Reporting and Analyzing Cash Flows

Chapter 17

Purposes of the Statementof Cash FlowsDesigned to fulfill the following:– predict future cash flows– evaluate management decisions– determine the ability to pay dividends plus

interest and principal– show the relationship of net income to

changes in the firm’s cash

Cash Balance Includes...

– cash on hand.– cash in the bank.– cash equivalents.

Cash Equivalents Are....

…short-term, highly liquid investments convertible into cash with little delay.

– money market accounts.– U.S. Government Treasury bills.

Basic Organization of theStatement of Cash FlowsA business may be evaluated in terms of three

types of business activities:1 Operating activities2 Investing activities3 Financing activities

Operating Activities

Related to transactions that make up net income.

Also affect current assets and current liabilities on the balance sheet.

Outflows – cash paid from incurring expenses Salaries and wages. Payments to suppliers

for inventory. Taxes and fines. Interest paid to lenders Other expenses

Operating Activities

Inflows – cash receipts from earning revenues Sale of goods or

services Interest revenue Dividend revenue Other revenues

Focus your attention on: income statement, and changes in current assets, current liabilities

Investing Activities

Investing activities increase and decrease the assets that are available to the business.

Related to the Long-Term Asset accounts.

Investing Activities

Outflows Purchase long-term

productive assets. Purchase equity

investments. Purchase debt

investments. Make loans.

Inflows Selling long-term

productive assets. Selling equity

investments. Collecting of

principal on loans. Other.

Focus your attention on changes in:plant assets, long-term investments, other long-term assets

Financing Activities

Transactions involving obtaining resources from the owners or returning resources to them.

Also involves obtaining resources from creditors and repaying the amount borrowed.

Financing Activities

Inflows Issuing stock. Issuing bonds and

notes.

Outflows Cash dividends or

withdrawals by owner. Purchase treasury

stock. Repay cash loans.

Focus your attention on changes in:long-term debt and stockholder’s equity

Investing and financing activities that affect the company’s financial position, but not the entity’s cash flow during the period.

Items requiring separate disclosure include: Retirement of debt by issuing equity securities. Conversion of preferred stock to common stock. Acquiring land by issuing a note payable.

Noncash Investing and Financing

Format of the Statementof Cash Flows FASB Statement 95 approved two methods

for reporting cash flows from operating activities.

1 Indirect method2 Direct method

Cash flows from operating activities:

Net cash provided (used) by operating activites $ #####Cash flows from investing activities:

Net cash provided (used) by investing activites #####Cash flows from financing activities:

Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####Cash (and equivalents) balance at beginning of period #####Cash (and equivalents) balance at end of period $ #####

[List]

[List]

Company NameStatement of Cash Flows

For the Period Ended XXXX

[List]

Format of Statement

Direct Method of Determining Cash Flows from Operating Activities Examine each income statement item with

the objective of reporting how much cash was received or disbursed in association with the item.

Start with Sales or Revenues Earned and work your way down through the income statement.

Think about itCash collected from customers = $24,440

or

Sales – increase in accounts receivable

$24,623 - 183 = $24,440

If accounts receivable is increasing, then our

customers are charging more and paying less.

Think about it.

Cash Paid for Inventory, $18,516

or

Cost of goods sold + increase in inventory - increase in accounts payable

18,048 + 651 – 183 = $18,516

If inventory increases, you’re going to have to pay cash for it.

If accounts payable

increases, you are charging

more, paying less

Think about it:

Cash paid for operating expenses = $4,793

Or

Operating expenses – increase in accrued liabilities

$4,883 – 90 = $4,793

Acquisitions of property and equipment:

Property & EquipmentBeg bal 3,428

End bal 4,345

1,186

269 Depreciation

3,159

Borrowing:

Long-term liabilitiesBeg bal 464

End bal 478

14

Proceeds from issuance of common stock:

Common stockBeg bal 446

End bal 676

230

Payment of cash dividends:

Retained earningsBeg bal 3,788

End bal 4,531

Net inc. 886

1434,674

Indirect Method of Determining Cash Flows from Operating Activities

Begin with net income as reported on the income statement and adjust: Add any noncash expenses or any losses Deduct any noncash gains or revenues Adjust for changes in current operating assets

and liabilities

Net Income

Net Income

Cash Flows from Operating

Activities

Cash Flows from Operating

Activities

Changes in current assets and current liabilities.

Changes in current assets and current liabilities.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.

Indirect Method of Reporting Operating Cash Flows

Indirect Method of Reporting Operating Cash Flows

Cash + Other Assets = Liabilities + Capital

Cash flows provided by operating activities: $80,000Cash flows from investing activities: Cash paid to acquire plant assets $(101,000) Cash received from sale of land 24,000Net cash flows used by investing activities (77,000)Cash flows from financing activities: Cash received from stock issuance $30,000 Cash paid on long-term note (15,000) Cash paid for dividends (11,000)Net cash flows provided by financing activities 4,000Net increase (decrease) in cash $7,000Cash balance, beginning of year 20,000Cash balance, end of year $27,000