Chapter 12, Slide #1 Ch.12 Statement of Cash Flows Prof. J. Wang

Chapter 12, Slide #2 How to read statement of cash flows How to prepare statement of cash flows

Chapter 12, Slide #3 Part I How to read statement of cash flows?

Chapter 12, Slide #4 How much cash did the company generate from its operations? Was the cash generated from its operations enough to pay for capital expenditures? Was the cash from operations, after paying for net capital expenditures, adequate to pay its shareholders’ dividends?

Chapter 12, Slide #5 Free cash flows The amount of cash that remain after deduction net capital expenditure and dividends from cash from operations. If free cash flows are positive, it means that the company has met all its planned cash commitments and has cash available for expansion or reducing debt.

Chapter 12, Slide #6 Part II How to prepare statement of cash flows

Chapter 12, Slide #7 Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Statement of Cash Flows Format from balance sheets Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx

Chapter 12, Slide #8 1. Classification of cash flows Operating activities Investing activities Financing activities

Chapter 12, Slide #9 Cash transactions concerned with acquiring and selling products and services (income statement activities) Payment of taxes Collection of customer accounts Payment to suppliers for inventory Payment of wages Operating Activities

Chapter 12, Slide #10 Cash transactions concerned with acquiring and disposing of long- term assets Purchase/sale of another company Sale of property, plant, and equipment Capital expenditures Investing Activities

Chapter 12, Slide #11 Cash transactions concerned with the raising and repayment of funds in the form of debt and equity Issuance/retirement of bonds Issuance/repayment of bank note Issuance/repurchase of stock Payment of dividends Paycheck for Date Dept. of Treasurer Jane Doe Financing Activities

Chapter 12, Slide #12 Categorizing Cash Flow Activities Current assets and current liabilities Operating Activities Long-term liabilities or stockholders’ equity Financing Activities Long-term assets Investing Activities

Chapter 12, Slide #13 2. Methods to Report Cash from Operating Activities  Direct Method Reports major classes of gross cash receipts and cash payments The amount of cash provided by operating activities is the same under both methods  Indirect Method Adjusts net income to remove the effect of all accruals and deferrals LO4

Chapter 12, Slide #14 Statement of Cash Flows Format Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

Chapter 12, Slide #15 Direct method Cash flows from operations: Cash collected from operationsxxx Less: cash paid for operations Purchase of inventoryxxx Salariesxxx Income taxesxxx Interest expensexxx xxx Net cash provided/used by operationsxxx Start with the income statement and adjust for changes in current assets and liabilities For example, to compute cash collected from sales: Sales + beginning A/R – ending A/R Or Sales +/- decrease/increase in A/R

Chapter 12, Slide #16 Indirect method Cash flows from operations: Net incomexxx Adjustments to convert net income to cash flows from operating activities: Add: non-cash expenses/lossesxxx Less: non-cash gainsxxx +/- decrease/increase in current assetsxxx +/- increase/decrease in current liab.xxx xxx Net cash provided/used by operationsxxx

Chapter 12, Slide #17 Cash flows from investing activities Examining the change in long-term assets Examine additional transaction information

Chapter 12, Slide #18 Cash flows from financing activities Examining the change in long-term liabilities and shareholders’ equity Examine additional transaction information