1. The Statement of Cash Flows
Chapter 13
The Statement of Cash Flows
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2. Overview of the Statement of Cash Flows
Objective 1
Describe the principal purposes and uses of the statement of cash flows, and identify its components.
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3. The Statement of Cash Flows
Shows how a company’s operating, investing, and financing activities have affected cash during an accounting period
Explains the net increase (or decrease) in cash during the accounting period
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4. Cash and Cash Equivalents
Cash includes cash and cash equivalents
Cash
Money on hand
Deposits in company checking accounts
Cash equivalents
Can be quickly converted to cash
Maturity of 90 days or less
Money market accounts
Commercial paper
U.S. Treasury bills
Combined with the Cash account on the statement of cash flows
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5. Purposes of the Statement of Cash Flows
Provides information about a company’s cash receipts and cash payments during an accounting period.
Provides information about a company’s operating, investing, and financing activities.
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6. Uses of the Statement of Cash Flows
Management uses the statement of cash flows as follows:
Assess liquidity
Determine if short-term financing is necessary
Determine dividend policy
Decide whether to raise or lower dividends
Evaluate the effects of investment and financing decisions
Plan for investing and financing needs
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7. Uses of the Statement of Cash Flows (cont’d)
Investors and creditors use the statement of cash flows to assess a company’s ability to
Manage cash flows
Generate positive future cash flows
Pay its liabilities
Pay dividends and interest
Anticipate its need for additional financing
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8. Classification of Cash Flows
The statement of cash flows classifies cash receipts and cash payments into categories:
Operating activities
Investing activities
Financing activities
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9. Operating Activities
Involve the cash inflows and outflows from activities that enter into the determination of net income
Cash Inflows
Receipts from sale of goods and services
Receipts from sale of trading securities
Interest and dividends
Cash Outflows
Payments for wages, inventory, expenses, taxes
Payments for purchase of trading securities
Trading securities are a type of marketable security that a company buys and sells for the purpose of making a profit in the near term.
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10. Investing Activities
Involve the acquisition and sale of property, plant, and equipment and other long-term assets, including long-term investments; the acquisition and sale of short-term marketable securities, other than trading securities, and the making and collecting of loans
Cash Inflows
Receipts from selling marketable securities and long-term assets
Collections on loans
Cash Outflows
Expenditures on purchase of securities and assets
Cash lent to borrowers
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11. Financing Activities
Obtaining resources from stockholders and providing them with a return on their investments, and obtaining resources from creditors and repaying the amounts borrowed (settling the obligations)
Cash Inflows
Proceeds from stock issues and from short- and long-term borrowing
Cash Outflows
Repayments of loans (excluding interest)
Payments to owners, including cash dividends
Treasury stock transactions
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12. Classification of Cash Inflows and Cash Outflows
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13. Classification of Cash Inflows and Cash Outflows (cont’d)
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14. Required Disclosure of Noncash Investing and Financing Transactions
Significant transactions that involve only long-term assets, long-term liabilities, or stockholders’ equity
Noncash examples:
Exchange of long-term asset for a long-term liability
Settle a debt by issuing capital stock
Take out a long-term mortgage to purchase real estate
Not reflected on the statement of cash flows; no cash inflows or outflows
Future cash flows are affected, so disclose these transactions in a separate schedule or as part of the statement
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15. Format of the Statement of Cash Flows1
Operating Activities section
Indirect method begins with net
income and ends with cash flows
from operating activities 2
Investing Activities section
Cash transactions involving
capital expenditures 3
Financing Activities section
Debt, cash stock, dividend, and
treasury stock transactions 4
Reconciliation of beg. and end. balances of cash
Ties to cash balances of the
balance sheet
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16. Analyzing Cash Flows Objective 2 Analyze the statement of cash flows.
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17. Cash-Generating Efficiency (CGE)
Shows the company’s ability to generate cash from its current or continuing operations
Ratios used to calculate
CGE:
Cash flow yield
Cash flows to sales
Cash flows to assets
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18. Cash Flows to Sales
Shows how much of net sales actually results in cash inflows
Amazon.com generated positive cash flows to
sales of 9.5 percent.
