THIS TOPIC WILL TALK ABOUT THE SOURCES AND USES OF NET WORKING CAPITAL AND THE CASH FLOW STATEMENT .
The discussion will not deal too much on the theoretical concept of this subject matter but would deal largely on the accounting technique of this subject matter.
Basically, these reports shall all come from the balance sheet data. The profit and loss data does anyway goes to the balance sheet in the form of the net income or net loss forming part of the retained earnings. As you may be aware, accounting transaction is simply the inter play of the balance sheet accounts to each other. though the profit and loss accounts are also having interplay with the balance sheet accounts .
WHAT COMPOSES THE WORKING CAPITAL.
Simply , working capital is compose of THE CURRENT ASSETS ONLY AND THE CURRENT LIABILITIES ONLY. However, when it is affected by the movement of the NON CURRENT ASSETS, NON CURRENT LIABILITIES, THE CAPITAL, THE NOMINAL OR THE PROFIT AND LOSS ACCOUNTS , THAT IS WHEN THE NET WORKING CAPITAL WILL CHANGE.
WHAT IS NET WORKING CAPITAL.
Since the CURRENT ASSETS IS one of the CONTRA ACCOUNTS OF LIABILITIES, therefore THE NET WORKING CAPITAL WOULD MEAN , CURRENT ASSETS LESS THE CURRENT LIABILITIES the resulting answer is the net working capital of either EXCESS OF THE CURRENT ASSETS OVER THE CURRENT LIABILITIES or vice versa.
EXAMPLE:
CURRENT ASSETS 100 current assets 59
CURRENT LIABILITIES 30 current liab. 79
net working capital 70 net work cap negative 20
THAT MEANS WHEN THE CURRENT ASSETS IS MORE THAN THE CURRENT LIABILITIES , there is an excess of current assets over the current liabilities, ON THE CONTRARY WHEN THE CURRENT ASSETS IS LESS THAN THE CURRENT LIAB. , THEN the net working capital is on the negative.
.
When we talk of the increase or the decrease of NET WORKING CAPITAL , we are dealing with the NET WORKING CAPITAL (CURRENT ASSETS AND THE CURRENT LIABILITIES) OF LAST YEAR AS AGAINST THE NET WORKING CAPITAL THIS YEAR, THAT MEANS IT IS A COMPARATIVE APPROACH , THAT IS why IT IS SAID THAT THERE IS AN INCREASE OR DECREASE OF NET WORKING CAPITAL. LAST YEAR VS. THIS YEAR.
BEFORE YOU CAN COMPUTE THIS WORKING CAPITAL , YOU MUST KNOW HOW TO DIFFERENTIATE CURRENT ASSETS AGAINST NON CURRENT ASSETS AND THE CURRENT LIABILITIES AS AGAINST THE NON CURRENT LIABILITIES. YOU MUST ALSO KNOW WHAT ARE THE ACCOUNTS COMPOSING THE CURRENT ASSETS AND THE CURRENT LIABILITIES AND EVEN THE NON CURRENT ASSETS AND THE NON CURRENT LIABILITIES.
IN THIS TOPIC, YOU MUST ASSUME THAT THE CURRENT ASSETS IS JUST A ONE ACCOUNT AND THE CURRENT LIABILITIES IS JUST A ONE ACCOUNT, BECAUSE IT DEAL WITH CURRENT ACCOUNTS AS ONE GROUP ONLY.
THE CURRENT ASSETS AND THE CURRENT LIABILITIES WILL CHANGE OR INCREASE OR DECREASE against last year IF AND WHEN
1. THERE IS A TRANSACTIONS INVOLVING CURRENT ASSETS AGAINST THE NON CURRENT ASSETS.
EXAMPLE:
1. PURCHASE OF FIXED ASSETS, ( decrease cash OR increase accounts payable , and increase non current assets,in the form of FIXED ASSETS>
2. PUTTING CURRENT ASSETS TO LONG TERM INVESTMENTS ( decrease cash increase, and increase non current assets. or increase in notes payable which is considered long term .
