Statement of Cash Flows Chapter 10 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible

Statement of Cash Flows

Chapter 10

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 10, Slide #2

Statement of Cash Flows – Background

• Required presentation since 1987

• Cash and cash equivalents– Cash on hand– Cash on deposit– Investments in short-term, highly liquid securities



Statement Use

• Internal (management) users– Determine dividend policy– Evaluate cash generated by operations– Review investing and financing policy

• External users– Assess firm’s ability to increase dividends– Assess firm’s ability to pay debt from operations– Assess firm’s relationship of cash from operations

to in relation to the cash from financing



Statement Structure

Cash flows from operations

+ Cash flows from investing activities

+ Cash flows from financing activities

= Change in cash

+ Beginning cash balance

= Ending cash balance

Supplemental disclosure: non-cash financing and investing activities



Operating Activities

Cash inflows from• Sale of goods or

services• Returns on loans

(interest)• Return on equity

securities (dividends)

Cash outflows for• Payments for

acquisitions of inventory• Payments to employees• Payments for taxes• Payments for interest• Payments for other

expenses

The cash effects of transactions and other events that enter into the determination of net income:



Investing Activities

Cash inflows from• Receipts for loans

collected• Sales of debt or equity

securities• Sales of plant, property,

and equipment

Cash outflows for• Loans to other entities• Investment in debt or

equity securities• Purchase of plant,

property, and equipment

Lending money and collecting on those loans and acquiring and selling investments and productive long-term assets:



Financing Activities

Cash inflows from• Sale of equity securities• Sale of bonds,

mortgages, notes, and other short- and long-term borrowings

Cash outflows for• Payment of dividends• Reacquisition of capital

stock • Payment of amounts

borrowed

Borrowing and repaying long-term loans; issuing equity securities; payment of dividends to shareholders:



Cash Flows From Operations

• Alternative presentations:• Direct method

– Converts the income statement from accrual basis to a cash basis

– Encouraged by FASB 95– Supplemental information required: reconciliation of net income

to cash provided by operations

• Indirect method– Adjusts net income for items that affected net income but did not

affect cash– Supplemental information required: cash paid for income taxes

and for interest



Cash Flows From Operations:Direct Method

Cash flows from operations: Cash received from customers $ 370,000 Cash paid to suppliers and employees (310,000) Interest received 10,000 Interest paid (net of amount capitalized) (4,000) Income taxes paid (15,000) Net cash provided by operations 51,000

Presents the income statement on a cash basis



Cash Flows From Operations:Indirect Method

Cash flows from operations: Net earnings $ 40,000 Provision for depreciation 6,000 Provision for allowance for doubtful accounts 1,000 Deferred income taxes 1,000 Loss on property, plant, and equipment disposals 2,000 Changes in operating assets and liabilities: Receivables increase (2,000) Inventories increase (4,000) Accounts payable increase 5,000 Accrued income taxes increase 2,000 Net cash provided by operations $51,000

Adjusts net income for items that affected net income but did not affect cash



Cash Flows From Operations

Cash flows from operations: Cash received from customers $ 370,000 Cash paid to suppliers and employees (310,000) Interest received 10,000 Interest paid (net of amount capitalized) (4,000) Income taxes paid (15,000) Net cash provided by operations 51,000

Cash flows from operations: Net earnings $ 40,000 Provision for depreciation 6,000 Provision for allowance for doubtful accounts 1,000 Deferred income taxes 1,000 Loss on property, plant, and equipment disposals 2,000 Changes in operating assets and liabilities: Receivables increase (2,000) Inventories increase (4,000) Accounts payable increase 5,000 Accrued income taxes increase 2,000 Net cash provided by operations $51,000

Direct

Indirect



Cash Flows From Investing Activities

Cash flows from investing activities: Capital expenditures $ (30,000) Proceeds from property, plant and equipment disposals 6,000 Net cash used in investing activities (24,000)



