1. STATEMENT OF CASH FLOWS

2. The Primary Purpose of the Statement of Cash Flows Is...
To provide information about:
cash receipts,
cash payments, and
the net change in cash resulting from:
operating,
investing, and
financing activities of a company during a period.

3. Usefulness of the Statement of Cash Flow11 1
Usefulness of the Statement of Cash Flow
The 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 Items11 2
Operating 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 and
Enter 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 and
Lending 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 and
Obtaining 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 services
From return on loans (interest received) and on equity securities (dividends received)
Cash outflows:
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses

8. Types of Cash Flows - Investing Activities
Cash inflows:
From sale of property, plant, and equipment
From sale of debt or equity securities of other entities
From collection of principal on loans to other entities
Cash outflows:
To purchase property, plant, and equipment
To purchase debt or equity securities of other entities
To 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 dividends
To 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) and
Payments 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 or
In 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:
operating
investing
financing
Plus significant noncash investing and financing activities in separate schedule or at bottom of the statement of cash flows.

14. Format of Statement of Cash Flows

15. Statement of Cash Flows Helps Users Evaluate
1. The entity's ability to generate future cash flows
2. The entity's ability to pay dividends and meet obligations
3. The reasons for the difference between net income and net cash provided (used) by operating activities
4. 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 sheet
Current income statement
Additional 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 Sheet11 4
Comparative Balance Sheet
Indicates the amount of changes in assets, liabilities, and stockholders' equities from the beginning to the end of the period.

22. Current Income Statement
Information in this statement helps the reader determine the amount of cash provided or used by operations during the period.

23. Income Statement and Additional Information

24. Indirect and Direct Methods
Convert net income from an accrual basis to a cash basis.
This conversion may be done by two methods:
indirect
direct

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 Method
Most companies favor the indirect method for the following reasons:
it is easier to prepare
it focuses on the differences between net income and net cash flow from operating activities
it 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

29. Analysis of Accounts Receivable

30. Adjustment For Changes in Current Assets

31. Adjustment For Changes in
Current Liabilities

32. Adjustments Needed to Convert Net Income to Net Cash Provided by Operating Activities

33. Statement of Cash Flows, 2007 Indirect Method