3. SELLING OF THIS LONG TERM INVESTMENTS ( increase cash or notes receivable and decrease in non current assets .
2. OR CURRENT ASSETS AGAINST THE NON CURRENT LIABILITIES.
EXAMPLE
1. OBTAIN LONG TERM LOAN. increase cash , increase in non current liabilities.
2. PURCHASE/ ISSUE OF BONDS . increase cash and increase in non current liab.
3. TERMINATION OF THIS BONDS PAYABLE . decrease non current , increase cash.
3. OR CURRENT ASSETS have CHANGED because of increase or decrease in CAPITAL STRUCTURE
1. ADDITIONAL INVESTMENTS TO INCREASE CAPITAL (increase in cash or increase in subscription receivable and increase in capital.
2. CASH DIVIDENDS ( decrease cash but decrease retained earnings.
4. CURRENT ASSETS OR CURRENT LIABILITIES HAVE CHANGE DUE TO THE TRANSACTIONS INVOLVING THE PROFIT AND LOSS ACCOUNTS .
EXAMPLE
1. A SALES WAS MADE, SO CASH OR ACCTS RECEIVABLE HAS INCREASE O CHANGE , THE INCOME ACCOUNTS IN THE FORM OF GROSS PROFIT ALSO HAVE INCREASED, THEN THE CURRENT ASSETS HAS INCREASE DUE TO CASH OR ACCTS. REC. INCREASE. THAT MEANS BECAUSE OF THE GROSS PROFIT DUE TO SALES OF INVENTORIES ARE MADE , THE INCOME ACCOUNTS HAS CAUSED THE accts receivable TO INCREASE.
2. WHEN AN EXPENSES WERE INCURRED , EITHER THE CASH HAS DECREASE OR OTHER CURRENT ASSETS such as prepaid exp, cash advances etc, etc, HAS DECREASE OR THE ACCTS PAYABLE, accrued expenses payable HAS INCREASED,..
3. WHEN AN OTHER INCOME IS INCURRED, THE CASH HAS INCREASE SO THE CURRENT ASSETS INCREASES.
" in short, the net income during the year is one of the reason why the current assets, current liabilites will increase or decrease compared to last year , that will increase the net working capital if it is profit. THAT IS WHY THE NET INCOME DURING THE PERIOD IS AUTOMATICALLY PART OF THE AMOUNT TO ATTRIBUTE TO THE INCREASE OR DECREASE OF NET WORKING CAPITAL. BUT TAKE NOTE THAT YOU MUST NOT INCLUDE IN THIS NET INCOME ( as a reason of the increase in net working capital) THE FOLLOWING PROFIT AND LOSS STATEMENT TRANSACTIONS:
1. the depreciation expense should be excluded, because , when the entry was made a depreciation expense was used which reduces NET INCOME and it is credited to a ACCUMULATED DEPN. ACCOUNT which is a NON CURRENT ASSETS ,but because the entry is depreciation expense and credit accumulated depn which are both non current within their category , the depreciation expense should not be part of the item that would change the working capital and the same with the accumulated depreciation being a non current assets therefore the transactions is between a NOMINAL ACCOUNTS OR PROFIT AND LOSS ACCOUNTS AND NON CURRENT ACCOUNTS which will not change the net working capital., hence the depreciation expense which as part of the net income should be added back to the net income amount/
EXAMPLE:
assuming networking capital last year is 100.
this year there are only three transactions:
a. interest income only 200
b. the selling of assets , net book value 50
sold at 75
c. depreciation exp. 5
this year the net working capital is 375 arrived at 100 plus 200 plus 75 ( no current liabl movement )
the INCREASE IN NET WORKING CAPITAL IS 275 as ff:
LAST YEAR 100
THIS YEAR ( 375)
INCREASE IN NET WORKING CAPITAL 275
the net income recorded would be:
interest income 200
less: depreciation 5
add gain on sale 25
NET INCOME 220
NOW IF YOU WILL PREPARE THE SOURCES AND USES OF WORKING CAPITAL , IT WILL APPEAR LIKE THIS.
net income for the period 220
add depreciation ( 5)
less : gain on sale + 25
NET INCOME AS ADJUSTED 200
add: sources of working capital
1. proceeds from sale 75
INCREASE IN NET WORKING CAPITAL 275
THE EXAMPLE PROVES THAT THE DEPRECIATION SHOULD BE ADDED BACK AND THE GAIN ON FIXED ASSETS SALE OR ANY OTHER NONCURRENT ASSET HAS TO BE DEDUCTED FROM THE RECORDED NET INCOME.
