Cash Flows

Cash Flow Information• Summarized by inflows and outflows into three key

activities

2

Presenting Cash Flow Information

• Two GAAP formats– Direct method– Indirect method

• Difference is how the cash flow from operations section is constructed

• Cash flow from investing activities and cash flow from financing activities are the same under both methods

3

The Walt Disney Company

Where did Disney obtain and spend

its cash?

Example

5

Years Ending (in $millions) Oct. 3, 2009 Sep. 27, 2008

Net Income $3,307 $4,427 Cash flows from operating activitiesDepreciation 1,631 1,582 Adjustments to net income 657 (14) Changes in accounts receivables 468 (594)Changes in liabilities (325) 488 Changes in inventories (117) (329)Changes in other operating activities (557) (114)Net cash provided by operating activities 5,064 5,446

Cash flows from investing activities

Capital expenditures (1,753) (1,578)

Investments 231 84 Other cash for investing activities (574) (668)Net cash used for investing activities (2,096) (2,162)

Cash flows from financing activitiesDividends paid (648) (664)Sale/purchase of stock (52) (3,817)Net borrowings (1,852) 528 Other cash from financing activities - -   Net cash used for financing activities (2,552) (3,953)Net increase In cash and cash equivalents 416 (669) Cash and cash equivalents at beg. of year 3,001 3,670 Cash and cash equivalents at end of year $ 3,417 $3,001

Disney used excess cash from operations

To acquire long-term assets

To buy back stock and pay dividends

Direct and Indirect Method Comparison

6

Operating activitiesCash receipts

Cash sales $270,000 Total cash receiptsCash disbursements

Cash payments for inventory 71,000 Cash payments for interest 6,300 Cash payment for wages 82,000 Cash payments for selling & adm. 41,000 Cash payments for taxes 15,000

Total cash disbursements 215,300 Cash flow from operations $54,700

Direct Method

Operating activitiesNet income $39,700 Depreciation expense 12,000 Amortization expense 30,000 Accounts receivable (35,000)Inventory (14,000)Accounts payable 13,000 Taxes payable 9,000

$54,700 Cash flow from operations

Indirect Method

Only the operating activities sections differ

Cash Flow and a Company’s Life Cycle

7

Operating activities Most important section Reflects the lifeblood of a company Principal source of financing for long-term survival