Company Performance: Cash Flows Chapter 19 Company Performance: Cash Flows McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Why Do We Need a Statement of Cash Flows? Assess ability to generate future cash Assess ability to meet obligations and pay dividends Understand the difference between net income and cash flows Understand cash and noncash investing and financing activities
What are the Sections of the Statement of Cash Flows? Operating activities Relating revenues and expenses to current, operating assets and current, operating liabilities Investing activities Buying and selling long-term and other investment assets Financing activities Issuing and retiring long-term and other financing liabilities and owners’ equity
How Do We Determine Operating Cash Flows—Direct? Revenues versus cash inflows Analyze current, operating assets and current, operating liabilities related to revenues to determine cash inflows Expenses versus cash outflows Analyze current, operating assets and current, operating liabilities related to expenses to determine cash outflows Revenues and cash inflows If a revenue does not have a related balance sheet account, we assume the revenue was received in cash Expenses and cash outflows If an expense (excluding noncash expenses) does not have a related balance sheet account, we assume the expense was paid in cash
How Do We Determine Operating Cash Flows—Indirect? Adjust net income for noncash expenses Add back depreciation, amortization, and depletion expense Adjust net income for nonoperating items Add back losses Subtract out gains Adjust net income for changes in current, operating accounts
How Do We Adjust Net Income for Changes in Current, Operating Accounts? Changes in current, operating assets If the asset increases, subtract the change If the asset decreases, add the change Changes in current, operating liabilities If the liability increases, add the change If the liability decreases, subtract the change
How Do We Determine Cash Flows from Investing Activities? Analyze long-term assets for purchases and sales Analyze current, nonoperating assets for purchases and sales Analyze the income statement for gains and losses to determine cash flows from sales
How Do We Determine Cash Flows from Financing Activities? Analyze long-term liabilities for issuances and retirements of debt Analyze owners’ equity accounts for issuances and retirements of stock Analyze retained earnings for dividend declarations Analyze current, nonoperating liabilities for issuances of debt or declarations of dividends and retirements of debt or payment of dividends
What Other Items are Disclosed on the Statement of Cash Flows? Investing and financing activities not requiring cash Significant Future cash flow implications
How Do We Evaluate Cash Flows Internally? Cash flow per share Comparison to past Comparison to competitors