1. Statement of Cash Flows COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 10

2. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #2 Statement Use Internal users –Determine dividend policy –Evaluate cash generated by operations –Review investing and financing policy External users –Assess firm’s ability to increase dividends –Assess firm’s ability to pay debt from operations –Assess firm’s relationship of cash from operations to total cash

3. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #3 Statement Structure Cash flows from operations +Cash flows from investing activities +Cash flows from financing activities =Change in cash +Beginning cash balance =Ending cash balance

4. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #4 Operating Activities Cash inflows from Sale of goods or services Returns on loans (interest) Return on equity securities (dividends) Cash outflows for Payments for acquisitions of inventory Payments to employees Payments for taxes Payments for interest Payments for other expenses The cash effects of transactions and other events that enter into the determination of net income:

5. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #5 Investing Activities Cash inflows from Receipts for loans collected Sales of debt or equity securities Sales of plant, property, and equipment Cash outflows for Loans to other entities Investment in debt or equity securities Purchase of plant, property, and equipment Lending money and collecting on those loans and acquiring and selling investments and productive long-term assets:

6. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #6 Financing Activities Cash inflows from Sale of equity securities Sale of bonds, mortgages, notes, and other short- and long- term borrowings Cash outflows for Payment of dividends Reacquisition of capital stock Payment of amounts borrowed Borrowing and repaying long-term loans; issuing equity securities; payment of dividends to shareholders:

7. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #7 Cash Flows From Operations 2 methods for operating section of Cash Flow: Direct method –Presents the income statement on a cash basis –Supplemental information required: reconciliation of net income to cash provided by operations Indirect method –Adjusts net income for items that affected net income but did not affect cash –Supplemental information required: cash paid for income taxes and for interest –Most widely used

8. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #8 Cash Flows From Operations: Direct Method Presents the income statement on a cash basis

9. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #9 Cash Flows From Operations: Indirect Method Adjusts net income for items that affected net income but did not affect cash

10. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #10 Cash Flows From Operations Direct Indirect

11. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #11 Cash Flows From Investing Activities

12. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #12 Cash Flows From Financing Activities

13. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #13 Statement of Cash Flows – Direct Method (supplemental disclosures not illustrated)

14. Statement of Cash Flows – Indirect Method (supplemental disclosures not illustrated)

15. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #15 Operating Cash Flow/Current Maturities of Long-Term Debt and Current Notes Payable Indicates a firm’s abilities to meet its current maturities of debt Higher ratio indicates better liquidity

16. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #16 Operating Cash Flow to Total Debt Indicates a firm’s ability to cover total debt with the yearly operating cash flow Conservative approach is to include all possible balance sheet debt

17. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #17 Operating Cash Flow per Share A better indication of a firm’s ability to make capital expenditure decisions and pay dividends than is earnings per share Does not reflect firm’s profitability –Firms are prohibited from reporting this statistic in financial statements or in the notes thereto

18. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #18 Operating Cash Flow to Cash Dividends Indicates a firm’s ability to cover cash dividends with the yearly operating cash flow

19. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #19 Procedures to Develop the Statement of Cash Flows (cont’d) 1.Determine change in cash and cash equivalents 2.Compute the change in all other balance sheet accounts 3.Classify as operating, investing, and financing

20. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #20 Procedures to Develop Direct Operating Cash Flows 1.Operating section describes income statement accounts as receipts or payments 2.Cash receipts From customers From other operating sources 3.Cash payments For merchandise To employees For other operating expenses

21. Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #21 Procedures to Develop Indirect Operating Cash Flows 1.Begin with net income 2.Eliminate gains and losses that relate to investing and financing activities 3.Add back or deduct adjustments to change accrual-based net income to cash basis Current noncash assets Current liabilities