Cash Flows From Financing Activities

Cash flows from financing activities: Net proceeds from repayment of commercial paper $ (4,000) Proceeds from issuance of long-term debt 6,000 Dividends paid (5,000) Net cash used in financing activities (3,000)



Statement of Cash Flows – Direct Method(supplemental disclosures not illustrated)

O P E R A TIN G A C TIV ITIE SC as h rec e ived from c us tom ers 370,000$ C as h pa id to s upp lie rs and em ploy ees (310,000) In teres t rec e ived 10,000 In teres t pa id (4 ,000) Inc om e tax es pa id (15,000)

N et c as h provided (us ed) by opera t ing ac t ivit ies 51,000

IN V E S TIN G A C TIV ITIE SC apita l ex pend itures (30,000) P roc eeds from property , p lant , and equ ipm ent d is pos a ls 6,000

N et c as h provided (us ed) by opera t ing ac t ivit ies (24,000) F IN A N C IN G A C TIV ITIE S

N et proc eeds from repay m ent o f c om m erc ia l paper (4 ,000) P roc eeds from is s uanc e o f long-term debt 6 ,000 D ividends pa id (5 ,000)

N et c as h provided (us ed) by financ ing ac t ivit ies (3 ,000)

Inc reas e in C as h 24,000

B eg inn ing c as h ba lanc e 8,000 E nd ing c as h ba lanc e 32,000$



Statement of Cash Flows – Indirect Method(supplemental disclosures not illustrated)

O P E RAT ING AC T IV IT IE SNe t e a rn in g s 4 0 ,0 0 0$ P ro v is io n fo r d e p re c ia tio n 6 ,0 0 0 P ro v is io n fo r a llo w a n c e fo r d o u b tfu l a c c o u n ts 1 ,0 0 0 D e fe r re d in c o m e ta x e s 1 ,0 0 0 L o s s o n p ro p e r ty , p la n t, a n d e q u ip m e n t d is p o s a ls 2 ,0 0 0 C h a n g e s in o p e ra tin g a s s e ts a n d lia b ilitie s :

Re c e iv a b le s in c re a s e (2 ,0 0 0 ) In v e n to r ie s in c re a s e (4 ,0 0 0 ) Ac c o u n ts p a y a b le in c re a s e 5 ,0 0 0 Ac c ru e d in c o m e ta x e s in c re a s e 2 ,0 0 0

Ne t c a s h p ro v id e d (u s e d ) b y o p e ra tin g a c tiv itie s 5 1 ,0 0 0

INV E S T ING AC T IV IT IE SC a p ita l e x p e n d itu re s (3 0 ,0 0 0 ) P ro c e e d s fro m p ro p e r ty , p la n t, a n d e q u ip m e n t d is p o s a ls 6 ,0 0 0

Ne t c a s h p ro v id e d (u s e d ) b y o p e ra tin g a c tiv itie s (2 4 ,0 0 0 ) F INANC ING AC T IV IT IE S

Ne t p ro c e e d s fro m re p a y m e n t o f c o m m e rc ia l p a p e r (4 ,0 0 0 ) P ro c e e d s fro m is s u a n c e o f lo n g -te rm d e b t 6 ,0 0 0 D iv id e n d s p a id (5 ,0 0 0 )

Ne t c a s h p ro v id e d (u s e d ) b y fin a n c in g a c tiv itie s (3 ,0 0 0 )

In c re a s e in C a s h 2 4 ,0 0 0

B e g in n in g c a s h b a la n c e 8 ,0 0 0

E n d in g c a s h b a la n c e 3 2 ,0 0 0$ © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Alternative Cash Flow Analysis

In flow s O ut flow s In flow s O ut flow sO P E R A TIN G A C TIV ITIE S

C as h rec e ived from c us tom ers 370,000$ 94%C as h pa id to s upp lie rs and em ploy ees (310,000)$ 84%In teres t rec e ived 10,000 3%In teres t pa id (4 ,000) 1%

