The Statement of Cash Flows

1
Chapter 12

• The Statement of Cash Flows

2
Purpose Objectives of Session

• Identify purposes and key concepts of Statement
  of Cash Flow (SCF)
• Discuss definitions and examples of the three
  types of cash flow activities Operating,
  Investing Financing
• Contrast Direct vs. Indirect approach to
  Operating section
• Provide examples and illustrations
• Discuss and illustrate Non-Cash exchanges

3
What are the purposes of theStatement of Cash
Flow?

• Supplements the Income Statement (which uses
  accrual basis)
• Provides a cash basis concept of income (in
  Operating section)
• Reflects all cash receipts disbursements
• Explains major changes in Cash account over a
  period
• Highlights certain significant transactions that
  are not detailed in I/S or B/S
• Cash is King!

4
Cash Flows vs. Net Income for Four Companies
(in millions)

• Increase
• (Decrease) Net Income
• in Cash ( Loss)
• 428 5,429
• ( 85) 62
• 40 (69)
• ( 671) ( 191)

• IBM
• Unisys
• AMD
• Time Warner

Note the direction (Inc or Dec) and the 4
different combinations
5
Cash EquivalentsA Review

• Commercial paper
• U.S. Treasury bills
• Certain money market funds

Remember that in the SCF analysis, Cash includes
Cash Equivalents
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Statement of Cash Flows Format
Cash

• Related with
• Operating activities
• Investing activities
• Financing activities

Change in cash (increase or decrease) must prove
to Balance Sheet Cash amounts
7
Statement of Cash Flows Format

• Cash flows from Operating activities
• (P/L, ?C/A ?C/L)
• Cash flows from Investing activities
• (?LTA)
• Cash flows from Financing activities
• (?LTL ?C/S)
• Net increase (decrease) in Cash XXX
• Cash and equivalents, beginning of year XXX
• Cash and equivalents, end of year XXX

from Balance Sheets
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Operating Activities A Review
Incur Employee Salaries and Wages
Defn Cash transactions related with acquiring
and selling products and services
Sell Products and Services
Incur Utility and other Operating Costs
Make Inventory Purchases
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Investing Activities A Review
Purchase/Sell Long-term Investments
Defn Cash transactions related with acquiring
and disposing of long-term assets
Buy/Sell Property, Plant Equipment
Purchase/Sell Intangible Assets (i.e. Patents,
trademarks, etc.)
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Financing Activities A Review
Sell/Repurchase Capital Stock
Defn Cash transactions related with internal and
external financing of the business
Borrow / Repay Loans
Issue/Retire L-T Bonds
Pay Dividends
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Categorizing Cash Flow Activities
Income Statement Transactions
Current Assets and Current Liabilities

• Operating Activities

Investing Activities
Long-term Liabilities or Stockholders Equity
Financing Activities
Long-term Assets
12
The SCF A Template Components(AKA ? Sources
Uses of Cash)
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Computing Cash Flows from Operating Activities 2
Alternates

• Direct Method
• report major classes of cash receipts and
  payments
• Indirect Method
• adjust net income to remove effect of accruals
  and deferrals

both methods are GAAP and arrive at same Cash
from Operating activities
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Statement of Cash Flows - Direct Method
Example

• Cash flows from operating activities
• Cash collected from customers ?
• Cash payments for insurance ?
• Cash payments for salaries wages ?
• Net cash flows from Operating activities ?

How would you determine these amounts??
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Direct Method - Operating Activities
Example

• Accounts receivable, 1/1/02 90,000
• Accounts receivable, 12/31/02 80,000
• Credit sales during year 900,000
• What are 2002 cash collections from customers?

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Direct Method - Operating Activities
Example

• Accounts receivable, 1/1/02 90,000
• Credit sales during year 900,000
• Less Accts. receivable, 12/31/02 ( 80,000)
• Cash collections 910,000

Accounts Receivable
When was/will the cash receipts occur?
Beg. Balance. (90k) Credit Sales (900k)
- Cash Collections (x)
End. Bal. (80k)
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Statement of Cash Flows - Direct Method

• Cash flows from operating activities
• Cash collected from customers 910,000
• Cash payments for insurance ?
• Cash payments for salaries wages ?
• Net cash flows from
• operating activities ?

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Direct Method - Operating Activities
Example

• Prepaid insurance, 1/1/02 10,000
• Prepaid insurance, 12/31/02 12,000
• Insurance expense (from I/S) 122,000
• What are 2002 cash payments for insurance?

