1 Copyright © 2013 McGraw-Hill Ryerson Limited Learning Objectives LO4Explain the three categories of cash flow reported in the cash flow statement and identify the types of transactions that apply to each category. LO5 Read and interpret the cash flow statement. LO6 Explain how manager decisions can affect cash flow information and how accrual accounting policy choices affect the cash flow statement.

2 Cash Flows - Financing Activities Quite straightforward: ▫Changes in long term liabilities and capital stock accounts ▫Do not net out positive and negative changes ▫Includes only transactions affecting cash Financing activities help to meet cash needs not met by cash from operations Copyright © 2013 McGraw-Hill Ryerson Limited LO5

3 Cash Flows - Investing Activities Quite straightforward: ▫Changes in long term asset accounts ▫Do not net out positive and negative changes ▫Includes only transactions affecting cash Involves assets typically used for more than one period Copyright © 2013 McGraw-Hill Ryerson Limited LO5

4 Cash From Operations Important source of liquidity Usually positive, but can be negative Choice of presentation ▫Direct Method ▫Indirect Method Copyright © 2013 McGraw-Hill Ryerson Limited LO5

5 Cash From Operations Direct Method ▫Reports cash collections and disbursements in detail Indirect Method ▫Starts with net income ▫Adjusts net income for non cash items included ▫Adjusts for operating cash flows that are not included in net income Copyright © 2013 McGraw-Hill Ryerson Limited LO5

6 Two Methods of Presentation Copyright © 2013 McGraw-Hill Ryerson Limited LO5

7 Indirect Method Adjustments required: 1.Changes in non-cash current operating accounts 2.Transactions included in the calculation of net income not involving cash Copyright © 2013 McGraw-Hill Ryerson Limited LO5

8 Indirect Method: Non-Cash Items Non-cash items subtracted when calculating net income must be added back when reconciling to CFO Include depreciation, gains, losses, deferred income taxes, writedowns of assets and writeoffs Copyright © 2013 McGraw-Hill Ryerson Limited LO5

9 Indirect Method: Accruals Adjust net income for accrual based revenues and expenses to reflect cash flows Convert by adjusting for changes in non-cash working capital accounts Examples of non-cash working capital accounts include: accounts receivable, inventory, prepaids, accounts payable, wages payable, accrued liabilities, etc. Copyright © 2013 McGraw-Hill Ryerson Limited LO5

10 Interpreting Cash Flows Used to predict future events Operating cash flow sustains the business Financing activities supports growth Investing activities are required to maintain position in the market Copyright © 2013 McGraw-Hill Ryerson Limited LO5

11 Qualitative Considerations Provides information relating to solvency Consider life cycle and entity characteristics Copyright © 2013 McGraw-Hill Ryerson Limited LO5

12 Quantitative Considerations Operating cash flow to current liability ratio ▫= CFO/Avg. Current Liabilities Free Cash Flow ▫= CFO – Capital Expenditure Copyright © 2013 McGraw-Hill Ryerson Limited LO5

13 IFRS Requirements A cash flow statement is a requirement Classification of interest paid and received Classification of dividends paid and received Copyright © 2013 McGraw-Hill Ryerson Limited LO5