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


back to the  top of this page
back to the  Managerial Accounting Home Page
back to  Professor Fisher's Home Page

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