2. the gain on sales of non current assets like fixed assets, should be excluded in the net income in computing the net increase or decrease in the net working capital, BECAUSE CURRENT ASSETS SAY SPECIFICALLY THE CASH HAS INCREASE BECAUSE OF THE PROCEEDS , BUT THE AFFECTED NON CURRENT ASSETS (FIXED ASSETS) WAS NOT THE SAME AMOUNT OF THE PROCEEDS BECAUSE THERE IS GAIN ON THAT SALE, .
EXAMPLE:
THE ENTRY IS:
CASH ( proceeds of sales 100
fixed assets 20
gain on sale 80
sales of fixed assets.
explanation : as you have learned any transaction between current assets ( cash ) and non current asset (fixed assets) is automatically will increase the current assets IN THE SAME AMOUNT . in this example the current asset CASH, INCREASE BY 100, BUT THE NON CURRENT ASSETS ( FIXED ASSET) DECREASE ONLY BY 20, SO IT IS NOT EQUAL , THAT WOULD LEAD YOU TO HAVE AN UNACCOUNTED DIFFERENCE OF INCREASE OR DECREASE IN NET WORKING CAPITAL , AND BECAUSE IN MAKING THE SOURCES AND USES OF WORKING CAPITAL , YOU START ON THE NET INCOME as one of the reason for the increase in net working capital and since that net income includes the 80 , you have no choice but to deduct that 80 on the net income .
there is no problem if only the NET INCOME YOU WILL CONSIDER IN THE MAKING OF SOURCES AND USES OF WORKING CAPITAL IS WITHOUT THIS GAIN ON SALE THEN IT IS ALRIGHT .
if there is no gain recorded , no problem because the cash received is equal to the fixed assets sold.
TAKE NOTE THAT TRANSACTIONS THAT INVOLVES THE CURRENT ASSETS VS THE CURRENT LIABILITIES, THE WORKING CAPITAL WILL NOT CHANGE /AFFECTED BECAUSE THEY ARE BOTH ON THE SAME CATEGORY
THEREFORE AFTER ALL HAS BEEN SAID, THE NET WORKING CAPITAL WILL ONLY CHANGE IF IT HAS A TRANSACTION WITH THE NON CURRENT ASSETS, NON CURRENT LIABILITES , CAPITAL , AND THE INCOME STATEMENT
THAT MEANS , ANY TRANSACTION BETWEEN THE NON CURRENT ASSETS AGAINST NON CURRENT LIABILITIES OR AGAINST CAPITAL OR AGAINST THE NOMINAL ACCOUNTS, SHOULD NOT BE CONSIDERED IN THE MAKING OF THE BREAKDOWN OF THE INCREASE IN NET WORKING CAPITAL .
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THIS NET WORKING CAPITAL FLOWS WOULD INDICATE or SHOW :
1. THAT THE WORKING CAPITAL HAS INCREASE BECAUSE OF BY HUGE LOANS PAYABLE AND NOT BECAUSE OF THE ABILITY TO GENERATE INCOME.
2. THAT THE WORKING CAPITAL HAS INCREASED ONLY BECAUSE OF CAPITAL INVESTMENT AND NOT CAUSED BY THE ABILITY TO GENERATE INCOME
3. THAT IT INCREASES ONLY BECAUSE OF THE SELLING OF FIXED ASSETS.
ON THE OTHER HAND IT INDICATES:
1. THAT THE WORKING CAPITAL HAS DECREASE BECAUSE OF THE HEAVY ACQUISITIONS OF FIXED ASSETS
2. THE TOO MUCH BORROWING OF FUNDS.
3. THE DIVIDENDS DECLARATION
4. OR WORST IS THE RECURRING OF LOSSES.
IN SHORT THIS REPORT CAN BE USED BY MANAGEMENT IN DECISION MAKING PROCESS FOR THE FUTURE PLANS AND ACTIONS. THAT MANAGEMENT HAS BEEN AWARE AS WHERE THE WORKING CAPITAL WAS PUT TO USE , FAVORABLY OR UNFAVORABLY . OR AS FROM SOURCES DOES THE INCREASE OR THE SOURCES OF THE WORKING CAPITAL CAME FROM AS EXPLAINED JUST ABOVE. .
ALLOW ME TO SHOW YOU THIS COMPARATIVE BALANCE SHEET .
