Major Financial Statements

1
Major Financial Statements

• Income Statement
• Statement of Owners Equity
• Balance Sheet
• Statement of Cash Flows

2
Statement of Cash Flows

• Reports a companys major cash inflows
• and outflows for a period of time
• Provides useful information about a
• companys ability to
• Generate cash from operations
• Maintain and expand its operating capacity
• Meet its financial obligations
• Pay dividends
• Why needed? Because Net Income is computed on an
  accrual
• basis, not a cash basis

3
Sections of a Statement of Cash Flows

• Cash flows from Operating Activities
  transactions that affect Net Income
• Cash flows from Investing Activities
  transactions that affect Non-Current Assets
  (Investments and Fixed Assets)
• Cash flows from Financing Activities
  transactions that affect debt and equity (bonds
  and stocks)

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Cash Flows from Operating Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
operating activities?
What are some of the typical cash outflows from
operating activities?
Sales of goods and services
Merchandise purchases
Payments of wages and other expenses
Interest revenue
Dividend revenue
Tax payments
5
Cash Flows from Investing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
investing activities?
What are some of the typical cash outflows from
investing activities?
Sales of fixed assets
Purchase of fixed assets
Sale of long-term investments
Purchase of long-term investments
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Cash Flows from Financing Activities
Typical cash inflows
Typical cash outflows
What are some of the typical cash inflows from
financing activities?
What are some of the typical cash outflows from
financing activities?
Paying cash dividends
Issuing bonds and long-term notes payable
Repaying debt
Issuing preferred and common stock
Acquiring treasury stock
7
Methods of Preparing the Operating Activities
Section

• Direct reports cash flows as the difference
  between operating cash receipts and operating
  cash payments
• Indirect reports cash flows as net income
  adjusted for revenues and expenses that do not
  involve the receipt or payment of cash
• 99 of companies use the Indirect Method

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Indirect Method Steps (1)

• Step 1 get Balance sheet for beginning and end
  of year
• Step 2 calculate changes in each Balance Sheet
  account (increase or decrease)

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Indirect Method Steps (2)

• Step 3 Prepare Operating Activities Section
• Start with Net Income (from Income Statement)
• Adjust for expenses that affect non-current
  assets but not cash (depreciation and
  amortization)
• Adjust for gains/losses on sales of fixed assets

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Indirect Method Steps (3)

• Step 3 continued adjust Net Income for revenues
  and expenses that affect current assets and
  current liabilities but not cash flows

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Indirect Method Steps (4)

• Step 4 - Prepare Investing section (Investments
  and Fixed Assets)
• Step 5 - Prepare Financing section
• (Debt, Stock, Dividends)
• Step 6 Calculate increase/decrease in Cash for
  the year

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Indirect Method Steps (5)

• Step 7 Add increase/decrease to beginning Cash
  balance for year
• Step 8 Verify that the result, Cash balance at
  end of year, agrees with the Cash balance on the
  Balance Sheet

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Non-Cash Investing and Financing Activities

• Do not involve cash but are important
• to disclose
• Issuing bonds to acquire land
• Issuing common stock for convertible preferred
  stock
• Issuing a long-term note to acquire equipment
• Issuing a stock dividend
• (reported in separate schedule, sometimes at the
  bottom
• of the Statement of Cash Flows)