© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 13 Reporting and Interpreting Cash Flows

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Business Background Positive cash flows permit a company to... expand its operations replace needed assets take advantage of market opportunities pay dividends to owners Financial analysts consider cash flow an important indicator of a company’s financial health.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Cash Currency Cash Equivalents Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes. Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes. Classifications on the Cash Flow Statement

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Classifications on the Cash Flow Statement The Cash Flow Statement must include the following three sections:  Operating  Operating Activities  Investing  Investing Activities  Financing  Financing Activities The Cash Flow Statement must include the following three sections:  Operating  Operating Activities  Investing  Investing Activities  Financing  Financing Activities

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Sleeman Breweries uses the indirect method. The indirect method is used by most companies. Statement continued...

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson This ending cash balance should be the same amount that appears on the balance sheet.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Cash Flows from Operating Activities Cash inflows and outflows that directly relate to income from normal operations reported on the income statement.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Outflows to: Purchase goods to resell and services Salaries and wages Income taxes Interest on liabilities Outflows to: Purchase goods to resell and services Salaries and wages Income taxes Interest on liabilities Inflows from: Sales to customers Interest and dividends received Inflows from: Sales to customers Interest and dividends received Cash Flows from Operating Activities + _

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson 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 + Non-cash expenses such as depreciation and amortization The indirect method adjusts net income by eliminating non-cash items.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Cash Flows from Investing Activities + _ Inflows from: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. Inflows from: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. Outflows to: Purchase property, plant, and equipment. Purchase investments in securities. Outflows to: Purchase property, plant, and equipment. Purchase investments in securities.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Cash Flows from Financing Activities + _ Inflows from: Borrowing on notes, mortgages, bonds, etc. from creditors Issuing equity securities to shareholders Inflows from: Borrowing on notes, mortgages, bonds, etc. from creditors Issuing equity securities to shareholders Outflows to: Repay principal to creditors (excluding interest) Repurchase equity securities from owners Pay dividends to shareholders Outflows to: Repay principal to creditors (excluding interest) Repurchase equity securities from owners Pay dividends to shareholders

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Relationships to the Balance Sheet and the Income Statement Information needed to prepare a cash flow statement: Comparative Balance Sheets Comparative Balance Sheets Income Statement Income Statement Additional details concerning different types of transactions and events Additional details concerning different types of transactions and events Information needed to prepare a cash flow statement: Comparative Balance Sheets Comparative Balance Sheets Income Statement Income Statement Additional details concerning different types of transactions and events Additional details concerning different types of transactions and events

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Relationships to the Balance Sheet and the Income Statement  Cash =  Liabilities  Shareholders’ Equity  Non-cash Assets Derives from... Assets = Liabilities  Shareholders’ Equity

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Use this table when adjusting Net Income to Operating Cash Flows using the indirect method. Relationships to the Balance Sheet and the Income Statement

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Using Sleeman Breweries Ltd., let us examine the preparation of the Cash Flow Statement for the quarter ended on September 29, Cash Flow Statement Example of Indirect Method

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson The Statement of Cash Flows will begin with Sleeman’s Net income from the Income Statement.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson In the case of Sleeman’s, those adjustments included depreciation and amortization expense ($1,845) These numbers may not be obvious in the Income Statement, so often they must be derived from other sources, such as the Notes to the Financial Statements, or the General Ledger Trial Balance. In the case of Sleeman’s, those adjustments included depreciation and amortization expense ($1,845) These numbers may not be obvious in the Income Statement, so often they must be derived from other sources, such as the Notes to the Financial Statements, or the General Ledger Trial Balance. The Net income number will be adjusted for non-cash items.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income. With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson To complete the Cash flows from operating activities section, you must examine a comparative balance sheet to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Now, make adjustments for changes in current assets and current liabilities using the decision table below.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Add the $11,473 decrease in Accounts Receivable.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Subtract the $3,093 increase in Inventory.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Add the $1,450 decrease in Prepaid Expenses.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Subtract the $2,295 decrease in Accounts Payable and Accrued Liabilities.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Statement continued...

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson The balance sheet indicates that Property, Plant and Equipment increased by $3,172 during the quarter.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Long-term investments increased by a net $71 during the quarter.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson $8,636 was repaid against a line of credit during the period.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson A Comparison of the Direct and Indirect Methods Net cash flowNet cash flow is the same for both methods. more detailThe direct method provides more detail about cash from operating activities. investing and financing sectionsThe investing and financing sections are identical for the two methods. Net cash flowNet cash flow is the same for both methods. more detailThe direct method provides more detail about cash from operating activities. investing and financing sectionsThe investing and financing sections are identical for the two methods.

© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chester, ol’ buddy, I wonder if you could help me with a little cash flow problem I’m having? End of Chapter 13