Presentation on theme: "PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright."— Presentation transcript:
12- 3 Identify cash flows arising from operating, investing, and financing activities. Learning Objective 12-1
12- 4 Operations Cash received and paid for day-to-day activities with customers, suppliers, and employees. Investing Cash paid and received from buying and selling long-term assets. Financing Cash received and paid for exchanges with lenders and stockholders. Business Activities and Cash Flows The Statement of Cash Flows focuses attention on:
12- 5 Cash Checking and Savings Accounts Cash Equivalents Highly liquid short-term investments within three months of maturity. Business Activities and Cash Flows Currency
12- 6 UNDER ARMOUR, INC. Statement of Cash Flows For the Year Ended December 31, 2010 (in millions) Net cash provided (used) by operating activities Net cash provided (used) by investing activities Net cash provided (used) by financing activities Net Change in Cash and Cash Equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ 37 (41) $ 190 Classifying Cash Flows
12- 7 Cash inflows and outflows that directly relate to revenues and expenses reported on the Income Statement. Operating Activities
12- 8 Under Armour’s 2010 Investing Activities Investing Activities
12- 9 Under Armour’s 2010 Financing Activities Financing Activities
Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories
Relationship to Other Financial Statements Information needed to prepare a Statement of Cash Flows: Comparative Balance Sheets. Income Statement. Additional details concerning selected accounts.
Relationship to Other Financial Statements Recall that the basic Balance Sheet equation is: We can recast the equation as follows: The following equation is true: From this basic Balance Sheet equation, we develop our model to solve for the change in cash :
Direct and Indirect Reporting of Operating Cash Flows We will concentrate on the indirect method for now, and we will look at the direct method again later in the chapter. Same result
Report cash flows from operating activities, using the indirect method. Learning Objective 12-2
Cash Flows from Operating Activities - Indirect Method Net Income Cash Flows from Operating Activities - Indirect Method Changes in Current Assets and Current Liabilities. + Losses and - Gains + Noncash expenses such as Depreciation and Amortization. The indirect method adjusts Net Income by analyzing noncash items.
Use this table when adjusting Net Income to operating cash flows using the indirect method. Relationships to the Balance Sheet and the Income Statement Change in account balances during the year
Statement of Cash Flows Indirect Method Example Use the following financial statements for Under Armour, Inc. and prepare the Statement of Cash Flows for the year ended December 31, 2010.
Statement of Cash Flows Indirect Method Example
Statement of Cash Flows Indirect Method Example
The Statement of Cash Flows using the indirect method will begin with Under Armor, Inc.’s Net Income from the Income Statement. Statement of Cash Flows Indirect Method Example
Direct and Indirect Reporting of Operating Cash Flows When using the indirect method, start with accrual basis Net Income and adjust it for: 1.items that are included in Net Income but do not involve cash, and 2.items that are not included in Net Income but do involve cash.
12-22 Next, adjust for the non-cash items included in Net Income. For Under Armour, the only non-cash adjustment is for Depreciation Expense.
12-23 Accumulated Depreciation increased by $17, from $70 in the 2009 Balance Sheet to $87 in the 2010 Balance sheet. The same $17 is shown as Depreciation Expense in the 2010 Income Statement. To complete the Cash Flows from Operating Activities section, we must examine comparative Balance Sheets to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period.
