2. 12 - 1 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows

3. 12 - 2 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows The Statement of Cash Flows $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

4. 12 - 3 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows To provide information about: –cash receipts –cash payments –the net change in cash resulting from: operating, investing financing activities of a company during a period. Primary Purpose of Statement

5. Questions the Statement of Cash Flows Answers

6. 12 - 5 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Cash equivalents are: –readily convertible to known amounts of cash –so near maturity that their market value is relatively insensitive to changes in interest rates. treasury bills commercial paper money market funds The term cash includes cash equivalents. Meaning of Cash Flows

7. 12 - 6 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Operating Activities... Include: –The cash effects of transactions that create revenues and expenses and –Enter into determination of net income. Involve Income Statement Items

8. 12 - 7 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Investing Activities... Include: –Acquiring and disposing of investments and productive long- lived assets. –Lending money and collecting the loans. Involve Investments and Long-Term Asset Items

9. 12 - 8 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Financing Activities... Include: –Obtaining cash from issuing debt and repaying the amounts borrowed –Obtaining cash from stockholders and paying them dividends. Involve Long-Term Liability and Stockholders’ Equity Items

10. 12 - 9 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Cash inflows: –From sale of goods or services –From return on loans (interest received) and on equity securities (dividends received) Cash outflows: –To suppliers for inventory –To employees for services –To government for taxes –To lenders for interest –To others for expenses Illustration 12-1 Types of Cash Flows - Operating Activities

11. 12 - 10 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Cash inflows: –From sale of property, plant, and equipment –From sale of debt or equity securities of other entities –From collection of principal on loans to other entities Cash outflows: –To purchase property, plant, and equipment –To purchase debt or equity securities of other entities –To make loans to other entities Types of Cash Flows - Investing Activities Illustration 12-1

12. 12 - 11 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Cash inflows: –From sale of equity securities (company's own stock) –From issuance of debt (bonds and notes) Cash outflows: –To stockholders as dividends –To redeem long-term debt or reacquire capital stock Illustration 12-1 Types of Cash Flows - Financing Activities

13. 12 - 12 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Some cash flows relating to investing or financing activities are classified as operating activities. For example... –Receipts of investment revenue (interest and dividends) and –Payments of interest to lenders are classified as operating activities because these items are reported in the income statement. Operating Activities ALERT

14. 12 - 13 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows That do not affect cash are NOT reported in the body of the statement of cash flows. Are reported: –In a separate schedule at the bottom of the statement of cash flows or –In a separate note or supplementary schedule to the financial statements. Significant Noncash Activities...

15. 12 - 14 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows 1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets. Significant Noncash Activities...

16. 12 - 15 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Three activities: –operating – investing –financing PLUS –noncash investing and financing activities Format for Statement of Cash Flows Body of Statement

17. 12 - 16 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows A series of phases all products go through The phases are often referred to as: –introductory phase –growth phase –maturity phase –decline phase. The phase a company is in affects its cash flows. Product Life Cycle

18. 12 - 17 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows To support asset purchases the company may issue stock or debt. Expect: ícash from operations to be negative ícash from investing to be negative. ícash from financing to be positive. Introductory Phase...

19. 12 - 18 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows The company is striving to expand its production and sales. Expect: ísmall amounts of cash to be generated from operations. ícash from investing to be negative. ícash from financing to be positive Growth Phase

20. 12 - 19 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Sales and production level- off Expect: ícash from operations to exceed investing needs ícash from investing to be neutral ícash from financing to be negative Maturity Phase

21. 12 - 20 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Sales and production decline Expect: ícash from operations to decline ícash from investing to possibly become positive ícash from financing to possibly become negative Decline Phase

22. Impact of Product Life Cycle on Cash Flows Illustration 12-3 0

23. Because investors, creditors, and other interested parties want to know what is happening to a company’s most liquid asset, CASH Why Report Causes of Changes in Cash?

24. 12 - 23 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Statement of Cash Flows Helps Users Evaluate 1. The company’s ability to generate future cash flows. 2. The company’s ability to pay dividends and meet obligations. 3. The reasons for the difference between net income and net cash provided (used) by operating activities. 4. The investing and financing transactions during the period.

25. 12 - 24 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Statement of Cash Flows Helps Answer the Following Questions How did cash increase when there was a net loss for the period? How were the proceeds of the bond issue used? How was the expansion in the plant and equipment financed? Why were dividends not increased? How was the retirement of debt accomplished? How much money was borrowed during the year? Is cash flow greater or less than net income?

26. 12 - 25 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Cash Provided By Operations – Capital Expenditures – Dividends Paid Free Cash Flow Free Cash Flow

27. 12 - 26 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Capital Expenditure Ratio êAn indicator of a company's ability to generate sufficient cash to finance new fixed assets. êCapital expenditures are purchases of fixed assets.

28. 12 - 27 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Capital Expenditure Ratio Cash Provided by Operations Capital Expenditures

29. 12 - 28 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Rather than using numbers from the income statement for assessment purposes, we use numbers from the statement of cash flows. Assessing Liquidity, Solvency, and Profitability Using Cash Flows The ratios are cash-based instead of accural-based.

30. 12 - 29 Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows Next Slide Previous Slide End Show Purpose of Statement Operating, Investing, and Financing Activities Product Life Cycle Statement of Cash Flows – Indirect Method Direct Method Use of Statement of Cash Flows