CURRENT ASSETS 2012 2011 INC DEC
CASH 22,100 18,300
MARKETABLE SECURITIES 14,000 15,000
ACCTS. RECEIVABLE 43.200 44.900
INVENTORIES 76,200 67,100
TOTAL 155,500 145,300
NON CURRENT ASSETS
INVESTMENT IN STOCKS 26,000 26,000
FIXED ASSETS 96,000 76,000 20,000
ACCUMULATED DEPN (14,000) 12,000)
TOTAL ASSETS 263,500 209,300
CURRENT LIAB.
ACCTS PAYABLE 10,300 11,500
WAGES PAYABLE 8,500 8,100
INCOME TAX PAYABLE 56,100 52,400
DIVIDENDS PAYABLE 6,000 5,000
TOTAL...........................................................80,900 77,000
NON CURRENT LIAB.
LONG TERM NOTES 25,000 15,000 10,000
BONDS PAYABLE 35,000 35,000
CAPITAL 60,000 15,000 45,000
RETAINED EARNINGS 97,600 67,300
TOTAL LIAB. CAPITAL 263,500 209,300
NET WORKING CAPITAL 74,600 68,300 6,300
INCOME STATEMENT \\
SALES 326.400
COST OF SALES 149,800
GROSS PROFIT 176,600
OPERATING EXPENSES 50,800
DEPN 7000
INTEREST EXP 4,000
INCOME TAX 56,100
GAIN ON SALE OF FIXED ASSETS 3200
net income for the year 61,900
Before you can start making the SOURCES AND USES OF WORKING CAPITAL , YOU HAVE TO MAKE A BREAKDOWN ON THE CHANGES OF THE NON CURRENT ASSETS, THE NON CURRENT LIABILITIES AND THE CAPITAL AND RETAINED EARNINGS, ALSO SOME CHANGES IN THE PROFIT AND LOSS MORE PARTICULARLY ON THE DEPRECIATION AND THE GAIN ON SALE OF ANY NON CURRENT ASSETS AND OF ANY GAIN IN THE DISPOSITION OF THE NON CURRENT LIABILITIES AND ANY LOSS INCURRED ON THIS ACCOUNT THEREOF AS IT AFFECTS THE CURRENT ASSETS AND LIABILITIES..
IN THE ABOVE EXAMPLE , CHECKING THE LEDGER ACCOUNTS OF NON CURRENT ASSETS AND LIABILITIES AND EVEN CAPITAL ,IT WOULD REVEAL THE FF:
1. THE INCREASE IN THE INVESTMENT IN STOCKS( NON current assets) IS PROBABLY A CASH PURCHASE OF THIS stocks at 26,000.
THE CURRENT ASSETS WAS USED TO FINANCE THE PURCHASE OF A STOCKS. OF 26,000
2. THE BOOK VALUE OF THE FIXED ASSETS INCREASED BY 20,000. CHECKING THE LEDGER INDICATES THAT THERE IS A CREDIT OF 12,000 FOR THE BOOK VALUE OF AN ASSET SOLD. THEREFORE THE FIXED ASSETS ACTUALLY INCREASE BY 32,000.
BEG FIXED ASSETS 76,000
PLUS ACQUISTION 32,000 USING CASH
LESS ; SELLING 12,000
END BALANCE 96,000
THE DETAILS OF THE ACCUMULATED DEPN.
BEG 12,000 GIVEN
THIS YEARS DEPN 7,000 GIVEN
DEPN OF FIXED ASSETS SOLD ( 5,000) BALANCING FIGURE
ENDING BALANCE 14,000 GIVEN
IF THIS IS THE CASE , THE GAIN ON SALE OF FIXED ASSETS IS:
PROCEEDS 10,200 BALANCING FIGURE
ACCUMULATED 5,000 DERIVED ABOVE
BOOK VALUE 12,000 GIVEN
GAIN 3,200 GIVEN
THEREFORE ONE ITEM THAT THE CURRENT ASSETS OR WORKING CAPITAL INCREASES AS SOURCES OF FUND IS DUE TO THE PROCEEDS OF 1O,200 OUT THE FIXED ASSETS SOLD.
TAKE NOTE THAT A TRANSACTION BETWEEN CURRENT ASSETS (CASH ) AND FIXED ASSETS HAD TRANSPIRED.
