2. The Statement of Cash Flows
14–
2
… shows how a company’s operating, investing, and
financing activities affected cash during an
accounting period
Explains the net increase (or decrease) in cash
during the accounting period
3. Cash and Cash Equivalents
14–
3
Cash includes cash and cash equivalents
Cash
Money on hand
Deposits in company checking accounts
Cash equivalents
Short-term, highly liquid investments including
Money market accounts
Commercial paper
U.S. Treasury bills
Combined with the Cash account on the statement of cash flows
4. Purposes of the Statement of Cash Flows
14–
4
… is to provide information about a company’s cash
receipts and cash payments during an accounting
period
Other financial statements may also provide some of
this information
5. Internal Uses of the Statement of Cash Flows
14–
5
Management uses the statement of cash flows to
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
6. External Uses of the Statement of Cash Flows
14–
6
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
8. Operating Activities
14–
8
… include the cash effects of transactions and other
events that affect the income statement
In effect, items on the income statement are changed
from an accrual to a cash basis
9. Operating Activities
14–
9
Cash inflows
Cash receipts from customers for goods and services
Interest and dividends received on loans and investments
Sales of trading securities
Cash outflows
Cash payments for
Wages
Goods and services
Expenses
Interest
Taxes
Purchases of trading securities
10. Investing Activities
14–
10
… include the cash effects of transactions that affect
long-term assets
Acquiring and selling long-term assets
Acquiring and selling marketable securities other
than trading securities or cash equivalents
Making and collecting loans
11. Investing Activities
14–
11
Cash inflows
Cash receipts from selling long-term assets and marketable
securities
Collecting loans
Cash outflows
Cash expended for purchases of long-term assets and
marketable securities
Cash loaned to borrowers
12. Financing Activities
14–
12
… include the cash effects of transactions that
affect long-term liabilities and stockholders’
equity
Obtaining resources from stockholders
Returning resources to stockholders and providing
them with a return on their investment
Obtaining resources from creditors
Repaying amounts borrowed from creditors or
otherwise settling obligations
Repayments of accounts payable or accrued liabilities are
classified under operating activities
13. Financing Activities
14–
13
Cash inflows
Proceeds from issues of stock
Proceeds from short-term and long-term borrowing
Cash outflows
Repayment of loans
Payments to owners (cash dividends)
Treasury stock transactions
16. Format of the Statement of Cash Flows
Divided into three sections
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
A reconciliation of beginning and ending Cash
balances appears near the bottom of the statement
Schedule of noncash investing and financing
transactions
18. Cash-Generating Efficiency (CGE) (cont’d)
14–
18
2. Cash Flows to Sales
3. Cash Flows to Assets
Shows how much of net
sales actually results in
cash inflows
Shows how much cash
is being generated by
operations for each
dollar of assets
SalesNet
ActivitiesOperatingfromFlowsCashNet
SalestoFlowsCash =
8.5%
$10,017
$850
==
AssetsTotalAverage
ActivitiesOperatingfromFlowsCashNet
AssetstoFlowsCash =
10.9%
2$7,324)($8,239
$850
=
÷+
=
19. Free Cash Flow (FCF)
14–
19
… is the amount of cash that remains after paying for
continuing operations at the current level, interest,
income taxes, dividends, and net capital
expenditures
Shows how much cash a company has available to
reduce debt or expand
Free Cash Flow = Net Cash Flows from Operating Activities
– Dividends
– Purchases of Plant Assets
+ Sales of Plant Assets
21. Determining Cash Flows from Operating
Activities14–
21
There are two methods of converting the
income statement from an accrual basis to a
cash basis
1. The direct method
Adjusts each item in the income statement to its cash
equivalent
More easily understood by the average reader
1. 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
22. Indirect Method of Determining Net Cash Flows
from Operating Activities14–
22
24. Adjustments to Depreciation
14–
24
Effect on income statement: -$37,000 Effect on cash flows: zero
Cash flow out is $37,000 less, because depreciation expense has no cash effect
Add $37,000 to net income
Depreciation Expense Income Taxes Payable Cash
37,000 37,000
Depreciation expense $37,000
25. Adjustments to Depreciation
14–
25
Cash Flows from Operating Activities
Net income $16,000
Depreciation expense $37,000
Depreciation expense $37,000
Depreciation Expense Accumulated Depreciation Cash
37,000 37,000
27. Adjustments to Gains and Losses
14–
27
Gain on sale of investments $12,000
Investments sold for $102,000 (original cost $90,000)
Effect on income statement: +$12,000 Effect on cash flows: +$102,000
(Shown under investing activities)
Gains do not affect cash flows from operating activities and need to be removed
from this section
Deduct $12,000 from net income
Gain on Sale - Investments Investments Cash
90,000
-0-
90,000
12,000 102,000
28. Adjustments to Gains and Losses
14–
28
Cash Flows from Operating Activities
Net income $16,000
Depreciation expense $37,000
Gain on sale of investments (12,000)
Gain on sale of investments $12,000
Investments sold for $102,000 (original cost $90,000)
Gain on Sale - Investments Investments Cash
90,000
-0-
90,000
12,000 102,000