1. Company Performance: Cash Flows
Chapter 19
Company Performance: Cash Flows
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. What Other Items are Disclosed on the Statement of Cash Flows?
Investing and financing activities not requiring cash
Significant
Future cash flow implications

10. How Do We Evaluate Cash Flows Internally?
Cash flow per share
Comparison to past
Comparison to competitors