3. LOOKING THE LEDGER OF LONG TERM NOTES PAYABLE , ON THE CREDIT SIDE , A 10,000 BORROWED FUNDS IS INDICATED AS EXPLAIN ON THE JOURNAL VOUCHER.
BEG BALANCE 15,000
LOANS 10,000
END BALANCE 25,000
THAT MEANS THERE IS TRANSACTION INVOLVING CASH AGAINST A NON CURRENT LIABILITIES THEREFORE THIS IS A SOURCES OF WORKING CAPITAL .
4. RETAINED EARNINGS LEDGER SHOWED THAT :
BEGINNING BALANCE 67,300
A CREDIT FOR THE NET INCOME DURING THE YEAR 61,900
A DEBIT FOR THE CASH DIVIDENDS PAID ( 21,600
A DEBIT OF THE STOCK DIVIDEND ( 10,000)
END BALANCE 97,600
THE NET INCOME OF 67,300 IS A TRANSACTION BETWEEN A NOMINAL ACCOUNTS AGAINST THE CURRENT ASSETS OR CURRENT LIABILITIES , THEREFORE THIS NET INCOME IS ONE OF THE REASON FOR THE INCREASE IN NET WORKING CAPITAL CATEGORIZED AS sources of net working capital.
IF YOU ARE GOING TO PREPARE THE SOURCES AND USES OF NET WORKING CAPITAL
IT WILL APPEAR LIKE THIS
SOURCES OF NET WORKING CAPITAL
FROM NET INCOME 61,900
ADD: DEPRECIATION 7,000
LESS: GAIN ON SALE OF FIXED ASSETS ( 3,200)
1. NET INCOME ACTUALLY CONTRIBUTED TO SOURCES 65,700
2. THE PROCEEDS OF FIXED ASSETS SOLD 10,200
3. THE PROCEEDS OF LONG TERM NOTES PAY 10,000
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TOTAL SOURCES..................................................................85,900
USES OF THE NET WORKKING CAPITAL
1. PURCHASE OF STOCKS 26,000
2. PURCHASE OF FIXED ASSETS 32,000
3. DIVIDENDS PAID 21,600
TOTAL USES 79,600
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EQUALS THE NET INCREASE IN NET WORKING CAPITAL 6,300
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+++++++++++========================================================
LET ME GO NOW TO ANOTHER TYPE OF ANALYSIS OF THE WORKING CAPITAL AND THIS IS ABOUT CASH FLOW STATEMENT.
IN THE PREVIOUS DISCUSSION ON NET WORKING CAPITAL , WE LARGELY DEAL WITH THE CURRENT ASSETS AND CURRENT LIABILITIES AS A WHOLE OR AS GROUP OF ACCOUNTS., IRRESPECTIVE OF THE INDIVIDUAL ACCOUNTS.
IN THIS CASH FLOW STATEMENT WE WILL TALK ABOUT ALL BALANCE SHEET ACCOUNTS AND THAT OF THE PROFIT AND LOSS AS IT AFFECTS THE CASH ACCOUNT.
UNLIKE IN NET WORKING CAPITAL ANALYSIS , ONLY THE GROUP OF CURRENT ACCOUNTS ARE BEING COUNTERCHECK AGAINST THE NON CURRENT ACCOUNTS , THE CAPITAL AND THE INCOME STATEMENT
THAT MEANS WE WILL CHECK THE TRANSACTIONS OR THE DEBIT AND CREDIT OF EACH EVERY ACCOUNT IN THE BALANCE SHEET AS IT AFFECTS THE CASH ACCOUNT OR IF ITS AFFECT THE CASH ITSELF..
AS YOU MAY BE AWARE, ALL ACCOUNTS IN THE ACCOUNTING SYSTEM ARE JUST MOVING FROM ONE ACCOUNT TO THE OTHER , THEREFORE WHEN A ACCOUNTS DO MOVE , A CORRESPONDING ACCOUNTS SHALL LIKEWISE MOVED , EITHER DEBIT OR CREDIT., INCREASE OR DECREASE UNTIL SUCH TIME THE CASH WILL BE AFFECTED
THERE TWO TYPES OF CASH FLOW:
FIRST IS THE ACCOUNTING AS TO WHY THE CASH DECREASE OR INCREASE COMPARED TO THE LAST PERIOD.
