Transcript Chapter 15 The Statement of Cash Flows: Reporting and Analyzing

Chapter 15
The Statement of Cash Flows:
Reporting and Analyzing
Topics to be Discussed
Introduction
Purpose of the Statement of Cash
Flows
The Definition of Cash: Cash and
Cash Equivalents
Introduction
The Statement of Cash Flows
Reports the impact of a firm’s operations,
investing, and financing activities on cash flows.
Is a required component of a company’s external
financial statements
May be a better indicator of financial
performance than net income or earnings per
share.
Introduction
The main purpose is to
provide information to
decision makers about
a company’s cash
inflows and outflows
during the period.
Other Purposes of the Statement of
Cash Flows
Provides information relating to the
change in cash balances between two
balance sheet dates.
Discloses items that affect how the
balance sheet changed, but that don’t
show up in the income statement such
as issuance of stock or acquisitions of
property, plant, and equipment.
Composition of the Statement of
Cash Flows
The SCF summarizes
and explains all major
cash receipts (inflows)
and cash payments
(outflows) during the
period and categorizes
the changes as resulting
from operating, investing,
or financing activities.
A Summary of Activities Making
Up a Cash Flow Statement
Operating Activities =
Cash received from the
sale of goods or services
Cash paid for
operating expenses
A Summary of Activities Making
Up a Cash Flow Statement
Investing Activities =
Cash received from
the sale of
investments and from
the sale of property,
plant and equipment
Cash paid for
investments and
the purchase of
property, plant,
and equipment
A Summary of Activities Making
Up a Cash Flow Statement
Financing Activities =
Cash received from the
sale of capital stock or
the borrowing of funds
Cash paid for dividends
or repayments of debt or
payments for reacquiring
capital stock.
The Definition of Cash: Cash
and Cash Equivalents
Cash
Equivalents
Commercial
Paper
T-Bills
Money Market
Funds
Non-cash Transactions
Exchange transactions that do not directly
involve cash inflows or outflows but still
warrant disclosure on a SCF:
Exchange stock for equipment
Converting preferred stock to common stock
Non-cash Transactions
Non-cash transactions are reported:
In a separate schedule
OR
In a footnote to the financial statements
Cash Flows Topics
Cash Flows from Operating Activities
The Statement of Cash Flows and the
Accounting Equation
Preparing the Statement of Cash Flows
Cash Flows from Operating Activities
Direct Method: Reports
major classes of gross
cash receipts and
payments
Indirect Method: Starts
with net income and then
removes the effect of all
non-cash items
Cash collected from
customers
Adds back depreciation
Cash paid for inventory
Cash paid for salaries
Adjusts for all accruals
Direct Method
When using the direct method, each
item on the income statement must
be looked at to determine how much
cash each of these activities either
generated or used during the year.
Direct Method
If all sales were for cash:
cash collections from customers = sales revenue
If sales are made on account, sales revenue must
be adjusted for changes in accounts receivable:
Sales revenue + Beginning accounts receivable
- Ending accounts receivable
= Cash collections from customers
Direct Method
If all operating expenses are paid in cash:
Cash outflows for operating expenses = Cash spent
If expenses are incurred on account, expenses must
be adjusted for any changes in related accounts
payable balances:
Operating expenses +
Beginning accounts payable - Ending accounts payable
= Cash outflows for operating expenses
Indirect Method
The indirect method of preparing the cash
flows from operating activities starts with
the net income for the period.
Net income is then adjusted to arrive at
the amount of cash provided by operating
activities by adding or subtracting the
increases or decreases in various
accounts.
Operating Activities
Key Concept
The only difference between the direct and
indirect methods is in the presentation of
the cash flows from operating activities.
Cash flows from investing activities and
cash flows from financing activities are
calculated in exactly the same way.
The Statement of Cash Flows and the
Accounting Equation
Assets = Liabilities + Owners’ Equity
in more detail:
Cash + NCCA + LTA = CL + LTL + CS + RE
rearranged:
Cash = CL + LTL + CS + RE - NCCA - LTA
The Statement of Cash Flows and the
Accounting Equation
Transaction
Activity
Left Side
Right Side
Collect accounts receivable
Operating
+ Cash
- NCCA
Prepay insurance
Operating
- Cash
+ NCCA
Collect customer’s deposit
Operating
+ Cash
+ CL
Pay suppliers
Operating
- Cash
- CL
Make a cash sale
Operating
+ Cash
+ RE
Investing
+ Cash
- LTA
Sell equipment
Preparing the Statement of Cash Flows
Comparative Balance
Sheet
Current Income
Statement
Any Additional
Information Needed to
Analyze Non-cash
Transactions
What
information
do I need
to start?
