2. Chapter 13
Cash Flow Statement

3. The Cash Flow Statement
Provides information about cash receipts, cash payments, and the net change in cash during the period
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4. Purpose of Cash Flow Statement
Helps users assess
Reasons for the difference between net earnings and net cash provided (used) by operating activities
Investing and financing transactions during the period
Company’s ability to generate future cash flows
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5. Definition of Cash
Cash may include cash equivalents (although not likely to in future)
Cash equivalents are short-term, highly liquid investments that are readily converted to cash within a short period of time
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6. Definition of Cash Examples include:
Treasury bills
Money market funds
Short-term investments
Short-term debt
Because the definition of “cash” varies, companies must clearly define cash if “cash equivalents” are included
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7. Format of Cash Flow Statement
The format is designed around the three main activities of the business:
Operating activities
Investing activities
Financing activities
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8. Operating Activities
Cash effects of transactions that create revenues and expenses that enter into determination of net earnings
Balance sheet
Includes noncash current assets and current liabilities on balance sheet
Statement of earnings items
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9. Investing Activities
Purchasing and disposing of investments and productive long-lived assets using cash
Lending money and collecting the loans
Balance sheet
Includes short-term investments and long-term asset items
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10. Financing Activities
Obtaining cash from issuing debt and repaying the amounts borrowed
Obtaining cash from shareholders and paying them dividends
Balance sheet
Includes short-term notes payable, long-term liabilities, and shareholders’ equity items
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11. Significant Noncash Activities
If it does not affect cash, do NOT report in cash flow statement
Report in separate note or supplementary schedule to the financial statements
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12. Format of Cash Flow Statement
COMPANY NAME
Cash Flow Statement
Period Covered
Operating activities
(List of individual items) $XX
Net cash provided (used) by operating activities $XXX
Investing activities
(List of individual items) $XX
Net cash provided (used) by investing activities XXX
Financing activities
Net cash provided (used) by financing activities XXX
Net increase (decrease) in cash XXX
Cash, beginning of period XXX
Cash, end of period $xxx
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13. Preparation of the Cash Flow Statement
Step 1: Operating activities
Determine the net cash provided (used) by operating activities by converting net earnings from an accrual basis to a cash basis
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14. Preparation of the Cash Flow Statement
Step 2: Investing activities
Determine the net cash provided (used) by investing activities by analyzing changes in short-term investment and long-term asset accounts
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15. Preparation of the Cash Flow Statement
Step 3: Financing Activities
Determine the net cash provided (used) by financing activities by analyzing changes in short-term notes payable and long-term liability and equity accounts
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16. Preparation of the Cash Flow Statement
Step 4: Cash Flow Statement
Complete the cash flow statement and determine the net increase (decrease) in cash
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17. Operating Activities ─Step 1
Net earnings must be converted from an accrual basis to a cash basis
Conversion may be done by two methods:
Indirect
Direct
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18. Indirect and Direct Methods
Affects only operating activities section
Arrive at the same total amount of cash provided (used) by operating activities
Differ in disclosing the items that make up the total amount
Investing and financing activities sections are the same
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19. Indirect Method
Most companies favour the indirect method for the following reasons
Easier to prepare
Focuses on the differences between net earnings and net cash flow from operating activities
Reveals less company information to competitors
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20. Convert Net Earnings to Net Cash Provided (Used) by Operating Activities
Starts with net earnings and adds or deducts items not affecting cash to arrive at net cash provided (used) by operating activities
Noncash expenses on statement of earnings
Gains and losses on statement of earnings
Changes in noncash current assets and current liabilities on balance sheet
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21. Convert Net Earnings to Net Cash Provided (Used) by Operating Activities ─Indirect Method
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22. Net Cash Provided (Used) by Operating Activities
ANY CORPORATION
Cash Flow Statement (Partial) — Indirect Method
Year Ended December 31, 2009
Operating activities
Net earnings
$139,000
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation expense
$15,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
Increase in prepaid expenses
(4,000)
Increase in accrued expenses payable
55,000
79,000
Net cash provided by operating activities
218,000
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23. Direct Method
CICA/IASB prefers the direct method but allows the use of either method
Details cash receipts and payments
Easier to understand
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24. Cash Receipts from Customers
The relationship among cash receipts from customers, revenues from sales, and changes in accounts receivable is:
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25. Cash Payments to Suppliers
The relationship among cash payments to suppliers, cost of goods sold, changes in inventory, and changes in accounts payable is:
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26. Cash Payments for Operating Expenses
The relationship among cash payments for operating expenses, changes in prepaid expenses, and changes in accrued expenses payable is:
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27. Cash Payments for Income Taxes
The relationship among cash payments for income taxes, income tax expense, and changes in income taxes payable is:
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28. Summary of Conversion of Net Cash Provided (Used) by Operating Activities ─Direct Method
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29. Net Cash Provided (Used) by Operating Activities
ANY CORPORATION
Cash Flow Statement (Partial) — Direct Method
Year Ended December 31, 2009
Operating activities
Cash receipts from customers
$517,000
Cash payments
For operating expenses
$(210,000)
For income taxes
(89,000)
(299,000)
Net cash provided by operating activities
218,000
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30. Investing Activities ─Step 2
Examine the balance sheet to determine changes in short-term investments and long-term assets
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31. Financing Activities ─Step 3
Examine the balance sheet to determine changes in short-term notes payable, noncurrent liabilities and shareholders’ equity accounts (except net earnings)
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32. Cash Flow Statement ─Step 4
Complete the cash flow statement
Determine increase (decrease) in cash
Ensure ending cash balance agrees to that reported on balance sheet
Identify any noncash disclosures
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33. Discussion Question
If a company acquired a piece of equipment by issuing common shares how would this be reported in the cash flow statement?
Discussion points:
Transaction should be disclosed in the notes as a non-cash investing/financing activity.
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34. ANY CORPORATION Cash Flow Statement (Partial) Year Ended December 31, 2009 (Sample Format)
Net cash provided by operating activities (Continued) $218,000
Investing activities
Purchase of building
$(160,000)
Purchase of equipment
(25,000)
Sale of equipment
4,000
Net cash used by investing activities
(181,000)
Financing activities
Payment of cash dividends
$15,000
Net cash used by financing activities
(15,000)
Net increase in cash
22,000
Cash, January 1
34,000
Cash, December 31
$ 56,000
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35. Using Cash Flows to Evaluate a Company
Liquidity
Cash current debt coverage
Solvency
Cash total debt coverage
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36. Cash Current Debt Coverage Ratio
Measures short-term debt paying ability (cash basis)
Cash provided (used) by operating activities
Average current liabilities
Higher is better
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37. Cash Total Debt Coverage Ratio
Measures long-term debt paying ability (cash basis)
Cash provided (used) by operating activities
Average total liabilities
Higher is better
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38. Discussion Question
What accrual-based ratios should the cash coverage ratios be compared to?
Discussion points:
The cash current debt coverage ratio should be compared to the current ratio. The cash total debt coverage ratio should be compared to the debt to total assets ratio. Any significant discrepancies between the cash-based ratios and the accrual-based ratios could indicate a significant amount of accruals.
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39. Copyright Notice
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