FA 48 - Statement of Cash Flows - Investing and Financing Sections

Summary

In this video, the speaker walks through the process of completing a statement of cash flows, focusing on the investing and financing sections. The video explains how to calculate cash flows from purchasing and selling equipment, borrowing debt, issuing shares, and paying dividends. The speaker also discusses how to analyze the cash flow statement, highlighting what investors typically look for in operating, investing, and financing activities. The session concludes with a check to ensure the calculations are correct and aligns with the company's cash balance.

Takeaways

• 📈 The video covers the process of completing a statement of cash flows, focusing on operating, investing, and financing activities.
• 🔍 The direct and indirect methods for the operating section were discussed, with the script moving on to long-term assets and investments.
• 🛠️ The investing section involves analyzing the purchase and sale of equipment, with specific transactions like buying equipment for $135 cash and selling equipment with a net book value of $15,000.
• 💰 The script explains how to calculate cash received from the sale of equipment, which was $6,000 after accounting for a loss on the sale.
• 🚫 It clarifies that there were no investments involved, hence no cash transactions related to long-term investments.
• 💼 The financing section discusses long-term debt, equity, and dividends, highlighting a new bank loan of $20,000 and an increase in shares by $10,000.
• 📉 The script calculates dividends paid as $50,000 by using the retained earnings formula and the net income figure.
• 📊 The video emphasizes the importance of ensuring that the calculated cash flow changes match the actual cash increase shown on the balance sheet.
• 📉 The final cash flow analysis shows a net increase in cash of $15,000, which is verified by comparing the beginning and ending cash balances on the balance sheet.
• 🤔 The video suggests that an investor would typically look for positive and growing operating cash flows, negative investing cash flows, and varying financing cash flows depending on the company's phase.
• 👍 The video concludes by encouraging viewers to apply the knowledge gained to their own analysis and to engage with the content by liking the video.

Q & A

What are the two methods mentioned in the script for calculating the operating section of the cash flow statement?

The two methods mentioned are the direct method and the indirect method.

What is the significance of equipment purchases in the investing section of the cash flow statement?

Equipment purchases represent cash outflows from investing activities, indicating that the company is investing in long-term assets.

How is the cash paid for equipment reflected in the cash flow statement?

The cash paid for equipment is shown as a negative cash flow because it represents money paid out by the company to acquire equipment.

What does the script imply about the sale of equipment in terms of its original cost and accumulated depreciation?

The script implies that the equipment had an original cost of $60 with accumulated depreciation of $45, indicating the equipment's net book value was $15,000 before its sale.

How is the cash received from the sale of equipment calculated in the script?

The cash received from the sale of equipment is calculated by considering the net book value of the equipment and the loss on sale, which in this case resulted in $6,000 received from the sale.

What is the purpose of analyzing the investing section of the cash flow statement?

Analyzing the investing section helps to understand the company's long-term investment activities, such as the purchase and sale of long-term assets and investments.

What does the script suggest about the company's long-term debt and equity activities?

The script suggests that the company took on new long-term debt of $20,000 and issued new shares, increasing the share capital by $10,000, but did not repay any debt or have any dividends payable.

How is the cash received from the issuance of new debt reflected in the financing section of the cash flow statement?

The cash received from the issuance of new debt is shown as a positive cash flow, indicating an inflow of cash into the company from borrowing.

What is the formula used in the script to calculate cash paid for dividends?

The formula used is Cash Paid for Dividends = Dividends Declared + Decrease in Dividends Payable. In this case, with no dividends payable, it simplifies to the declared dividends amount.

How does the script determine the amount of dividends paid by the company?

The script determines the amount of dividends paid by calculating the difference between the net income added to the beginning retained earnings and the ending retained earnings.

What is the final step in the script for completing the statement of cash flows?

The final step is to add up the operating, investing, and financing cash flows to ensure the overall change in cash matches the increase in cash shown on the balance sheet.