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19. Cash Flows to Assets
Shows how much cash is being generated by operations for each dollar of assets
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20. Operating Activities Objective 3
Use the indirect method to determine cash flows from operating activities.
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21. Determining Cash Flows from Operating Activities
There are two methods of converting the income statement from an accrual basis to a cash basis.
The direct method
Adjusts each item in the income statement to its cash equivalent
More easily understood by the average reader
The indirect method
Lists only necessary adjustments to convert net income to net cash flows
Superior from an analyst’s perspective
Used by most companies
Both methods produce the same net figure.
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22. Indirect Method:Determining Net Cash Flows from Operating Activities
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23. Depreciation expense added back to net income
Depreciation expense appears on the income statement, but involves no outlay of cash.
Adjustment:
Depreciation expense added back to net income
for the period
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24. Gain/Losses subtracted and added to net income
Gains and Losses
Do not affect cash flows from operating activities; should be removed from net income.
Adjustments:
Gain/Losses subtracted and added to net income
for the period
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25. Changes in Current Assets
Decreases in current assets (frees up cash) have a positive effect on cash flows.
Increases in current assets (consumes cash) have a negative effect on cash flows.
To reconcile net income to cash flows, a decrease is added to net income and an increase is subtracted from net income.
Exclude Short Term Investments
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26. Changes in Current Assets
Example: Laguna Corporation’s Accounts Receivable decreased by $4,000 as illustrated below.
Accounts Receivable
Beg. Bal ,000
End. Bal ,000
Cash Receipts from Customers
706,000
Sales to
Customers
698,000
The $8,000 decrease in Accounts Receivable
should be added to net income on the statement of cash flows.
Decreases in current assets are added to net income
Increases in current assets are deducted from net income
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27. Changes in Current Liabilities
Increases in current liabilities represent a postponement of cash payments and increases cash flows
Decreases in current liabilities represent the use of cash, thereby decreasing cash flows
Exclude Notes Payable
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28. Changes in Current Liabilities
Example: Laguna Corporation’s accounts payable increased by $7,000 as illustrated below.
Accounts Payable
Beg. Bal ,000
End. Bal ,000
547,000
Cash Paid to Suppliers
544,000
Purchases
The $7,000 increase in Accounts Payable should
be added to net income on the statement of cash flows.
Decreases in current liabilities are deducted from net income
Increases in current liabilities are added to net income
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29. Net Income versus Cash Flows from Operating Activities
A net income of $16,000, after adjustments, actually yielded $30,000 in positive cash flows from operating activities
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30. Items on the Income Statement That Do Not Affect Operating Cash Flows
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31. Adjustments for Changes in Current Assets and Liabilities
Add to
Net Income
Deduct from
Current Assets:
A/R
Decrease
Increase
Inventory
Prepaid expenses
Current Liabilities:
A/P
Accrued Liabilities
Income Taxes Payable
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32. Investing Activities Objective 4
Determine cash flows from investing activities.
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33. Cash Flows from Investing Activities
Analyze increases and decreases in the Investments account to determine effects on Cash account
Objective
Explain the change in each account balance from one year to the next
Focus
Long-term assets (balance sheet)
Short-term investments (current asset section of the balance sheet)
Investment gains and losses (income statement)
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34. Investment Transactions Cash Flows Illustrated
Laguna Corporation’s purchases of investments totaled $78,000 during These transactions caused a $78,000 decrease in cash flows (cash paid).
Laguna sold investments that cost $90,000 for $102,000. This transaction resulted in a gain of $12,000 and caused an increase in cash flows of $102,000 (cash received) .
Investing activities section, statement of cash flows:
Purchase of investments ($78,000)
Sale of investments ,000
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35. Plant Asset Transactions Cash Flows Illustrated
Examine the Plant Assets account and the related Accumulated Depreciation account
Amir Corporation purchased plant assets totaling $60,000. These transactions caused a $60,000 decrease in cash flows (cash paid).