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Direct Method - Operating Activities
Example

• Prepaid insurance, 12/31/02 12,000
• Insurance expense 122,000
• Less Prepaid insurance, 1/1/02 ( 10,000)
• Cash payments for insurance 124,000

Prepaid Insurance
What year was the cash disbursed?
Beg. Bal. (10k)
- Expense Adjusting Entry (122k)
Pymts. (x)
End Bal. (12k)
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Statement of Cash Flows - Direct Method

• Cash flows from operating activities
• Cash collected from customers 910,000
• Cash payments for insurance
  (124,000)
• Cash payments for salaries wages ?
• Net cash flows from
• operating activities ?

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Direct Method - Operating Activities
Example

• Salaries payable, 1/1/02 18,000
• Salaries payable, 12/31/02 14,000
• Salaries wage expense 160,000
• What are 2002 cash payments for salaries wages?

22
Direct Method - Operating Activities
Example

• Salaries payable, 1/1/02 18,000
• Add salaries wage expense 160,000
• Less Salaries payable, 12/31/02 ( 14,000)
• Cash payments for salaries 164,000

Salaries Payable
What year will these be paid?
Beg. Bal.(18k) Salary Expense (160k)
- Salary Pymts. (x)
End. Bal. (14k)
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Statement of Cash Flows - Direct Method

• Cash flows from operating activities
• Cash collected from customers 910,000
• Cash payments for insurance
  (124,000)
• Cash payments for salaries wages (164,000)
• Net cash flows from
• operating activities ?

24
Statement of Cash Flows - Direct Method

• Cash flows from operating activities
• Cash collected from customers 910,000
• Cash payments for insurance
  (124,000)
• Cash payments for salaries wages (164,000)
• Net cash inflow from
• operating activities
  622,000

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Indirect Method - Operating Activities
Income Statement

Conversion of accrual to cash basis
Cash Flows from Operating Activities
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Indirect Method - Operating Activities

• Operating Activities
• Net income xxxx
• Increases in current assets -
• Decreases in current assets
• Increases in current liabilities
• Decreases in current liabilities -

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Statement of Cash Flows - Operating Activities
Indirect Method

• Cash flows from Operating activities
• Net income
  ?
• Change in Accounts receivable ?
• Change in Prepaid insurance ?
• Change in Salaries payable ?
• Net cash inflow from
• Operating activities
  ?

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Statement of Cash Flows - Indirect Method
Calculate Net Income

• Cash flows from Operating activities
• Net income
  618,000
• Change in Accounts receivable ?
• Change in Prepaid insurance ?
• Change in Salaries payable ?
• Net cash inflow from
• Operating activities
  ?

Net Income Sales Insurance Expense Salaries
Expense 618,000 910,000 - 122,000 -
160,000
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Statement of Cash Flows - Indirect Method
Change in A/R

• Cash flows from Operating activities
• Net income
  618,000
• Decrease in Accounts receivable 10,000
• Change in Prepaid insurance ?
• Change in Salaries payable ?
• Net cash inflow from
• Operating activities
  ?

Change in A/R A/R (1/1/02) A/R (12/31/02)
(10,000) 90,000 - 80,000 (C/A Decrease)
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Statement of Cash Flows - Indirect Method
Change in Prepaid Insurance

• Cash flows from Operating activities
• Net income
  618,000
• Decrease in Accounts receivable 10,000
• Increase in Prepaid insurance ( 2,000)
• Change in Salaries payable ?
• Net cash inflow from
• Operating activities
  ?

Change in PPI PPI (1/1/02) PPI (12/31/02)
2,000 10,000 - 12,000 (C/A Increase)
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Statement of Cash Flows - Indirect Method
Change in Salaries Payable

• Cash flows from Operating activities
• Net income
  618,000
• Decrease in Accounts receivable 10,000
• Increase in Prepaid insurance ( 2,000)
• Decrease in Salaries payable ( 4,000)
• Net cash inflow from
• Operating activities
  ?

Change in S/P S/P (1/1/02) S/P (12/31/02)
(4,000) 18,000 - 14,000 (C/L Decrease)
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Statement of Cash Flows - Operating Activities
Indirect Method

• Cash flows from Operating activities
• Net income
  618,000
• Decrease in Accounts receivable 10,000
• Increase in Prepaid insurance ( 2,000)
• Decrease in Salaries payable ( 4,000)
• Net cash inflow from
• Operating activities
  622,000

NOTE Indirect Method highlights articulation
with the Income Statement
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Indirect MethodAdjustments to Net Income

• Concept Adjustments are necessary since Indirect
  method starts with accrual basis Net Income
• Accrual basis includes non-cash expenses and
  revenues
• Key adjustments
• Deduct non-cash expenses (eg, Depreciation, Bond
  Discount Amortization)
• Deduct Gains (eg, PPE Disposals, Bond
  Retirements)
• Add-back Losses (eg, PPE Disposals, Bond
  Retirements)
• RATIONALE Entire cash proceeds from LT asset
  disposals are shown as Investing activity and
  from LT debt retirement as Financing activity.