THAT MEANS , THIS IS A COMPARISON OF THE PREVIOUS BALANCE SHEET ACCOUNTS BALANCES AS AGAINST THE BALANCE SHEET THIS PERIOD.
I WILL SHOW YOU A VERY SIMPLE EXAMPLE OF CASH FLOW ANALYSIS
LAST YEAR THIS YEAR INCREASE DECREASE
CASH 100 300 200
ACCTS RECEIVABLE 200 150 50
INVENTORIES 300 500 200
FIXED ASSETS 100 100
ACCU. DEPN 20 22 2
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TOTAL 680 1,028 398 50
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ACCTS PAYABLE 30 40 10
CAPITAL 400 400
RETAINED EARNINGS 250 250
PROFIT THIS YEAR. 338 338
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TOTAL 680 1,028 348
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IF YOU WILL TAKE A LOOK OF A BALANCE SHEET SHOWING THE INCREASE AND DECREASE OF EACH ITEM COMPARED WITH THE LAST PERIOD, YOU WILL NOTICE THAT THERE DIFFERENCE IN AMOUNT IS ALSO BALANCE, IN THE ABOVE , ASSETS DIFFERENCE OF 348 IS THE SAME WITH THE LIAB. AND STOCKHOLDERS EQUITY DIFFERENCE OF 348.
IT ONLY MEANS , THAT IF YOU WILL SUMMARIZE THE DIFFERENCE OF ALL THE ACCOUNTS EXCEPT CASH, THE RESULT IS THE INCREASE IN CASH OF 200 AS SHOWN BELOW.
WITHOUT MAKING EXCEPTION, THE FOLLOWING IS THE DETAILS OF THE INCREASE IN CASH OF 200 .
INCREASE DUE TO :
. NET INCOME 338
ADD: DEPRECIATION 2
ADD: INCREASE IN PAYABLE 10
ADD :DECREASE IN ACCTS. RECEIVABLE 50
DECREASE DUE TO:
INCREASE IN INVENTORIES 200
NET INCREASE IN CASH 200
LET ME FIRST EXPLAIN WHY FOR EVERY ITEM IN THE BALANCE SHEET, IT AFFECTS CASH BALANCE.
1. WHEN THE ACCTS. RECEIVABLE HAS INCREASE COMPARED TO LAST YEAR IT MEANS THAT THE CREDIT ON THIS ACCOUNT SAY COLLECTION IS SMALLER THAT IT DID NOT BRING DOWN THE RECEIVABLE TO A SMALLER AMOUNT THAN THE LAST PERIOD . SO THE CASH COLLECTION IS LOWER , SO YOU PRESUME AND PUT IT ON THE "DECREASE OF CASH DUE TO " ACCTS. RECEIVABLE BEING BIGGER VS. LAST YEAR.
OR THE SALES DURING THE PERIOD DEBITED TO ACCTS RECEIVABLE IS BIGGER THAN THE COLLECTION OF RECEIVABLE , HENCE CASH DECREASE AS A RESULT.
IN THE EVENT THAT THE RECEIVABLE BECOMES SMALLER VS. LAST YEAR THAT MEANS , A BIG COLLECTION OR CREDIT WAS MADE , THEREFORE THE CASH BECOMES BIGGER, SO YOU INCLUDE THAT ON THE " increase of cash due to"
2. WHEN THE INVENTORY AMOUNT IS BIGGER THAN LAST YEAR , THAT MEANS PURCHASES IS BIGGER THAN WHAT WAS SOLD, SO CASH DECREASES BECAUSE OF HEAVY PURCHASES, HENCE , THAT INCREASE OF AMOUNT IS PLACED TO " decrease of cash due to:" , because you purchases is bigger leading to the increase of inventory.
OR THE PURCHASES THIS PERIOD IS BIGGER THAN WHAT WAS SOLD
IN THE EVENT THAT THE INVENTORY IS SMALLER THAN LAST YEAR , IT MEANS THAT A BIG SALES OF THIS INVENTORY WAS MADE , THEREFORE THE CASH INCREASE , so it is place to " increase in cash due to " decrease in inventory due to big sales.
OR THE SOLD AMOUNT OF INVENTORY IS BIGGER THAN THE PURCHASES , HENCE CASH INCREASES
3. WHEN THE FIXED ASSETS HAS INCREASE THAT MEANS , THERE IS A PURCHASES OF FIXED ASSETS, SO THE CASH DECREASES " put that to '" decrease of cash due to " INCREASE IN FIXED ASSET.
