Statement of Cash Flows Statement of Cash Flows

(1)

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA

Statement of Cash Flows Statement of Cash Flows

Chapter 13

(2)

Provides information about the cash

receipts and cash payments of a business entity during the accounting period.

Provides information about the cash

receipts and cash payments of a business entity during the accounting period.

Purpose of the Statement Purpose of the Statement

Helps investors with questions about the Helps investors with questions about the

company’s company’s

•Ability to generate positive cash flows.Ability to generate positive cash flows.

•Ability to meet its obligations and to pay dividends.Ability to meet its obligations and to pay dividends.

•Reasons for difference between net income and net Reasons for difference between net income and net cash flows from operating activities.

cash flows from operating activities.

•Need for external financing.Need for external financing.

(3)

(4)

The Statement of Cash Flows must include the following three sections:

• Cash Flows from Operating Activities

• Cash Flows from Investing Activities

• Cash Flows from Financing Activities The Statement of Cash Flows must

include the following three sections:

• Cash Flows from Operating Activities

• Cash Flows from Investing Activities

• Cash Flows from Financing Activities

Classification of Cash Flows

(5)

+

_ Inflows from:

•

Interest and dividends received

•

Sales to customers

Inflows from:

•

Interest and dividends received

•

Sales to customers Cash

Flows from Operating

Activities Cash

Flows from Operating

Activities

Operating Activities Operating Activities

Outflows to:

•

Suppliers of merchandise and services

•

^Employees

•

Lenders for interest

•

Governments for taxes

Outflows to:

•

Suppliers of merchandise and services

•

^Employees

•

Lenders for interest

•

Governments for taxes

(6)

Cash

Flows from Investing Activities

Cash

Flows from Investing Activities +

_

Investing Activities Investing Activities

Inflows from:

•

Sale of investments and plant assets

•

Collection of principal on loans

Outflows to:

•

Purchase investments and plant assets

•

Purchase debt or equity investments

•

^{Make loans}

(7)

+

_

Financing Activities Financing Activities

Inflows from:

•

Short-term and long-term borrowing

•

Owners (for example, from issuing stock)

Inflows from:

•

Short-term and long-term borrowing

•

Owners (for example, from issuing stock)

Outflows to:

•

Make payments on borrowed funds

•

Owners for dividends

•

Purchase treasury stock

Outflows to:

•

Make payments on borrowed funds

•

Owners for dividends

•

Purchase treasury stock

Cash

Flows from Financing

Activities Cash

Flows from Financing

Activities

(8)

Cash Equivalents

Cash Cash

Currency

•

Short-term, highly liquid investments.

•

Readily convertible into cash.

•

So near maturity that market value is unaffected by interest rate changes.

•

Short-term, highly liquid investments.

•

Readily convertible into cash.

•

So near maturity that market value is unaffected by interest rate changes.

Cash and Cash Equivalents

(9)

Direct Method: Cash Direct Method: Cash

Received from Customers Received from Customers

• Accrual basis revenue includes sales that did not result in cash inflows.

• Can be computed as:

Cash

Received from Customers

Cash

Received from Customers Decrease in

receivables Decrease in

receivables

Increase in receivables Increase in receivables

+

– =

=

Net Sales Net Sales

(10)

Net Income

Cash Flows from Operating

Activities

Cash Flows from Operating

Activities

Reporting Operating Cash Reporting Operating Cash

Flows by the Indirect Method Flows by the Indirect Method

Changes in current assets and current liabilities as shown on the following table

+ Losses and - Gains

+ Losses and

- Gains + Noncash

expenses such as depreciation and

amortization + Noncash

expenses such as depreciation and

amortization

(11)

Use this table when adjusting Net Income to Operating Cash Flows.

Reconciling Net Income with Reconciling Net Income with

Net Cash Flows

(12)

Managing Cash Flows Managing Cash Flows



Increase collection of accounts receivables.



Keep inventory low.



Delay payment of liabilities.



Plan timing of major expenditures.



Invest idle cash.

(13)

End of Chapter 13