Durogage Case 1

DuroGage Statement of Cash Flow Analysis

Our recent acquisition of the company DuroGage should be a huge success for our company. However, before we recognize DuroGage in our statement of cash flows we must address a number of issues that will need to be changed from their previous reporting to match our reporting and more importantly be compliant with SEC and GAAP requirements.

GAAP requires that companies report the statement of cash flows using the direct method. In the past DuroGage has not used the direct method and has no sense of cash and cash equivalents in their reporting. To address this, I have put together a brief summary of the direct method reporting, with a emphasis on reporting cash flows from operations. I will also go over cash equivalents.

The Direct Method

The direct method presents cash flows as inflows and outflows of cash. For cash flows from operating activities you start with finding your cash collections.

Cash Collections = Sales + Decrease (subtract increase) in Accounts Receivable

You do this because sales that increase accounts receivable are not bringing in cash, since the cash is still owed to you. Next you find cash payments for purchases.

Cash Payments for purchases = Cost of Goods Sold + Increase (subtract decrease) in Inventory + Decrease (subtract increase) in Accounts Payable

This adjusts your cost of goods sold for any inventory sold that was purchased in past periods and any for any inventory bought on credit instead of cash. Next you find cash payments for operating expenses.

Cash Payments for Operating Expenses = Operating Expenses + Increase (subtract decrease) in Prepaid Expenses + Decrease (subtract increase) in Accrued Liabilities.

Once you have cash payments for operating expenses, you need to find cash interest.

Cash Interest = Interest Expense – Increase (subtract decrease) in Interest Payable + Amortization of Bond Premium (subtract discount bond)

Lastly, you need to find cash payment for income...