Week 2
mloi01
AGibson_13E_Ch10.pptx© 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.
© 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.
2
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 focus
Explains the changes in focus accounts
Basic Elements of the 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.
© 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.
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
Basic Elements of the Statement of Cash Flows—Continued
© 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.
© 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.
4
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.
© 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.
5
Operating Activities
Cash inflows from
Sale of goods or services
Returns on loans (interest)
Return on equity securities (dividends)
Cash outflows for payments
For acquisitions of inventory
To employees
For taxes
For interest expenses
For other expenses
Include the cash effects of events that enter into the determination of net income
© 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.
© 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.
6
Investing Activities
Cash inflows from
Receipts from loans collected
Sales of debt or equity securities of other corporations
Sale of property, plant, and equipment
Cash outflows for
Loans to other entities
Investment in debt or equity securities of other entities
Purchase of property, plant, and equipment
Lending and collecting money and acquiring and selling investments and long-term assets
© 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.
© 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.
7
Financing Activities
Cash inflows from
Sale of equity securities
Sale of bonds, mortgages, notes, and other short- and long-term borrowings
Cash outflows for
Payment of dividends
Reacquisition of capital stock
Payment of amounts borrowed
Include cash flows relating to liability and owners’ 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.
© 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.
8
Direct method
Converts the income statement from accrual basis to a cash basis
Encouraged by SFAS No. 95
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
Presentation of Cash Flows From Operations
© 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.
© 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.
9
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.
© 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.
10
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.
© 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.
11
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.
© 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.
12
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.
© 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.
13
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
Financial Ratios and the 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.
© 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.
14
Indicates a firm’s ability to meet its current maturities of debt
Higher ratio indicates better liquidity
Operating Cash Flow to Current Maturities of 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.
© 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.
15
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 to 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.
© 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.
16
Indicates the funds flow per common share outstanding
Higher than earnings per share as depreciation is not deducted
Operating Cash Flow per Share
© 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.
© 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.
17
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
Operating Cash Flow per Share—Continued
© 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.
© 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.
18
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 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.
© 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.
19
No standard definition of cash flow
Alternative definition
Net income plus depreciation expense
Less useful than the net cash flow from operating activities
Alternative Cash Flow
© 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.
© 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.
20
Analyze all balance sheet accounts other than cash and cash equivalents.
Procedures to Develop the Statement of Cash Flows
| 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.
© 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.
21
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
Procedures to Develop the 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.
© 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.
22
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
Procedures to Develop Operating Cash Flows: Direct Approach
© 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.
© 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.
23
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
Procedures to Develop Operating Cash Flows: Indirect Approach
© 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.
© 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.
24
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
Procedures to Develop Operating Cash Flows: Indirect Approach
© 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.
© 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.
25
Operating Cash Flow
Current Maturities of Long-Term Debt and
Current Note Payable
Operating Cash Flow
Total Debt
Operating Cash
Operating Cash Flow Preferred Dividends
=
Flow per Share
Diluted Weighted Average Common
Shares Outstanding
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Operating Cash Flows
Cash Dividends
