Statement of Cash FlowsStatement of Cash Flows

Chapter 13

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2

The statement of cash flowsreports the entity’s cash flows

(cash receipts and cash payments)for the period.

Basic Concept

McGraw-Hill/Irwin Slide 3

Timing of the Financial Statements

December 31, 20x1(a point in time)

BalanceSheet

December 31, 20x2(a point in time)

BalanceSheet

For the Year Ended December 31, 20x2(a period of time)

IncomeStatement

Statement ofCash Flows

Statement ofStockholders’

Equity

McGraw-Hill/Irwin Slide 4

Understanding the BusinessPositive cash flows permit a company to . . .

Expand its operations

.

Expand its operations

.

Replace needed assets.

Replace needed assets.

Take advantage of market

opportunities.

Take advantage of market

opportunities.

Pay dividends to

owners.

Pay dividends to

owners.

Wall Street analysts consider cash flow an important indicator of a company’s

financial health.

Wall Street analysts consider cash flow an important indicator of a company’s

financial health.

Relationships to the Balance Sheet and the Income Statement

Information needed to prepare a statement of cash flows:

Comparative Balance Sheets.Income Statement.Additional details concerning

selected accounts.

Information needed to prepare a statement of cash flows:

Comparative Balance Sheets.Income Statement.Additional details concerning

selected accounts.

McGraw-Hill/Irwin Slide 6

Relationships to the Balance Sheet and the Income Statement

Cash = Liabilities Stockholders’ Equity Noncash Assets

Cash = Liabilities Stockholders’ Equity Noncash Assets

Derives from . . .

Assets = Liabilities Stockholders’ Equity

Assets = Liabilities Stockholders’ Equity

McGraw-Hill/Irwin Slide 7

Classifications of the Statement of Cash Flows

Operating Activities

Cash inflows and outflows directly related to earnings

from normal operations.

Investing Activities

Cash inflows and outflows related to the acquisition or sale of productive

facilities and investments in the securities of other companies.

Financing Activities

Cash inflows and outflows related to external sources of financing (owners and creditors) for the

enterprise.

McGraw-Hill/Irwin Slide 8

Direct Method vs. Indirect Method

Two Formats for Reporting Operating Activities

Reports the cash effects of each operating

activity

Direct Method

Starts with accrual net income and converts to cash basis

Indirect Method

Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.

McGraw-Hill/Irwin Slide 9

Reporting Cash Flows from Operating Activities-Indirect Method

Net Income

Net Income

Cash Flows from Operating

Activities - Indirect Method

Cash Flows from Operating

Activities - Indirect Method

+/- Changes in current assets and current

liabilities.

+/- Changes in current assets and current

liabilities.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.

The indirect method adjusts net income by eliminating noncash items.

The indirect method adjusts net income by eliminating noncash items.

McGraw-Hill/Irwin Slide 10

April 30, April 30,

Dollars in Thousands 2009 2008 Changes

ASSETSCurrent assets:

Cash & cash equivalents 84,140$ 51,497$ 32,643 Short-term investments - 3,000 (3,000) Accounts Receivable 53,735 49,186 4,549 Inventories 39,612 38,754 858 Prepaid expenses 5,552 12,009 (6,457)

Total current assets 183,039 154,446 Equipment, net 79,381 81,781 (2,400) Total assets 262,420$ 236,227$

LIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:

Accounts payable 48,005$ 49,803$ (1,798)Accrued expenses 44,403 41,799 2,604

Total current liabilities 92,408 91,602 Stockholders' Equity:

Contributed capital 9,803 9,158 645Retained earnings 160,209 135,467 24,742

Total stockholders' equity 170,012 144,625Total liabs & stockholders' equity 262,420$ 236,227$

NATIONAL BEVERAGE GORP.Consolidated Balance Sheet

The Statement of Cash Flows will begin with net income from the Income

Statement.

The Statement of Cash Flows will begin with net income from the Income

Statement.

Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable

Inventory Prepaid expense Accounts payable Accrued expenses

Net cash provided by operating activities

Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.

Year Ended April 30, 2009

Step 1Adjust net income for depreciation and

amortization expense.

Step 1Adjust net income for depreciation and

amortization expense.

Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable (4,549)

Inventory (858)Prepaid expense 6,457Accounts payable (1,798)Accrued expenses 2,604

Net cash provided by operating activities 35,489Cash flows for investing activities: Purchases of property, plant and equipment (6,658)

167 Purchase of short-term investments (109,450) Proceeds from short-term investments 112,450 Net cash used by investing activities (3,491) Cash flows from financing activities: Purchase of treasury stock (305) Proceeds from issuance of stock 950 Net cash used in financing activities 645 Net increase (decrease) in cash & cash equivalents 32,643 Cash & cash equivalents at beginning of period 51,497 Cash & cash equivalents at end of period 84,140$

Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.

Proceeds from disposal of property, plant & equipment

Year Ended April 30, 2009

Step 2Adjust net income for changes in

current assets and current liabilities.

Step 2Adjust net income for changes in

current assets and current liabilities.

McGraw-Hill/Irwin Slide 14

Use this table when adjusting Net Income Use this table when adjusting Net Income to Operating Cash Flows using the to Operating Cash Flows using the

indirect methodindirect method..

Reporting Cash Flows from Operating Activities—Indirect Method

McGraw-Hill/Irwin Slide 15

Adjustment for Gains and Losses

GainsGains must be subtracted from net

income to avoid double counting the gain.

Losses Losses must be added to net income to avoid double counting the loss.

Transactions that cause gains and losses should be classified on the cash flow statement as operating, investing, or financing activities, depending on their dominate characteristics. For example, if the sale of

equipment produced a gain, it would be classified as an investing activity.

McGraw-Hill/Irwin Slide 16

Quality of Income Ratio

In general, this ratio measures the portion of income that was generated in cash. All other things equal, a higher quality of income ratio indicates greater ability to finance operating

and other cash needs from operating cash inflows.

Cash Flow from Operating ActivitiesNet Income

Quality of Income Ratio

=

McGraw-Hill/Irwin Slide 17

Cash Flows from

Investing Activities

Cash Flows from

Investing Activities

+

Cash Flows from Investing Activities

Inflows Cash received from:Sale or disposal of property,

plant and equipmentSale or maturity of investments

in securities

Inflows Cash received from:Sale or disposal of property,

plant and equipmentSale or maturity of investments

in securities

_

Outflows Cash paid for: Purchase of property, plant and

equipment Purchase of investments in

securities

Outflows Cash paid for: Purchase of property, plant and

equipment Purchase of investments in

securities

McGraw-Hill/Irwin Slide 18

In general, this ratio reflects the portion of purchases of property, plant and equipment financed from operating

activities. A high ratio indicates less need for outside financing for current

and future expansions.

Capital Acquisitions Ratio

Cash Flow from Operating ActivitiesCash Paid for Property, Plant,

and Equipment

Capital Acquisitions

Ratio=

McGraw-Hill/Irwin Slide 19

Cash Flows from

Financing Activities

Cash Flows from

Financing Activities

+

_

Cash Flows from Financing ActivitiesInflows

Cash received from:Borrowings on notes,

mortgages, bonds, etc. from creditors

Issuing stock to owners

Inflows Cash received from:Borrowings on notes,

mortgages, bonds, etc. from creditors

Issuing stock to owners

Outflows Cash paid for: Repayment of principal to

creditors (excluding interest, which is an operating activity)

Repurchasing stock from owners

Dividends to owners

Outflows Cash paid for: Repayment of principal to

creditors (excluding interest, which is an operating activity)

Repurchasing stock from owners

Dividends to owners

McGraw-Hill/Irwin Slide 20

Required Supplemental Information

1. Reconciliation of net income to cash flow from operations (for direct method).

2. Cash paid for income taxes and interest.

3. Significant noncash investing and financing activities.

Required Supplemental Information

1. Reconciliation of net income to cash flow from operations (for direct method).

2. Cash paid for income taxes and interest.

3. Significant noncash investing and financing activities.

Additional Cash Flow Disclosures

Example: Purchase of a building with a mortgage.

McGraw-Hill/Irwin Slide 21

In general, this measures a firm’s ability to pursue long-term investment opportunities.

Free Cash Flow

Free Cash Flow = Cash Flow from Operating Free Cash Flow = Cash Flow from Operating Activities – Dividends – Capital ExpendituresActivities – Dividends – Capital Expenditures

© 2008 The McGraw-Hill Companies, Inc.

End of Chapter 13