IF THIS FIXED ASSETS DECREASES, THAT MEANS A SALE OF FIXED ASSETS WAS MADE, SO A CASH HAS BEEN RECEIVED, SO THE CASH INCREASES "" increase in cash due to"
4. the same is true with the rest of the non current assets.
5. IF THE ACCOUNTS PAYABLE HAS INCREASED THAT MEANS NO MUCH PAYMENT WAS MADE TO THIS ACCOUNTS PAYABLE , THEREFORE THE CASH INCREASE , " increase in cash due to " increase in acct. payable.
CONVERSELY, IF THIS PAYABLE HAS DECREASED A BIG PAYMENT IS MADE ,than purchase , so the CASH HAS DECREASED , " decrease due to " decrease in accts. payable.
6. IF THERE IS AN INCREASE IN LOANS PAYABLE , IT MEANS THERE IS A CASH BORROWING MADE , SO CASH INCREASE ,, " increase due to " bigger credit to loans payable than payment .
7. IF CAPITAL INCREASE , THAT MEANS A AN ADDITIONAL CASH INVESTMENT WAS MADE so, " increase in cash due to"
IF THIS CAPITAL DECREASE, THAT MEANS A CASH DIVIDEND WAS PAID, HENCE CASH DECREASE, " decrease in cash due to "
8. NOW , OF COURSE , THE PROFIT DURING THE PERIOD IS AUTOMATICALLY BIGGER THAN LAST YEAR BECAUSE PROFIT LAST YEAR IS MERGED WITH THE RETAINED EARNINGS ON THAT YEAR..
THIS PROFIT THIS PERIOD IS AUTOMATICALLY PRESUMED TO HAVE INCREASE THE CASH BECAUSE THE INCOME , SALES AND THE EXPENSE IS PRESUMED TO HAVE COURSED THRU THE CASH AND THIS PROFIT PRESUMED TO HAVE INCREASED THE CASH AND THE NET LOSS MAKES THE CASH BECOMES SMALLER. SO IF IT IS A NET LOSS , ACTUALLY THIS IS PRESENTED AS A NEGATIVE AMOUNT.
THOUGH IT IS NOT A PRACTICED, THE SALES SHOULD BE PRESENTED AS " increase cash due to sales" and COST OF SALES is presented as " decrease cash due to cost of sales" , and the expenses is presented as " decrease in cash ".due to expenses. .
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THERE IS ANOTHER TYPE OF CASH FLOW , CALLED STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS.
WHAT IS THIS REPORT:
THIS REPORT IS THE ACCOUNTING OF THE CASH INFLOW AND OUTFLOW DURING THE PERIOD TO ARRIVE AT THE ENDING BALANCE OF THE CASH , SO IT BEGINS WITH THE BEGINNING BALANCE OF CASH.AND END UP TO THE ENDING CASH .
THIS IS DIFFERENT WITH SOURCES AND USES OF WORKING CAPITAL WHEREIN IN SOURCES AND USES OF WORKING CAPITAL , THE INCREASE OF CASH OF THE PRESENT PERIOD AS AGAINST THE LAST PERIOD IS THE ONE THAT IS BEING ACCOUNTED
. WHAT IS INVOLVE HERE IN THIS CASH RECEIPTS AND DISBURSEMENT REPORT IS THE ACCOUNTING OF INFLOW AND OUTFLOW OF CASH DURING THE YEAR AND ADDED AND DEDUCTED IT TO THE BEGINNING BALANCE TO ARRIVE AT ENDING BALANCE
WHAT ARE THE ADDITIONS TO BEG CASH BALANCE.
A. THE NET INCOME
1. OF COURSE ONE REASON WHY THE ENDING CASH HAD INCREASE IS THE NET INCOME GENERATED DURING THE PERIOD, THE 61,900 INDICATED ABOVE.
2. ANY DEPRECIATION EXPENSE SHOULD BE ADDED TO THE NET INCOME.. THE GAIN ON ANY SALE OF NON CURRENT ASSETS SHOULD BE DEDUCTED ON THE NET INCOME.
