Page 640 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

A. Direct Method
Welby Company
Statement of cash flows
For the year ended 2010 December 31
Cash flows from operating activities:
Cash received from customers $130,000
Cash paid for merchandise (102,000)
Cash paid for operating expenses (23,000)
Net cash provided by operating activities $5,000
Cash flows from investing activities:
Purchase of equipment (20,000)
Cash flows from financing activities:
Proceeds from issuing common stock $ 30,000
Paid cash dividends (4,000)
Net cash provided by financing activities 26,000
Net increase (decrease) in cash $11,000
B. Direct Method
Welby Company
Statement of cash flows
For the year ended 2010 December 31

Cash flows from operating activities:
Net income $10,000
Adjustments to reconcile net income to net
cash
Provided by operating activities:
Increase in accounts receivable (10,000)
Decrease in merchandise inventory 4,000
Decrease in accounts payable (6,000)
Increase in accrued liabilities payable 2,000
Depreciation expense 5,000
Net cash provided by operating activities $ 5,000
Cash flows from investing activities:
Purchase of equipment (20,000)
Cash flows from financing activities:
Proceeds from issuing common stock $ 30,000
Paid cash dividends (4,000)
Net cash provided by financing activities 26,000
Net increase (decrease) in cash $11,000
Exhibit 130: Statement of cash flows-Welby company
Supplemental cash flow information:
Interest paid $ 200
Income taxes paid 8,000
Analysis of the statement of cash flows

Business students will benefit throughout their careers from knowing how to analyze a statement of cash flows.
We will use the consolidated statement of cash flows from Synotech, Inc. to illustrate the analysis. This company
will be used in the next chapter to illustrate the complete analysis and interpretation of all the financial statements.
The example is adapted from a real USA company's recent annual report.
Exhibit 131 shows the consolidated statements of cash flows for the years 2010, 2009, and 2008 for Synotech,
Inc. We also include portions of Management's Discussion and Analysis of the 2010 statement of cash flows. We
will then discuss the statement further, explaining various items and illustrating how the information might be used

for decision making.
Liquidity and capital resources
Net cash provided by operations increased 13 per cent to USD 1,101.0 in 2010 compared with USD 972.3 in
2009 and USD 995.3 in 2008. The increase in cash generated by operating activities in 2010 reflects the Company's

improved profitability and working capital management. Cash generated from operations was used to fund capital
spending, reduce debt levels and increase dividends.

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