Chapter 13,Statement of Cash Flows,Understanding the Business,Positive cash flows permit a company to . . .,Expand its operations.,Replace needed assets.,Take advantage of market opportunities.,Pay dividends to owners.,Wall Street analysts consider cash flow an important indicator of a companys financial health.,Learning Objectives,Classify cash flow statement items as part of net cash flows from operating, investing, and financing activities.,LO1,Classifications of the SCF (Statement of Cash Flows),SCF does not include transactions not included in BS and ISSimply provides information on the cash flow effects of those transactionsBreaks down cash from/for three principal business activities: Operating, Investing, Financing,Cash Flows from Operating Activities (CFO),CFO:Cash inflows and outflows that directly relate to earning from normal operations reported on the income statement.,Cash Flows from Investing Activities (CFI),Inflows Cash received from:Sale or disposal of property, plant & equipmentSale or maturity of investments in securities (stocks/bonds) of other companies,CFI:Cash inflows and outflows related to acquisition and sale of long-term productive assets and investments in securities of other companies,+,Cash Flows from Financing Activities (CFF),Inflows Cash received from:Borrowings on notes, bonds, etc. from creditorsIssuing stock to owners,Outflows Cash paid for:Repayment of principal to creditors (excluding interest, which is an operating activity)Repurchasing stock from owners (treasury stocks)Dividends to owners,CFF:Cash inflows and outflows related to external sources of financing (owners & creditors).,Classifications of the SCF,Cash paid for/ received from interests and dividends,Classifications of the SCF,1. Operating activities (CFO)Cash flows related to earnings from normal operationsCash received/paid for goods and servicesTypically involve current asset/liability and income accounts2. Investing activities (CFI)Cash flows related to the acquisition/sale of productive facilities and investments in the securities of other companies Cash received/paid for PP&E and other long-term assetsTypically involve noncurrent assets3. Financing activities (CFF)Cash flows related to external sources of financing Cash received for issuing debt or stock, cash paid for dividends, repaying debt or buying back stocksTypically involve noncurrent liabs and equity accounts,Classifications of the SCF,Classify each of the following as operating activities (O), investing activities (I), financing activities (F) or not on cash flow statement (NA).,Relationships to the Balance Sheet and the Income Statement,Information needed to prepare a statement of cash flows:Comparative Balance Sheets.Income Statement.Additional details concerning selected accounts.,Lets look at how to derive CF changes from other Financial StatementsAssets = Liabilities + SE Cash + Noncash Assets = Liabilities +SE Cash = Liabilities + SE Noncash AssetsCash = L + SE - Noncash Assets Cash = CL + NCL + SE - Other CA - NCACash = CL- Other CA - NCA + NCL + SE,CFO,CFI,CFF,Relationships to the Balance Sheet and the Income Statement,Relationships to the Balance Sheet and the Income Statement,Learning Objectives,Two methods for SCF: direct & indirect method.,LO2,Direct Method vs. Indirect Method,Direct methodReports the cash effects of each operating activityCFO = gross cash receipts gross cash payments(i.e., Cash receipts from customers-Cash payments to suppliers)Indirect method (commonly used)CFO = NI (accrual basis)+/-Adjustments to convert it to cash basis,Regardless of the approach, the amount reported for CFO is the same consistent with balance sheet disclosures,The only difference is about how to prepare CFO. The CFI & CFF are identical.,Boston Beer uses the indirect method.,The indirect method is used by 98.3% of companies.,This ending cash balance should agree with the balance sheet.,Learning Objectives,Report and interpret cash flows from operating activities using the indirect method.,LO3,Reporting Cash Flows from Operating ActivitiesIndirect Method,Net Income,Cash Flows from Operating Activities - Indirect Method,The indirect method adjusts net income by eliminating noncash items.,Adjustment for Noncash Expenses/Revenues,Noncash expense,Must be added to net income to get CFO. Such as depreciation and amortization.,Noncash revenues,Must be subtracted from net income to get CFO.,Dr: Depreciation ExpenseCr: Accumulated DepreciationNI is reduced, but no cash effect.,Adjustment for Gains and Losses,Gains,Must be subtracted from net income to avoid double counting the gain.,Losses,Must be added to net income to avoid double counting the loss.,Dr: Cash8,000 Accumulated depreciation4,000Cr: PPE10,000 Gain 2,000,Use this table when adjusting Net Income to Operating Cash Flows using the indirect method.,Adjustment for current assents and current liabilities,