B. THOSE CURRENT ASSETS AND CURRENT LIABILITIES
3 ALSO THE CASH INCREASE AS A RESULT OF DECREASE OF CURRENT ASSETS COMPARED TO LAST PERIOD
4 ALSO THE CASH INCREASE AS A RESULT OF THE INCREASE IN CURRENT LIABILITIES COMPARED TO LAST PERIOD.
C. THE MOVEMENT OF NON CURRENT ASSETS AND NON CURRENT LIABILITIES REPRESENTING INFLOW OF CASH.
1. PROCEEDS OF SALE OF FIXED ASSETS
2. PROCEEDS OF SALE OF OTHER NON CURRENT ASSETS
3. PROCEEDS OF BANK LOANS , BONDS SALES , LONG TERM LOANS ETC
4. ADDITIONAL CAPITAL INFUSION..
D. THE MOVEMENT OF NON CURRENT ASSETS AND NON CURRENT LIABILITIES REPRESENTING OUTFLOW OF CASH
1. PURCHASE OF FIXED ASSETS
2. PAYMENT OF LOANS PAYABLE , BONDS PAYABLE, LONG TERM LIAB.
3. PAYMENT OF CASH DIVIDENDS
4. AN ALL OTHERS PAYMENTS OF NON CURRENT LIAB. AND CAPITAL
NOW USING THE ABOVE BALANCE SHEET AND PROFIT AND LOSS , THIS IS THE REPORT ON STATEMENT OF CASH RECEIPTS AN DISBURSEMENTS.
CASH BALANCE BEGINNING 18,300
ADD NET INCOME 61,900
ADD DEPN 7,000
LESS GAIN ON SALE ( 3,200 ) 65,700
-------------------------------------------------
ADD: DECREASE IN ACCTS. RECE. 1700
INCREASE IN WAGES PAY 400
INCREASE INCOME TAX PAY 3,700
------------------------------------------------ ------5800
LESS: INCREASE IN INVENTORY 9,100
DECREASE IN ACCTS.PAY 1,200
--------------------------------------------------- 10.300
NET INFLOW OF CASH CAUSED
BY WORKING CAPITAL ___ 61,200
ADD/DEDUCT THOSE CASH TRANSACTIONS AFFECTING NON CURRENT
PROCEEDS OF SALE OF SECURITIES 1,000
PROCEEDS OF SALE OF FIXED ASSETS 10,200
PROCEEDS OF LONG TERM LOANS 10,000 21,200
LESS:
PAYMENT OF DIVIDENDS 20,600
PAYMENT OF INVESTMENTS 26,000
PAYMENT OF PURCHASE OF FIXED ASSETS 32,000 ( 78,600)
ENDING CASH BALANCE ..............................................................22,100
HOWEVER, YOU MAY ASK , WHY NOT JUST ANALIZE THE CONTENTS OF THE CASH LEDGER AND DETERMINE THE CLASS OF TRANSACTIONS THAT ARE IN ITS DEBIT AND IN ITS CREDITS.
THE FACT IS WE CAN DO THAT, THE ONLY PROBLEM IS THE SEGREGATION OF DEBITS AND CREDITS TO CASH ACCOUNT WHICH IF THIS IS A BIG COMPANIES A LOT OF TRANSACTION IS BEING ENTERED TO THIS ACCOUNT ,HENCE IT IS IMPRACTICAL.
TO GIVE YOU AN IDEA ON HOW TO DO IT.
1. SEGREGATE THE DEBITS TO CASH NOT REPRESENTING NON CURRENT ASSETS OR NON CURRENT LIABILITIES OR RETAINED EARNING OR CAPITAL, THAT MEANS SEGREGATE DEBITS AGAINST CURRENT ASSETS OR CURRENT LIABLITIES.
2. SEGREGATE ALSO FROM THIS CASH DEBITS , THOSE NON CURRENT ASSET, NON CURRENT LIAB. CAPITAL RET. EARNINGS.
3. ON CREDIT, SIDE, SEGREGATE THOSE REPRESENTING TRANSACTIONS AFFECTING CURRENT ASSETS, CURRENT LIABILIITES.
4. SEGREGATE THOSE CREDIT REPRESENTING NON CURRENT ASSETS AND LIABILITIES AND CAPITAL OR RETAINED EARNINGS.
THE 1, AND 3, IF YOU WILL GET THE NET AMOUNT WOULD REPRESENT THE WORKING CAPITAL FROM OPERATION..
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