12-24 These five items were shown earlier in the current portions of Under Armour’s comparative Balance Sheets for 2009 and 2010
Report cash flows from investing activities. Learning Objective 12-3
We will need this additional data to prepare the investing portion of the statement. 1.No disposals or impairments of Equipment or Intangibles occurred 2.Equipment costing $30 million and Intangibles costing $11 million were purchased with Cash. Reporting Cash Flows from Investing Activities
Under Armour, Inc., has two investing activities on the Statement of Cash Flows that required the use of Cash: 1. Purchase of Equipment, and 2. Purchase of Intangibles and Other Assets. Reporting Cash Flows from Investing Activities
Report cash flows from financing activities. Learning Objective 12-4
We will need this additional data to prepare the financing portion of the statement. 1.No Dividends were declared or paid. 2.Long-term Debt of $5 million was paid. 3.$9 million in new long-term loans were issued. 4.Shares of Stock were issued for $3 million. Reporting Cash Flows from Financing Activities
Long-term Debt increased because of $9 in new loans during the year. The long-term Debt increase is a Cash inflow. Reporting Cash Flows from Financing Activities
Payments on Long-term Debt resulted in a Cash outflow of $5. The net effect of these two Long-term Debt transactions increased Long-term Debt by $4, from $25 on the 2009 Balance Sheet to $29 on the 2010 Balance Sheet. Reporting Cash Flows from Financing Activities
The third financing activity is the issuance of Common Stock resulting in a Cash inflow of $3. Contributed Capital increased from $224 in the 2009 Balance Sheet to $227 in the 2010 Balance Sheet. Reporting Cash Flows from Financing Activities
Now we can reconcile the change in Cash to the ending $190 Cash balance that appears on the Balance Sheet. Reporting Cash Flows from Financing Activities
Required Supplemental Information: 1.Cash paid for taxes and interest. 2.Significant non-cash investing and financing activities. Noncash Financing and Investing Activities
Interpret cash flows from operating, investing, and financing activities. Learning Objective 12-5
Evaluating Operating Cash Flows Operating cash flows must be positive over the long- run for a company to be successful. An upward trend in operating cash flows over time indicates growth and efficient operations. Look at the relationship between operating cash flows and Net Income.
Evaluating Investing Cash Flows Healthy companies tend to show negative cash flows in the investing activities section. Be cautious over a positive total cash flow in the investing activities section
Evaluating Financing Cash Flows It’s not possible to evaluate the company’s financing cash flows by simply determining whether they are positive or negative on an overall basis. Instead, consider detailed line items with this section to assess the company’s overall financing strategy.
Overall Patterns of Cash Flows
Report and interpret cash flows from operating activities using the direct method. Learning Objective 12-6
Reporting Operating Cash Flows with the Direct Method Provides more detailed information Identifies cash inflows and outflows relationships Prepared by adjusting accrual basis to cash basis Investing and financing sections for the two methods are identical
When we prepared the operating section using the indirect method, we also arrived at net cash inflow of $37. Let’s see how we arrive at these cash flows. Direct Method Operating Activities
With the direct method, we convert each revenue and expense on the Income Statement to a cash flow. Direct Method Operating Activities
Depreciation Expense Loss on Sale of PPE A loss on the sale of PPE is added back to Net Income just as Depreciation Expense is added back. Adding these noncash items restores Net Income to what it would have been had Depreciation and the loss not been subtracted at all. Just the opposite is true for a gain on the sale of PPE. Subtracting the gain reverses the effect of the gain having been added to Net Income. Gain on Sale of PPE Reporting Sales of Property, Plant, and Equipment (PPE) (Indirect)
Instead of creating schedules for each section of the Statement of Cash Flows, some prefer to prepare a single large T-account to represent the changes that have taken place in Cash subdivided into the three sections of the Statement of Cash Flows. T-account Approach (Indirect Method) T
A spreadsheet can be used to ensure that no reportable activities are inadvertently overlooked. Reconstructing the events and transactions that occurred during the period helps identify the operating, investing and financing activities to be reported. Spreadsheet Approach (Indirect Method)
12-51 We begin by entering the beginning and ending balances for each account on the comparative Balance Sheets. The cash inflows and outflows columns will be used later to explain the changes in each account balance.
12-52 Changes in Balance Sheet accounts are analyzed in terms of debits and credits in the top half of the spreadsheet and recorded as cash inflows and outflows in the bottom half of the spreadsheet.
12-53 Changes in Balance Sheet accounts are analyzed in terms of debits and credits in the top half of the spreadsheet and recorded as cash inflows and outflows in the bottom half of the spreadsheet.
12-54 The top of the completed spreadsheet is shown here.
12-55 The bottom of the completed spreadsheet is shown here.