Preparing the Statement of Cash Flows
OK, now
what do
I do?
1. Compute the net
change in cash
(increase or decrease)
2. Compute net cash
provided or used by
operating activities
3. Compute net cash
provided or used by
investing activities
Preparing the Statement of Cash Flows
OK, now
what do
I do?
4. Compute net cash provided or
used by financing activities
5. Compute net cash flow by
combing the results from
operating, investing, and
financing activities
6. Report on significant non-cash
investing and/or financing
activities in a separate schedule
or a footnote
Preparing the Statement of Cash Flows
Step 1:
Compute the Net Change in Cash
Using the comparative balance sheet,
determine the difference in the cash
balance.
Preparing the Statement of Cash Flows
Step 2:
Compute Net Cash Provided or Used by
Operating Activities Direct Method
Net Cash Provided:
Sales revenue +
Beginning accounts receivable - Ending accounts
receivable
= Cash collections from customers
Preparing the Statement of Cash Flows
Step 2:
Compute Net Cash Provided or Used by Operating
Activities Direct Method
Net Cash Used:
Beginning inventory + Cost of goods purchased - Ending inventory =
Cost of goods sold
Cost of goods purchased:
Cost of goods sold - Beginning inventory + Ending inventory
Cash outflows for purchases:
Cost of goods purchased + Beginning accounts payable Ending accounts payable
Preparing the Statement of Cash Flows
Step 2:
Compute Net Cash Provided or Used by
Operating Activities Direct Method
Net Cash Used for Other Expenses:
Cash outflows for payroll=
Payroll expense + Beginning payroll payable Ending payroll payable
Preparing the Statement of Cash Flows
Net Cash Flows from Operating Activities
Direct Method
Cash receipts from
Sales on account
Interest income
Cash payments for
Inventory purchases
Payroll
Insurance
Rent expense
Taxes
Net cash provided (used) by operating activities
Preparing the Statement of Cash Flows
Net Cash Flows from Operating
Activities Indirect Method
Net income from income statement
+ Increases in related liabilities
+ Decreases in related non-cash assets
- Increases in related non-cash assets
- Decreases in related liabilities
= Cash flow amount
Preparing the Statement of Cash Flows
Key Concept
When using the indirect method, increases
(decreases) in asset (liability) accounts during the
year require deductions from net income. When
asset (liability) accounts decrease (increase) during
the year, the amount of decrease or increase must
be added to net income in arriving at net cash
provided by operating activities.
Preparing the Statement of Cash Flows
Step 3:
Compute Net Cash Provided or
Used by Investing Activities
Long-Term Assets
If Purchased LTA, Decrease Cash
If Sold LTA, Increase Cash
Preparing the Statement of Cash Flows
Step 4:
Compute Net Cash Provided or
Used by Financing Activities
Long-Term Liabilities
Stock
Retained Earnings (Dividends)
If increase in above, increase cash
If decrease in above, decrease cash
Preparing the Statement of Cash Flows
Step 5:
Compute Net Cash Flow by Combining the
Results from Operating, Investing, and
Financing Activities (Compare to Step 1)
Net cash increase (decrease)
+
Cash balance at the beginning of the year
=
Cash balance at the end of the year
Preparing the Statement of Cash Flows
Step 6:
Report Any Significant Non-cash
Investing or Financing Activities in a
Separate Schedule or a Footnote
Example:
Acquisition of land in exchange for note payable
$20,000
More About Cash Flows Topics
Using the Cash Flow
Statement in Decision Making
Cash Flow Adequacy
Using the Cash Flow Statement
in Decision Making
Source of information to
investors and creditors.
Many investors and bankers
focus on cash flows as opposed
to net income because they are
concerned with the ability of the
company to meets its short-term
obligations.
Details about cash flows not
found on other financial
statements can be useful.
Cash Flow Adequacy
Cash Flow Adequacy: A measure of cash
available to meet future debt obligations.
Cash flow from operating activities - Interest Taxes - Capital expenditures
Average amount of debt maturing over the next
five years
Cash Flow Adequacy
Consider the following CFA ratios:
Wal-Mart
1.0047
Carnival Cruise Lines
- .3462
Hasbro
- .0502
What do these ratios mean?
Cash Flow Adequacy
Pause and Reflect
Visit Web sites for Wal-Mart
(www.walmart.com), Hasbro
(www.hasbro.com), and Carnival Cruise
(www.carnival.com) and examine their
cash flow statements. How do these
three companies compare?
End of Chapter 15
How do you keep
track of your cash
flow?