2 The Primary Purpose of the Statement of Cash Flows Is... To provide information about:cash receipts,cash payments, andthe net change in cash resulting from:operating,investing, andfinancing activities of a company during a period.
3 Usefulness of the Statement of Cash Flow 111Usefulness of the Statement of Cash FlowThe entity’s ability to generate future cash flows.The entity’s ability to pay dividends and meet obligations.The reason for the difference between net income and net cash provided (used) by operating activities.The cash investing and financing transactions during the period.
4 Involve Income Statement Items 112Operating Activities...Operating Activities are the day to day activities of the organization. It is the principal source of funds – the engine of the company.Include:The cash effects of transactions that create revenues and expenses andEnter into determination of net income.Involve Income Statement Items
5 Involve Investments and Noncurrrent Asset Items Investing Activities...Include:Purchasing and disposing of investments and productive long-lived assets using cash andLending money and collecting the loans.Involve Investments and Noncurrrent Asset Items
6 Involve Noncurrent Liability and Stockholders’ Equity Items Financing Activities...Financing Activities are the owner’s equity structure of the organization.Include:Obtaining cash from issuing debt and repaying the amounts borrowed andObtaining cash from stockholders, repurchasing shares, and paying dividends.Involve Noncurrent Liability and Stockholders’ Equity Items
7 Types of Cash Flows - Operating Activities Cash inflows:From sale of goods or servicesFrom return on loans (interest received) and on equity securities (dividends received)Cash outflows:To suppliers for inventoryTo employees for servicesTo government for taxesTo lenders for interestTo others for expenses
8 Types of Cash Flows - Investing Activities Cash inflows:From sale of property, plant, and equipmentFrom sale of debt or equity securities of other entitiesFrom collection of principal on loans to other entitiesCash outflows:To purchase property, plant, and equipmentTo purchase debt or equity securities of other entitiesTo make loans to other entities
9 Types of Cash Flows - Financing Activities Cash inflows:From sale of equity securities (company's own stock)From issuance of debt (bonds and notes)Cash outflows:To stockholders as dividendsTo redeem long-term debt or reacquire capital stock
10 Operating Activities - ALERT Some cash flows relating to investing or financing activities are classified as operating activities. For example...Receipts of investment revenue (interest and dividends) andPayments of interest to lenders are classified as operating activities because these items are reported in the income statement.
11 Significant Noncash Activities... That do NOT affect cash are NOT reported in the body of the statement of cash flows.Are reported:In a separate schedule at the bottom of the statement of cash flows orIn a separate note or supplementary schedule to the financial statements.
12 Significant Noncash Activities... 1. Issuance of common stock to purchase assets.2. Conversion of bonds into common stock.3. Issuance of debt to purchase assets.4. Exchanges of plant assets.
13 Format of the Statement of Cash Flows Statement of Cash Flows explains the difference between beginning cash and ending cash on the balance sheet.Three parts:operatinginvestingfinancingPlus significant noncash investing and financing activities in separate schedule or at bottom of the statement of cash flows.
15 Statement of Cash Flows Helps Users Evaluate 1. The entity's ability to generate future cash flows2. The entity's ability to pay dividends and meet obligations3. The reasons for the difference between net income and net cash provided (used) by operating activities4. The investing and financing transactions during the period
16 Statement of Cash Flows Helps Answer the Following Questions How did cash increase when there was a net loss for the period?How were the proceeds of the bond issue used?How was the expansion in the plant and equipment financed?Why were dividends not increased?How was the retirement of debt accomplished?How much money was borrowed during the year?Is cash flow greater or less than net income?
17 Sources of Information for the Statement of Cash Flows Comparative balance sheetCurrent income statementAdditional information
18 Major Steps in Preparing Statement of Cash Flows
19 Major Steps in Preparing Statement of Cash Flows In order to perform step a company MUST convert net income from a cash to accrural basis.Over Ninety-eight (98.8)% of companies use the indirect method, so will we.
20 Comparative Balance Sheet 114Comparative Balance SheetIndicates the amount of changes in assets, liabilities, and stockholders' equities from the beginning to the end of the period.
24 Indirect and Direct Methods Convert net income from an accrual basis to a cash basis.This conversion may be done by two methods:indirectdirect
25 Indirect and Direct Methods Both methods arrive at the same total amount for “Net cash” provided by operating activities.The methods differ in disclosing the items that make up the total amount.The choice of methods affects only the operating activities section; the investing and financing activities sections are the same.
26 Indirect MethodMost companies favor the indirect method for the following reasons:it is easier to prepareit focuses on the differences between net income and net cash flow from operating activitiesit tends to reveal less company information to competitors.
27 3 Steps to Convert Net Income to Net Cash from Operations
28 Adjustment of Depreciation Adjustment of Loss on Equipment