Managerial Accounting
Class Notes and Lecture Outline
Cash Flows and Working Capital Analysis 
Statement of Cash Flows
  • The primary purpose and objective is to identify and report the effects of cash inflows and cash outflows occurring during an operating period
  • Used to predict future cash flows for developing short run operating budgets and long run capital budgets
3 Specific Areas of Activity
  1. Operating Activities
    • all activities involving the exchange of goods and services that produce sales revenue inflows for cash, or on credit
    • the primary operating accounts involved in the production of sales revenue are current assets (for operating cash outflows ==> current liabilities)
    • depreciation and amortization are automatic add back items
  2. Investing Activities
    • involve the purchase of long-term assets/investments as well as their disposal and sale
  3. Financing Activities
    • involve items that change ownership equity

Note:  having a net income does NOT infer that cash will increase by an equal amount because of noncash items included in an accrual  accounting method (e.g., depreciation, amortization)
Working Capital
  • Working Capital  =  Current Assets - Current Liabilities   [WC = CA - CL]
  • working capital source inflows and outflows
    inflow source of WC
    Net Income
    <= Income =>
    Net Loss
    outflow use of WC
    inflow source of WC
    Sold an Asset
    <= Assets =>
    Purchase an asset
    outflow use of WC
    inflow source of WC
    Borrowed Funds
    <= Liabilities =>
    Payment on debt
    outflow use of WC
    inflow source of WC
    Sale of Stock
    <= OE =>
    Buy back stock
    outflow use of WC

    Cash Dividends =>
    payment of cash
    outflow use of WC
  • Preparing a Statement of Changes to Working Capital
    • do this to identify the net change in working capital
    • incorporates the basic elements of horizontal comparative analysis
    • based on a source inflow and outflow uses that occurred to working capital over an operating period
    • shows the net change based on each source inflow that increases WC, and each outflow use that decreased WC
  • Note:  money tied up in working capital is money that is NOT working to earn income
Major Elements in Both the Statement of Cash Flows and Analysis of Working Capital
  • current assets
    • a current asset increase is negative and deducted 
    • a current asset decrease is positive and added
    • a current asset increase a no change in current liabilities  ==>  increase in WC
    • a current asset decrease a no change in current liabilities  ==>  decrease in WC
  • current liabilities 
    • a current liability increase is positive and added
    • a current liability decrease is negative and deducted
    • a current liability increase a no change in current assets  ==>  decrease in WC
    • a current liability decrease a no change in current assets  ==>  increase in WC
  • current ratio
  • depreciation expense  =  positive effect  =  add back
  • amortization expense  = positive effect  =  add back
  • loss, long-term asset disposal  =  positive effect  =  add back
  • gain, long-term asset disposal  =  negative effect  =  deduct

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this page is maintained by Reed Fisher
last updated January 15, 2011