreciation 0 -20
Total 172 773
LIABILITIES
A/C's Payable 12 81
Bonds Payable 0 300
Common Stock 120 120
Retained Earnings 40 272
Total 172 773
INCOME STATEMENT SUMMARY Year 2
$M
Sales Revenue 984
Operating Expenses 580
Profit before tax 404
Income Tax 136
Net Income 268
Dividends paid 36
Net Income retained 232
Brought forward 40
Carried forward 272
TO DO
Prepare the cash flow statement for Banner (CFO using the indirect method, CFI & CFF and check
with initial and final cash position)
Hint
• Step 1: prepare the CFO section of the cash flow statement using the indirect method
• Step 2: prepare the CFI section of the cash flow statement
• Step 3: prepare the CFF section of the cash flow statement
• Step 4: disclose the cash flow statement (showing the total cash variance and the proof with
the initial and final balance sheets)
1
Exercise 7.2 - cash flow statement Baker & Co (exam MIB 40) - for your practice
The followings are Baker & Co’s financial statements:
Balance Sheet
Assets
12/31/2015 12/31/2016
Cash $305 370
Accounts receivable 275 290
Inventory 600 580
Current assets 1,180 1,240
Plant and equipment 1,700 1,840
Less: Acc. Depr. (500) (600)
Net plant and equipment 1,200 1,240
Total assets $2,380 $2,480
Liabilities and Owners' Equity
Accounts payable $150 $200
Others payable 125 0
Current liabilities 275 200
Bonds (LT Debt) 500 500
Share capital 165 305
Additional Paid-in-capital 775 775
Retained earnings 665 700
Total owners' equity 1,605 1,780
Total liabilities and owners' equity $2,380 $2,480
Income Statement
Sales (100% credit) $1,100 $1,330
Cost of goods sold 600 760
Gross profit 500 570
Operating expenses 20 30
Depreciation 160 200
Net operating income (EBIT) 320 340
Interest expense 64 57
Earnings before taxes (EBT) 256 283
Taxes 87 96
Net income $169 $187
Additional Information / notes (2016):
• The firm disposed of an old machine for 100$ (Cost 200 $, accumulated depreciation 100$, so
Net Book Value was 100$). The firm replaced this old machine with a new one for 340$.
• Baker & Co distributed 152$ as dividend to its ordinary shareholders.
TO DO
Prepare the cash flow statement for Baker & Co (CFO using the indirect method, CFI & CFF and check
with initial and final cash position)
2
Exercise 7.3 - interpreting cash flow statements
You will find hereunder cash flow statements for 3 companies
Company 1 Company 2 Company 3
Cash & equivalents – beginning of year 1 285 3 150 1 047
Cash flows from operating activities 855 (700) 1 115
Net income/(loss) (149) (850) 120
Depreciation 469 50 1 310
Changes in inventories 331 95 46
Changes in accounts receivable 144 45 (80)
Changes in accounts payable 60 (40) (281)
Cash flows from investing activities (279) 1250 (1 074)
Capital expenditures (279) (1 456)
Disposal of non-current assets 1 250 326
Dividends received 56
Cash flows from financing activities (496) (250) (416)
Debt borrowings 834
Debt repayments (569) (1 253)
Proceeds from stock issuance 323 5
Stock repurchase (250)
Dividends paid (250)
Net cash flows 80 300 (375)
Cash & equivalents – end of year 1 365 3 450 672
TO DO
Analyze the cash flow statements by answering to the following 3 questions
a) Have we been able to finance our investments with cash generated by business operations?
b) If not, what type of external financing have we used?
c) If yes, what did we do with the excess cash?
Comment on the financial situation of these companies
