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1 STATEMENT OF CASH FLOWS. 2 The Primary Purpose of the Statement of Cash Flows Is...  To provide information about:  cash receipts,  cash payments,

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Presentation on theme: "1 STATEMENT OF CASH FLOWS. 2 The Primary Purpose of the Statement of Cash Flows Is...  To provide information about:  cash receipts,  cash payments,"— Presentation transcript:

1 1 STATEMENT OF CASH FLOWS

2 2 The Primary Purpose of the Statement of Cash Flows Is...  To provide information about:  cash receipts,  cash payments, and  the net change in cash resulting from:  operating,  investing, and  financing activities of a company during a period.

3 3 Usefulness of the Statement of Cash Flow  The entity’s ability to generate future cash flows.  The entity’s ability to pay dividends and meet obligations.  The reason for the difference between net income and net cash provided (used) by operating activities.  The cash investing and financing transactions during the period. 11 1

4 4 Operating Activities... Operating Activities are the day to day activities of the organization. It is the principal source of funds – the engine of the company. Include:  The cash effects of transactions that create revenues and expenses and  Enter into determination of net income. Involve Income Statement Items 11 2

5 5 Investing Activities... Include:  Purchasing and disposing of investments and productive long-lived assets using cash and  Lending money and collecting the loans. Involve Investments and Noncurrrent Asset Items

6 6 Financing Activities... Financing Activities are the owner’s equity structure of the organization. Include:  Obtaining cash from issuing debt and repaying the amounts borrowed and  Obtaining cash from stockholders, repurchasing shares, and paying dividends. Involve Noncurrent Liability and Stockholders’ Equity Items

7 7 Types of Cash Flows - Operating Activities  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

8 8 Types of Cash Flows - Investing Activities  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

9 9 Types of Cash Flows - Financing Activities  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

10 10 Operating Activities - ALERT  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.

11 11 Significant Noncash Activities...  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.

12 12 Significant Noncash Activities 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.

13 13 Format of the Statement of Cash Flows Statement of Cash Flows explains the difference between beginning cash and ending cash on the balance sheet. Three parts:  operating  investing  financing Plus significant noncash investing and financing activities in separate schedule or at bottom of the statement of cash flows.

14 14 Format of Statement of Cash Flows

15 15 Statement of Cash Flows Helps Users Evaluate 1. The entity's ability to generate future cash flows 2. The entity'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

16 16 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?

17 17 Sources of Information for the Statement of Cash Flows  Comparative balance sheet  Current income statement  Additional information

18 18 Major Steps in Preparing Statement of Cash Flows

19 19 Major Steps in Preparing Statement of Cash Flows In order to perform step 1 a company MUST convert net income from a cash to accrural basis. Over Ninety-eight (98.8)% of companies use the indirect method, so will we.

20 20 Comparative Balance Sheet Indicates the amount of changes in assets, liabilities, and stockholders' equities from the beginning to the end of the period. 11 4

21 21

22 22 Current Income Statement Information in this statement helps the reader determine the amount of cash provided or used by operations during the period.

23 23 Income Statement and Additional Information

24 24 Indirect and Direct Methods  Convert net income from an accrual basis to a cash basis.  This conversion may be done by two methods:  indirect  direct

25 25 Indirect and Direct Methods  Both methods arrive at the same total amount for “Net cash” provided by operating activities.  The methods differ in disclosing the items that make up the total amount.  The choice of methods affects only the operating activities section; the investing and financing activities sections are the same.

26 26 Indirect Method  Most companies favor the indirect method for the following reasons:  it is easier to prepare  it focuses on the differences between net income and net cash flow from operating activities  it tends to reveal less company information to competitors.

27 27 3 Steps to Convert Net Income to Net Cash from Operations

28 28 Adjustment of Depreciation Adjustment of Loss on Equipment

29 29 Analysis of Accounts Receivable

30 30 Adjustment For Changes in Current Assets

31 31 Adjustment For Changes in Current Liabilities

32 32 Adjustments Needed to Convert Net Income to Net Cash Provided by Operating Activities

33 33 Statement of Cash Flows, 2007 Indirect Method


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