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Statement of Cash Flows Operating activities 2
alternate approaches

• Direct Method
• Net cash inflow from
• operating activities 622,000
• Indirect Method
• Net cash inflow from
• operating activities 622,000

Same end result
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Statement of Cash FlowsInvesting Financing
Activities

• Direct vs. Indirect approaches ONLY apply to
  Operating activities
• Exact SAME approach is used for
• Investing activities section
• Financing activities section
• Remaining slides illustrate examples for each
  activity

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Cash Flows From Investing ActivitiesFormat and
Examples

• Cash flows from Operating activities XXX
• Cash flows from Investing activities
• Purchases of long-term assets ( XXX)
• Sales of long-term assets XXX
• Net cash flows from Investing activities XXX
• Cash flows from Financing activities XXX

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Computing Cash from Investing Activities
Example

• Property equipment, 1/1/02 280,000
• Property equipment, 12/31/02 320,000
• Cash receipts from disposals of
• Property Equipment during year
  35,000
• What were cash purchases of Property Equipment
  during the year?

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Computing Cash from Investing Activities
Example

• Property equipment, 1/1/02
  280,000
• Deduct Disposal of PE (35,000)
• Less Property equipt., 12/31/02 ( 320,000)
• Cash purchases of
• Property Equipment 75,000

Property, Plant Equipment
Beg. Bal. (280k)
- Disposals (35k)
Acquisitions (x)
End. Bal. (320k)
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Cash Flows From Investing Activities

• Cash flows from Operating activities XXX
• Cash flows from Investing activities
• Purchases of property equip. (75,000)
• Sales of property equipment 35,000
• Net cash from Investing activities
  40,000
• Cash flows from Financing activities XXX

NOTE Acquisitions and Disposals are reported
separately and not netted out
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Cash Flows From Financing Activities Format and
Examples

• Cash flows from Operating activities XXX
• Cash flows from Investing activities XXX
• Cash flows from Financing activities
• Sell (repurchase) stocks XX or (XX)
• Issue (retire) bonds XX or (XX)
• Borrow (repay) loans XX or (XX)
• Pay dividends (XX)
• Net cash from Financing activities XXX

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Computing Cash from Financing Activities
Example

• Notes payable, 1/1/02 560,000
• Notes payable, 12/31/02 600,000
• New borrowings during the year 60,000
• What were cash repayments during the year?

42
Computing Cash from Financing Activities
Example

• Notes payable, 1/1/02 560,000
• Add new borrowings 60,000
• Less Notes payable, 12/31/02 ( 600,000)
• Cash payments on notes 20,000

Notes Payable
NOTE Same analysis applies for 1. Cap.
Stock 2. L/T Bonds
Beg. Bal. (560k) New Loans (60k)
- Loan Pymts.(x)
End. Bal. (600k)
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Cash Flows From Financing Activities

• Cash flows from Operating activities XXX
• Cash flows from Investing activities XXX
• Cash flows from Financing activities
• Borrowings on Note Payable 60,000
• Note Payable repayments (20,000)
• Net cash from
• Financing activities 40,000

NOTE Separate reporting of additional borrowings
vs. repayments of same note
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Non-cash Investing and Financing Activities

• Concept Disclose important Financing and
  Investing activities which do not require cash
• Examples

Exchange Stock for Plant (10M)
Buy Equipment through Debt financing (1M) from
Supplier
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Non-Cash Investing Financing ActivitiesIllustr
ated Example

• Cash flows from Operating activities XXX
• Cash flows from Investing activities
• Acquire new Plant (10M)
• Acquire new Equipment ( 1M)
• Net cash used for Investing activities (11M)
• Cash flows from Financing activities
• Issue Common Stock for Plant 10M
• Issue Note for Equipment 1M
• Net cash from Financing activities 11M

NOTE The net effect on change in Cash is zero
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Cash Flow Adequacy

• Measures companys ability to meet principal and
  interest obligations
• Creditors concerned with cash available to repay
  debts after company has replaced its long-term
  assets

Cash Flow from Operating Activities Capital
Expenditures Avg. Debt Maturing over Next Five
Years
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Summary of Session

• Identify purposes and key concepts of Statement
  of Cash Flow (SCF)
• Discuss definitions and examples of the three
  types of cash flow activities Operating,
  Investing Financing
• Contrast Direct vs. Indirect approach to
  Operating section
• Provide examples and illustrations
• Discuss and illustrate Non-Cash exchanges
• CASH IS KING!