Amir sold plant assets that cost $5,000 and that had accumulated depreciation of $1,000 for $2,500. This transaction resulted in a loss of $1,500 and caused an increase in cash flows of $2,500 (cash received).
Investing activities section, statement of cash flows:
Purchase of plant assets ($60,000)
Sale of plant assets ,500
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36. Plant Asset Transactions Cash Flows Illustrated
Examine the Plant Assets account and the related Accumulated Depreciation account.
Laguna Corporation purchased plant assets totaling $120,000. These transactions caused a $120,000 decrease in cash flows (cash paid).
Laguna sold plant assets that cost $10,000 and that had accumulated depreciation of $2,000 for $5,000. This transaction resulted in a loss of $3,000 and caused an increase in cash flows of $5,000 (cash received).
Investing activities section, statement of cash flows:
Purchase of plant assets ($120,000)
Sale of plant assets ,000
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37. Noncash Transaction Illustrated
Laguna Corporation issued bonds at face value ($100,000) for plant assets. There are no cash inflows or outflows, but it is a significant transaction.
Schedule of Noncash Investing and
Financing Transactions:
Issue of bonds payable for plant assets $100,000
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38. Financing Activities Objective 5
Determine cash flows from financing activities.
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39. Cash Flows from Financing Activities
Analysis similar to investing activities, including treatment of related gains or losses.
Focus
Short-term borrowings
Long-term liabilities
Stockholders’ equity accounts
Cash dividends from the statement of stockholders’ equity must also be considered.
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40. Bonds Payable Transactions Cash Flows Illustrated
Laguna Corporation repaid $50,000 of bonds at face value at maturity. This transaction caused a $50,000 decrease in cash flows (cash paid).
Financing activities section, statement of cash flows:
Repayment of bonds ($50,000)
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41. Common Stock Transactions Cash Flows Illustrated
Laguna Corporation issued 15,200 shares of $5 par value common stock for $175,000. The Common Stock account increased by $76,000, and the Additional Paid-in Capital account increased by $99,000. This transaction caused an $175,000 increase in cash flows (cash received).
Financing activities section, statement of cash flows:
Issue of common stock $175,000
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42. Dividend Transactions Cash Flows Illustrated
Laguna Corporation paid cash dividends in the amount of $8,000. This amount decreased Retained Earnings. This transaction caused an $8,000 decrease in cash flows (cash paid).
Only the payment of dividends appears on the statement of cash flows, not the declaration of dividends.
Financing activities section, statement of cash flows:
Payment of dividends $8,000
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43. Treasury Stock Transactions Cash Flows Illustrated
Laguna Corporation purchased treasury stock for $25,000. This transaction created a cash outflow of $25,000.
Financing activities section, statement of cash flows:
Purchase of treasury stock ($25,000)
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44. Cash Flows from Financing Activities
The transactions of Laguna Corporation that we have examined are presented in the financing section of the statement of cash flows:
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45. Statement of Cash Flows
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46. Stop & Review
Using the indirect method to prepare the statement of cash flows, tell where each of items on the left would appear on the statement sections listed on the right:
Dividends paid
Cash receipts from sales
Decrease in accounts receivable
Sale of plant assets
Gain on sale of investment
Issue of stock for plant assets
Issue of common stock
Net income
As cash flows from operating activities
As cash flows from investing activities
As cash flows from financing activities
In the schedule of noncash investing and financing transactions
Not at all
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47. Stop & Review (cont’d) ANSWER: Dividends paid c
As cash flows from operating activities
As cash flows from investing activities
As cash flows from financing activities
In the schedule of noncash investing and financing transactions
Not at all
Dividends paid c
Cash receipts from sales e
Decrease in accounts receivable a
Sale of plant assets b
Gain on sale of investment a
Issue of stock for plant assets d
Issue of common stock c
Net income a
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48. Chapter Review
Describe the principal purposes and uses of the statement of cash flows, and identify its components.
Analyze the statement of cash flows.
Use the indirect method to determine cash flows from operating activities.
Determine cash flows from investing activities.
Determine cash flows from financing activities.
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