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The Statement of Cash Flows 15
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.
Figure 1: Classification of Cash Inflows and Cash Outflows
Exhibit 1: Consolidated Statement of Cash Flows
Exhibit 1: Consolidated Statement of Cash Flows
Exhibit 1: Consolidated Statement of Cash Flows
Overview of the Statement of Cash Flows
• The statement of cash flows is a major financial statement.
Overview of the Statement of Cash Flows
• Purposes of the statement of cash flows– The statement of cash flows provides
information that is not provided by the other three statements.
Overview of the Statement of Cash Flows
• Purposes of the statement of cash flows (cont.)– The statement of cash flows shows the effects on
cash and cash equivalents of operating, investing, and financing activities.
• Cash equivalents are short-term, highly liquid investments.
• Marketable securities are not cash equivalents.
– The statement of cash flows provides information about a company’s cash receipts and cash payments.
Overview of the Statement of Cash Flows
• Uses of the statement of cash flows– The statement of cash flows also provides
information about a company’s investing and financing activities.
Overview of the Statement of Cash Flows
• Uses of the statement of cash flows (cont.)– Investors, creditors, and management use the
statement of cash flows for many reasons:• To assess a company’s ability to generate positive
future cash flows
• To assess a company’s ability to pay debts
• To assess a company’s ability to pay dividends
• To assess a company’s need for additional financing
• To plan for investing idle cash
Overview of the Statement of Cash Flows
• Classification of cash flows– Operating activities include cash received from
customers; interest and dividends received; sales of trading securities; and cash paid for wages, goods, services, interest, taxes, and purchases of trading securities.
Overview of the Statement of Cash Flows
• Classification of cash flows (cont.)– Investing activities involve long-term asset and
marketable-security transactions and loans made and collected.
– Financing activities involve stock, bond, and note transactions, as well as dividends paid.
• A schedule of noncash investing and financing transactions should accompany the statement of cash flows.
Overview of the Statement of Cash Flows
• In the statement of cash flows, individual cash inflows and outflows are shown separately in their respective categories.
Overview of the Statement of Cash Flows
• Unethical means of falsely enhancing cash flows range from failing to fully disclose financial transactions to misclassifying payments and expenses.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analyzing Cash Flows
OBJECTIVE 2: Analyze the statement of cash flows.
Analyzing Cash Flows
• Many companies put their cash to good use, but sometimes shareholders suffer when management is too conservative and keeps cash in low-yielding assets.
Analyzing Cash Flows
• Cash-generating efficiency is the ability of a company to generate cash from operations.– Cash flow yield is the quotient of net cash
flows from operating activities divided by net income.
– Cash flows to sales is the quotient of net cash flows from operating activities divided by net sales.
Analyzing Cash Flows
• Cash-generating efficiency is the ability of a company to generate cash from operations. (cont.)– Cash flows to assets is the quotient of net cash
flows from operating activities divided by average total assets.
Analyzing Cash Flows
• To interpret a statement of cash flows, it is important to know the right questions to ask.– Why did cash flow from operating activities
differ from net income?– What investing activities are important other
than capital expenditures?– How did the company manage it’s financing
activities during the fiscal year?
Analyzing Cash Flows
• Free cash flow is net cash flows from operating activities less dividends and investments in plant assets plus proceeds from the sale of plant assets.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Operating Activities
OBJECTIVE 3: Use the indirect method to determine cash flows from operating activities.
Exhibit 2: Income Statement
Exhibit 3: Comparative Balance Sheets Showing Changes in Accounts
Exhibit 3: Comparative Balance Sheets Showing Changes in Accounts
Exhibit 3: Comparative Balance Sheets Showing Changes in Accounts
Figure 2: Indirect Method of Determining Net Cash Flows from Operating Activities
Exhibit 4: Schedule of Cash Flows from Operating Activities: Indirect Method
Operating Activities
• Under the indirect method, cash flows from operating activities equal net income adjusted by items that increase or decrease cash flow from operations.– Items to be added back to net income:
• Depreciation expense, amortization expense, and depletion expense
• Losses
Operating Activities
• Under the indirect method, cash flows from operating activities equal net income adjusted by items that increase or decrease cash flow from operations. (cont.)– Items to be added back to net income:
• Decreases in accounts receivable, inventory, and prepaid expenses
• Increases in accounts payable, accrued liabilities, and income taxes payable
Operating Activities
• Under the indirect method, cash flows from operating activities equal net income adjusted by items that increase or decrease cash flow from operations. (cont.)– Items to be deducted from net income:
• Gains• Increases in accounts receivable, inventory, and
prepaid expenses• Decreases in accounts payable, accrued liabilities,
and income taxes payable
Operating Activities
• The direct and indirect methods produce the same results, and both are GAAP.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Investing Activities
OBJECTIVE 4: Determine cash flows from investing activities.
Investing Activities
• Investing activities include the following:– Purchase and sale of long-term assets– Purchase and sale of short-term investments
Investing Activities
• Gains and losses under the indirect approach.– deducted from and added back to net income to
arrive at net cash flows from operating activities– full cash proceeds are entered into the cash flows
from investing activities section of the statement of cash flows
• Upon a sale, the full cash proceeds are entered into the statement of cash flows.
Investing Activities
• Upon a purchase, the full cash outflows are entered into the statement of cash flows.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financing Activities
OBJECTIVE 5: Determine cash flows from financing activities.
Exhibit 5: Statement of Cash Flows: Indirect Method
Exhibit 5: Statement of Cash Flows: Indirect Method
Exhibit 5: Statement of Cash Flows: Indirect Method
Financing Activities
• Financing activities include the following:– Short- and long-term borrowing (notes and
bonds) and repayment– Issuance and repurchase of capital stock
• Changes in retained earnings are explained through analyses of net income and dividends declared.
Financing Activities
• The direct and indirect methods differ only in the cash flows from operating activities section of the statement of cash flows.
• Exhibit 5 shows a completed indirect method statement of cash flows.– The essence of the indirect approach is the
conversion of net income to net cash flows from operating activities.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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