Setting source parameters

While building out the income statement and the balance sheet portion of the three-statement financial model is usually fairly straightforward, building out the statement of cash flows can be a little bit trickier because it often draws from the income statement and the balance sheet. I'm in the zero two zero four begin Excel file. Now we have our basic three-statement model and this includes the balance sheet and the income statement completely filled out for our purposes. But we have a significant portion of the statement of cash flows that's missing. In our case though, we should be able to go through and fill out the rest of the sheet based on that income statement and balance sheet. Notice the net income portion, which starts the cash from operating activities, this is going to be drawn directly from our income statement above. So our net income flows right out of the bottom of the income statement. We want to make sure that we continue to do this across the entire statement of cash flows. 

Next, we're going to need to go through and add back all of the non-cash items in order to get our total cash from operations. So that's going to include, for example, depreciation. In this case, we don't have a direct appreciation line in our income statement. So instead we're going to use the change in accumulated depreciation year to year from the balance sheet. We can then follow that approach across all five years. The same thing holds true when we look at net receivables. We haven't directly tied that out of the income statement, so we're instead going to use the balance sheet in order to determine that particular line item. Inventories, as you might expect, will come directly off of the balance sheet. But we might wish to use the change in inventories rather than just inventories over time. So we'd want to adjust our formula so that it takes into account the previous year's inventories just as we did with receivables. 

Next, we're looking at changes in working capital. This is going to be based on our current assets and current liabilities in each year. And again, we're looking at the differences between them in each period. Once we've figured all of these particular items we can go through and sum them up in order to get our total cash from operations. This'll include all of our changes in working capital, receivables, depreciation, et cetera. 

Next, we'll want to go through and look at our change in cash investing activities. This is going to be based on capital expenditures and any sale and purchases of different investments. Now, purchases and sales of investments may not appear in other places so in this particular case we're simply going to assume that we have the same level each year on an ongoing basis. We'd probably need to gather this data from supporting schedules, which we don't have in this particular set of financial statements. For our purposes, I'm just going to assume that those changes are consistent from period to period rather than trying to draw them from other parts of the financial statements. Once we've done that, we can go through and determine our total cash from investments by summing up these line items. 

Next we'll look at our total cash dividends paid. Again, this is generally going to be a line item directly from the statement of cash flows. It won't appear in other financial statements directly, though it would appear in supporting cash schedules. We'll assume a constant level of cash dividends paid. When we look at issuance and retirement of stock this may be available through the balance sheet but you're more likely to find it in your supporting schedules in another portion of the financial statements. In our case, we'll assume that we continue to retire stock over time and that we have the same level of debt assurances. Now of course, these assumptions are solely for learning purposes. A real company will have differences each year over time. We're simply illustrating how you put together these particular statements. Same thing holds true with our FX. This will be a line item that you'll need to draw from your supporting schedules. From there, you'll be ready to go through and determine your change in cash over time, and then the resulting beginning and ending cash, which should illustrate a corkscrew effect. 2015's ending cash is 2016's starting cash and vice versa. Each year the ending cash becomes the beginning cash for the following year. Finally, we'll go through and clean up our statements by adding the appropriate lines to make them a little bit easier to read. And at this point you now should have a completed set of cash flow statements.