Inc om e tax es pa id (15 ,000) 4%N et c as h provided (us ed) by opera t ing ac t ivit ies 380,000 (329,000) 97% 89%

IN V E S TIN G A C TIV ITIE SC apita l ex pend itu res (30 ,000) 8%

P roc eeds from property , p lan t , and equ ipm ent d is pos a ls 6 ,000 2% N e t c as h provided (us ed) by opera t ing ac t ivit ies 6 ,000 (30 ,000) 2% 8%

F IN A N C IN G A C TIV ITIE SN et p roc eeds from repay m ent o f c om m erc ia l paper (4 ,000) 1%P roc eeds from is s uanc e o f long-te rm debt 6 ,000 2%D ividends pa id (5 ,000) 1%N et c as h provided (us ed) by financ ing ac t ivit ies 6 ,000 (9 ,000) 2% 2%C hanges in c as h:Tota l c as h in flow s (ou t flow s ) 392,000 (368,000) 100% 100%

Tota l c as h ou t flow (368,000) Inc reas e in C as h 24,000$

P erc ent



Financial Ratios and the Statement of Cash Flows

• Statement of cash flows is relatively new– Required presentation began in 1987

• Cash flow financial ratios were slowly developed

• Traditional ratios relate balance sheet to income statement



Operating Cash Flow/Current Maturities of Long-Term Debt and Current Notes Payable

• Indicates a firm’s abilities to meet its current maturities of debt

• Higher ratio indicates better liquidity

Operating Cash Flow

Current Maturities of Long-Term Debtand Current Notes Payable



Operating Cash Flow to Total Debt

• Indicates a firm’s ability to cover total debt with the yearly operating cash flow

• Conservative approach is to include all possible balance sheet debt

Operating Cash Flow

Total Debt



Operating Cash Flow per Share

• A better indication of a firm’s ability to make capital expenditure decisions and pay dividends than is earnings per share

• Does not reflect firm’s profitability– Firms are prohibited from reporting this

statistic in financial statements or in the notes thereto

Operating Cash Flow - Preferred Dividends

Diluted Weighted AverageCommon Shares Outstanding



Operating Cash Flow to Cash Dividends

• Indicates a firm’s ability to cover cash dividends with the yearly operating cash flow

Operating Cash Flow

Cash Dividends



Alternative Cash Flow

• No standard definition of cash flow

• Alternative definition– Net income plus depreciation expense– Less useful than the net cash flow from operating

activities



Procedures to Develop the Statement of Cash Flows

Analyze all balance sheet accounts other than cash and cash equivalents.

Increase Decrease

Current assets Operating outflow Operating inflow

Noncurrent assets Investing outflow Investing inflow

Current liabilities Operating inflow Operating outflow

Long-term liabilities Financing inflow Financing outflow

Stockholders’ equity

Financing inflow Financing outflow



Procedures to Develop the Statement of Cash Flows (cont’d)

1. Determine change in cash and cash equivalents

2. Compute the change in all other balance sheet accounts

3. Classify as operating, investing, and financing



Procedures to DevelopDirect Operating Cash Flows

1. Operating section describes income statement accounts as receipts or payments

2. Cash receipts• From customers• From other operating sources

3. Cash payments• For merchandise• To employees• For other operating expenses



Procedures to DevelopIndirect Operating Cash Flows

1. Begin with net income2. Adjust net income (loss) for noncash expenses (like

depreciation expense) and noncash revenues.3. Eliminate non cash gains and losses that relate to

investing and financing activities4. Add back or deduct adjustments to change accrual-

based net income to cash basis• Changes in current noncash assets

-Changes in noncash assets go in the inverse direction of changes in cash

• Changes in current liabilities-Changes in noncash liabilities go in the same direction of changes in cash


Documents

Statement of Cash Flows Chapter 10 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible