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Chapter 12 Reporting and Interpreting the Statement of Cash Flows PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

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: 12-3

Cash Checking and Savings Accounts Cash Equivalents Highly liquid short-term investments within three months of maturity. Business Activities and Cash Flows Currency 12-4

Cash inflows and outflows that directly relate to revenues and expenses reported on the income statement. Operating Activities 12-5

Investing Activities Under Armour’s 2008 Investing Activities 12-6

Financing Activities Under Armour’s 2008 Financing Activities 12-7

Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories 12-8

Information needed to prepare a statement of cash flows: Comparative Balance Sheets. Income Statement. Additional details concerning selected accounts. Relationship to Other Financial Statements 12-9

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 : 12-10

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 12-12

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

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. Evaluating Cash Flows 12-14

Quality of Income Ratio Net Cash Flow from Operating Activities Net Income = A measure for determining what portion of a company’s income was generated in cash. A ratio near 1.0 indicates a high likelihood that revenues are realized in cash and that expenses are associated with cash outflows. Evaluating Cash Flows Quality of Income Ratio = = 2.08 for Under Armour in

Capital Acquisitions Ratio Net Cash Flow from Operating Activities Cash Paid for Property, Plant, and Equipment = A measure for determining whether a company is generating enough cash internally to purchase long-term assets. A ratio greater than 1.0 indicates that outside financing was not needed to purchase long-term assets. Evaluating Cash Flows Capital Acquisitions Ratio = = 2.19 for Under Armour in

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 12-17

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) 12-18

End of Chapter 12