Transcript Fina

(2) Statement of Cash Flows
The Function of the CF
Statement
The Statement of cash flows shows:
1. Where did the company obtain its cash
2. How did the company spend its cash
3. Why the cash balance changed from the
beginning to the end of the accounting
period.
Cash and Cash Equivalents
Statement of Cash Flows
includes:
Cash
Cash equivalents
 Money market accounts
 Commercial paper
 Treasury bills
Excerpt from IBM 2008 Annual Report
Statement of Cash Flows
Operating
Activities
CASH
INFLOWS
Investing
Activities
Financing
Activities
Statement of Cash Flows
Cash Inflows
CASH
OUTFLOWS
Operating
Activities
Investing
Activities
Financing
Activities
Classification of Cash Flows
The statement of cash flows classifies cash
receipts and cash payments into three major
categories
Operating
Activities
Investing
Activities
Financing
Activities
The Format of CF Statement
Operating Activities
(CF from ongoing operations)
Involve the cash inflows and outflows from
activities that enter into the determination of net
income
Cash Inflows
• Receipts from sale of
goods and services
• Receipts from sale of
trading securities
• Interest and dividends
Cash Outflows
• Payments for wages,
inventory, expenses,
interest, and taxes
• Payments for purchase
of trading securities
Investing Activities
(CF from buying/selling generally non-current assets)
Involve the acquisition and sale of property, plant, and
equipment and other long-term assets, including long-term
investments; and the making and collecting of loans
Cash Inflows
• Receipts from
selling plant assets
• Receipts from
selling marketable
securities and longterm investments
• Collections on loans
Cash Outflows
• Expenditures on
purchases of plant
assets
• Expenditures on
purchases of securities
and long-term
investments
• Cash lent to borrowers
Financing Activities
(CF from Dealing with the providers of capital)
Obtaining resources from stockholders and providing them
with a return on their investments, and obtaining resources
from creditors and repaying the amounts borrowed (settling
the obligations)
Cash Inflows
• Proceeds from stock
issues and from shortand long-term
borrowing
• Sales of treasury stock
Cash Outflows
• Repayments of loans
(excluding interest)
• Payments to owners,
including cash
dividends
• Purchases of treasury
stock
Classification of Cash Inflows and Cash Outflows
CASH INFLOWS
ACTIVITIES
CASH OUTFLOWS
To pay wages
From sales of goods and
services to customers
From receipt of interest or
dividends on loans or
investments
To purchase inventory
OPERATING
ACTIVITIES
From sale of trading securities
To pay expenses
To pay interest
To pay taxes
To purchase trading securities
From sale of property, plant,
and equipment and other
long-term investments
From sale of long-or short-term
held-to-maturity and availablefor-sale securities
To purchase property, plant,
and equipment and other longterm assets
INVESTING
ACTIVITIES
To make loans
From collection of loans
From sale of preferred or
common stock
From issuance of debt
To purchase long- or short-term
held-to-maturity and availablefor-sale securities
To acquire preferred or
common stock
FINANCING
ACTIVITIES
To repay debt
To pay dividends
Noncash Investing and
Financing Transactions
Significant transactions that involve only longterm assets, long-term liabilities, or stockholders’
equity
Noncash examples:
• Exchange of long-term asset for
a long-term liability
• Settle a debt by issuing capital
stock
• Take out a long-term mortgage
to purchase real estate
Not reflected on the
statement of cash flows;
no cash inflows or
outflows
Future cash flows are
affected, so disclose
these transactions in a
separate schedule or at
the bottom of the
statement
Components of CF Statement
1
Indirect method begins with net
Operating Activities section
income and ends with cash flows
from operating activities
2
Investing Activities section
Cash transactions involving
capital expenditures and loans
3
Financing Activities section Debt, stock, dividend,
and treasury stock transactions
4
Reconciliation of beginning Ties to cash balances of the
and ending balances of cash balance sheets
Determining Cash Flows
from Operating Activities
1. The direct method
• Adjusts each item on the income statement to its
cash equivalent
• More easily understood by the average reader
2. The indirect method
• Lists only necessary adjustments to convert net
income to net cash flows
• Superior from an analyst’s perspective
• Used by most companies
Both methods produce the same net figure
Indirect Method Adjustments to Net Income
Revenues
Revenues
Accrued
Revenue
Cash Income
Cash
Expenses
Cash
Revenue
_
Expenses
Expenses
Accrued
Expenses
Net
Income
=
Net
Income
Accrued
Income
+
_
Collections
Payments