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How Well Am I Doing?Statement of Cash Flows
Chapter13
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Purpose of the Statement of Cash Flows

• Helps the reader assess . . .
• a firms ability to generate cash.
• a firms ability to pay dividends and meet its
  obligations.
• the reasons for differences between net income
  and cash provided from operations.
• the effect of cash and noncash investing and
  financing activities during the period.

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Definition of Cash

• The term cash on the statement of cash flows
  refers broadly to both currency and cash
  equivalents.

Cash
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Constructing the Statement of Cash Flows
Assets Liabilities Stockholders Equity
Net Cash Flows for a Period
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Constructing the Statement of Cash Flows
Contra asset accounts follow the rules for
liabilities
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Simplified Statement of Cash Flows

• Lets prepare a simplified Statement of Cash
  Flows for Matrix, Inc. based the the information
  shown on the next slide.

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Full-Fledged Statement of Cash Flows
Three Sectionsof the Statement
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Operating Activities

• Operating activities
• Net income
• Changes in current assets
• Changes in noncurrent assets that affect net
  income (depreciation and amortization).
• Changes in noncurrent liabilities that affect
  income

Includes those activities that enter into the
determination of net income.
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Operating Activities

• Changes in current assets and current liabilities
  imply changes in cash, as indicated below.

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Investing Activities

• Changes in noncurrent assets that are not
  included in net income.
• Acquiring or selling property, plant, and
  equipment.
• Acquiring or selling securities held for
  long-term investment.
• Lending money to another entity.

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Financing Activities

• Includes transactions involving receipts from or
  payments to creditors and owners.
• Changes in the current liabilities that are
  debts to lenders rather than obligations to
  suppliers, employees, or the government.
• Changes in noncurrent liabilities that are not
  included in net income.
• Changes in capital stock accounts.
• Dividends paid.

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Cash Flows Gross or Net?

• For both financing and investing activities,
  items on the statement of cash flows should be
  presented in gross amounts.For operating
  activities, amounts are typically netted.

• Investing Activity Example
• A Company sells an old building for 700,000 and
  purchases a new building for 1,000,000.
• The 700,000 inflow of cash and the 1,000,000
  outflow of cash must be shown separately.

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Direct Method or Indirect Method?

• Indirect Method
• Net income is reconciled to cash flow from
  operating activities.
• No supplemental schedule is required.
• Used by 98.8 of companies.

• Direct Method
• Net income is reconstructed on a cash basis.
• Requires a supplemental reconciliation of net
  income to cash flow from operating activities.
• Used by 1.2 of companies.

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Direct Exchange Transactions

• Direct Exchange
• A company acquires a building in exchange for
  200,000 shares of common stock.
• This is reported in a separate supplemental
  schedule attached to the statement of cash flows.

• Noncurrent balance sheet items are swapped.
• Such exchanges must be disclosed.

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Lets look at the eight basic steps in preparing
the Statement of Cash Flows.
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Setting Up the Worksheet
Step ? List all the relevant account titles from
the companys balance sheet.
Step ? Calculate the change in each account
balance during the period.
Step ? Classify each change as a source or a use
of cash.
Step ? Code sources with a positive number and
uses with a negative number.
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Adjustments to Reflect Gross Amounts
Step ? Losses are treated as a source of cash and
gains are treated as a use of cash in the
operating activities section of the Statement.
Step ? Classify each entry in the worksheet as an
operating, investing, or financing activity (the
change in deferred income taxes is included in
the operating activities section).
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Complete the Statement of Cash Flows
Step ? Construct the formal Statement of Cash
Flows.
Step ? Reconcile beginning and ending cash
balances.
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Additional Information

• Matrix, Inc. Supplemental Information
• A building was purchased for cash during the
  year.
• Land was sold at cost for cash.
• No buildings or equipment were sold during the
  year.
• Bonds were issued at the end of the year.
• Cash dividends of 3,500 were paid during the
  year.

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Interpretation of the Statement of Cash Flows
Cash flows from operating activities provide a
measure of how successful the company is in
generating cash on a continuing basis. A positive
cash flow permits the company to make substantial
additional to its property, building and
equipment or to pay off its debt.
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Depreciation, Depletion, and Amortization
Since depreciation is added back to net income,
there is a tendency to think that all you have to
do to increase net cash flows is to increase
depreciation charges.
This is false!
The amounts are added back because they are
decreases in an asset, not because they generate
cash.
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End of Chapter 13