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FSA Ch10 Cashflow Statement

This document discusses the statement of cash flows, which explains changes in cash and cash equivalents over an accounting period. It has three sections - operating, investing, and financing activities. The statement of cash flows is useful for both internal and external users to evaluate a firm's liquidity, dividend policy, and ability to pay off debt. It can be presented using either the direct or indirect method. The document also introduces some cash flow-based financial ratios that can be used in analysis.

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0% found this document useful (0 votes)
101 views26 pages

FSA Ch10 Cashflow Statement

This document discusses the statement of cash flows, which explains changes in cash and cash equivalents over an accounting period. It has three sections - operating, investing, and financing activities. The statement of cash flows is useful for both internal and external users to evaluate a firm's liquidity, dividend policy, and ability to pay off debt. It can be presented using either the direct or indirect method. The document also introduces some cash flow-based financial ratios that can be used in analysis.

Uploaded by

azza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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© 2013 Cengage Learning. All Rights Reserved.

May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
Chapter
10

Statement of Cash Flows

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
classroom use.
Basic Elements of the Statement of
Cash Flows
• Uses a concept of cash that includes not only
cash but also short-term, highly liquid
investments
– Referred to as the cash and cash equivalent
• Explains the changes in focus accounts

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Basic Elements of the Statement of Cash
Flows—Continued
• Uses of the statement of cash flows
– Internal (management) users
• Determine dividend policy
• Evaluate cash generated by operations
• Review investing and financing policy
– External users
• Determine a firm’s ability to increase dividends
• Determine a firm’s ability to pay debt from operations
• Determine the percentage of cash from operations in relation
to the cash from financing

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Structure of the Statement of Cash
Flows
Cash Flows from Operating Activities
Add: Cash Flows from Investing Activities
Add: Cash Flows from Financing Activities
Change in Cash

Beginning Cash Balance


Add: Change in cash
Ending Cash Balance

Supplemental disclosure: Noncash investing


and financing activities

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Activities
Include the cash effects of events that enter into
the determination of net income
• Cash inflows from • Cash outflows for
– Sale of goods or payments
services – For acquisitions of
– Returns on loans inventory
(interest) – To employees
– Return on equity – For taxes
securities (dividends) – For interest expenses
– For other expenses

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Investing Activities
Lending and collecting money and acquiring and
selling investments and long-term assets
• Cash inflows from • Cash outflows for
– Receipts from loans – Loans to other entities
collected – Investment in debt or
– Sales of debt or equity equity securities of
securities of other other entities
corporations – Purchase of property,
– Sale of property, plant, plant, and equipment
and equipment

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Financing Activities
Include cash flows relating to liability and owners’
equity
• Cash inflows from • Cash outflows for
– Sale of equity – Payment of dividends
securities – Reacquisition of
– Sale of bonds, capital stock
mortgages, notes, and – Payment of amounts
other short- and long- borrowed
term borrowings

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Presentation of Cash Flows From
Operations
• Direct method
– Converts the income statement from accrual basis to
a cash basis
– Encouraged presentation
– 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
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Exhibit 10-1—Statement of Cash Flows:
Direct Method

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Exhibit 10-1—Statement of Cash Flows:
Direct Method

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Exhibit 10-1—Statement of Cash Flows:
Indirect Method

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Exhibit 10-1—Statement of Cash Flows:
Indirect Method

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Financial Ratios and the
Statement of Cash Flows
• Traditional ratios related income statement
item(s) to a balance sheet item(s)
• Statement of cash flows became a required
statement in 1987
• Cash flow financial ratios were slowly developed
– Operating cash flow to current maturities of debt
– Operating cash flow to total debt
– Operating cash flow per share
– Operating cash flow to cash dividends

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Cash Flow to Current
Maturities of Debt
• Indicates a firm’s ability to meet its current
maturities of debt
• Higher ratio indicates better liquidity

Operating Cash Flow


Current Maturities of Long-Term Debt and Current Note Payable

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Cash Flow to Total Debt
• Indicates a firm’s ability to cover total debt with
the yearly operating cash flow
• The higher the ratio, the better the firm’s ability
to carry its total debt
• Conservative approach is to include all possible
balance sheet debt

Operating Cash Flow


Total Debt

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Cash Flow per Share
• Indicates the funds flow per common share
outstanding
• Higher than earnings per share as depreciation
is not deducted

 Operating Cash  Operating Cash Flow  Preferred Dividends


 Flow per Share  =
  Diluted Weighted Average Common
Shares Outstanding

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Cash Flow per Share—
Continued
• 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 on financial
statements

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Operating Cash Flow to Cash Dividends

• Indicates a firm’s ability to cover cash dividends


with the yearly operating cash flow
• Higher the ratio, the better the firm’s ability to
cover cash dividends

Operating Cash Flows


Cash Dividends

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Alternative Cash Flow
• No standard definition of cash flow
• Alternative definition
– Net income plus depreciation expense
• Less useful than the net cash flow from operating activities

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop the Statement of
Cash Flows
• Analyze all balance sheet accounts other than
cash and cash equivalents.
Increase Decrease
Current assets Operating outflow Operating inflow
Noncurrent assets Investing outflow Investing inflow
Current liabilities Operating inflow Operating outflow
Long-term liabilities Financing inflow Financing outflow
Stockholders’ equity Financing inflow Financing outflow

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop the Statement of
Cash Flows
• Analyze all balance sheet accounts other than
cash and cash equivalents.
• Accounting equation: Assets=Liabilities+Equity
• Balance sheet:

Assets Liabilities+Equity

Cash and cash equivalents Liabilities

Other assets Equity

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop the
Statement of Cash Flows
• Three techniques used to prepare the statement
of cash flows
– The visual method
• Determine change in cash and cash equivalents
• Compute the net change in all other balance sheet accounts
• Classify as operating, investing, and financing
– The T-account method
– The worksheet method

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop Operating Cash
Flows: Direct Approach
• Operating section describes income statement
accounts in terms of receipts or payments
• Cash receipts
– From customers
– From other operating sources
• Cash payments
– For merchandise
– To employees
– For other operating expenses

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop Operating Cash
Flows: Indirect Approach
• Begin with net income
• Add or deduct adjustments to change accrual
basis net income to cash basis net income
– Changes in current noncash assets
– Changes in noncash assets go in the inverse direction
of changes in cash
– Changes in current liabilities
– Changes in noncash liabilities go in the same
direction of changes in cash

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
Procedures to Develop Operating Cash
Flows: Indirect Approach
• Adjust net income (loss) for noncash expenses
(like depreciation expense) and noncash
revenues
• Eliminate non cash gains and losses that relate
to investing and financing activities

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.

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