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Slide

17-1

Reporting and Analyzing
Cash Flows

Slide
17-2

Importance of Cash Flows
How
How did
didthe
the
business
businessfund
fundits
its
operations?
operations?

Does
Doesthe
thebusiness
business
have
havesufficient
sufficient cash
cash
to
topay
payits
itsdebts
debtsas
as
they
theymature?
mature?

Did
Didthe
thebusiness
business
make
makeany
anydividend
dividend
payments?
payments?

Did
Didthe
thebusiness
business
borrow
borrow any
anyfunds
fundsor
or
repay
repayany
anyloans?
loans?

Slide
17-3

Measuring Cash Flows
Cash
Equivalents   

Cash
Cash

Currency

Short-term,
Short-term,highly
highlyliquid
liquidinvestments.
investments.
Readily
Readilyconvertible
convertibleinto
intocash.
cash.
So
Sonear
near maturity
maturitythat
that market
market value
valueis
isunaffected
unaffectedby
by
interest
interest rate
ratechanges.
changes.

Slide 17-4 Classifying Cash Flows The Statement of Cash Flows includes the following three sections:  Operating Activities  Investing Activities  Financing Activities .

lenders.  Other.  Payments Paymentsto tosuppliers.Slide 17-5 Operating Activities Inflows Inflows  Receipts Receipts from from customers. suppliers. Other. borrowers.  Interest Interestfrom from borrowers.  Cash Cashdividends dividends received. received. fines. Outflows Outflows  Salaries Salaries and andwages. Other. .  Interest Interestpaid paidto tolenders.  Taxes Taxes and and fines. wages. customers.  Other.

Slide 17-6 Investing Activities Inflows Inflows     Selling Sellinglong-term long-termproductive productive assets. investments. assets. + Outflows Outflows     Purchase Purchaselong-term long-term productive productive assets. assets. loans. Other. Make Makeloans. investments. Selling Sellingequity equity investments. Purchase Purchaseequity equity investments. Purchase Purchasedebt debt investments. Collecting Collectingof of principal principal on onloans. Other. _ Cash Cash Flows Flows from from Investing Investing Activities Activities . investments. loans.

Cover Cover withdrawals withdrawals by byowners owners. notes. _ Cash Cash Flows Flows from from Financing Financing Activities Activities . stockholders. Purchase Purchasetreasury treasury stock. + Outflows Outflows     Pay Pay dividends dividends to tostockholders. stock.Slide 17-7 Financing Activities Inflows Inflows    Issuing Issuingits its own ownequity equity securities.. Issuing Issuingbonds bonds and andnotes. liabilities. loans. Repay Repay cash cashloans. securities. Issuing Issuingshort-term short-termand andlonglongterm termliabilities.

Slide 17-8 Noncash Investing and Financing Items Items requiring requiring separate separate disclosure disclosure include: include:   Retirement Retirement of of debt debt by by issuing issuing equity equity securities. stock. transaction. securities.   Leasing Leasing of of assets assets in in aa capital capital lease lease transaction. .   Conversion Conversion of of preferred preferred stock stock to to common common stock.

5 $ ##### ##### ##### $ ##### ##### $ ##### .Slide 17-9 Company Name Statement of Cash Flows Covered Period Cash flows from operating activities: [List of individual inflows and outflows] Net cash provided (used) by operating activites Cash flows from investing activities: [List of individual inflows and outflows] Net cash provided (used) by investing activites Cash flows from financing activities: [List of individual inflows and outflows] Net cash provided (used) by financing activites Net increase (decrease) in cash Cash (and equivalents) balance at beginning of period Cash (and equivalents) balance at end of period Exh. 17.

5 Company Name Statement of Cash Flows Covered Period Cash flows from operating activities: [List of individual inflows and outflows] Net cash provided (used) by operating activites $ ##### Cash flows from investing activities: There are two acceptable methods to determine Cash [List of individual inflows and outflows] Flows from Operating Activities: Net cash provided (used) by investing activites ##### Cash flows from financing activities: Direct Method [List of individual inflows and outflows] Method Net cash provided (used)Indirect by financing activites ##### $ ##### Net increase (decrease) in cash ##### Cash (and equivalents) balance at beginning of period $ ##### Cash (and equivalents) balance at end of period . 17.Slide 17-10 Exh.

.Slide 17-11 Analyzing Noncash Accounts The The changes changes in in cash cash can can be be determined determined by by analyzing analyzing the the noncash noncash accounts accounts on on the the balance balance sheet. Assets Assets == Liabilities Liabilities ++ Stockholders’ Stockholders’ Equity Equity . . ∆∆ Cash Cash == ∆∆ Liabilities Liabilities ++ ∆∆ Stockholders’ Stockholders’ Equity Equity −− ∆∆ Noncash Noncash Assets Assets Derives from . sheet.

Slide 17-12 Let’s look at the Direct Method for preparing the Cash Flows from Operating Activities section. .

17.  Obtained from accrual sales information.Increase in A/R + Decrease in A/R Exh. Cash received = Sales from customers { .12 .Slide 17-13 Direct Method Cash Received from Customers Can be computed two ways:  Obtained from cash receipts journal.

17.Decrease in inventory  Step 2 Cash paid for merchandise = Purchases { + Decrease in A/P .Increase in A/P Exh.13 .Slide 17-14 Direct Method Cash Paid for Merchandise  Step 1 Purchases = COGS { + Increase in inventory .

Slide 17-15 Direct Method Wages and Operating Expenses Exh.Decrease in prepaid expenses { { + Decrease in accrued liabilities . Cash paid for wages and other operating expenses Wages and other = operating expenses + Increase in prepaid expenses . accrued. 17. and and (2) (2) whether whether the the expense expense was was accrued. prepaid.14 The The cash cash paid paid for for wages wages and and other other operating operating expenses expenses is is affected affected by by (1) (1) whether whether the the expense expense was was prepaid.Increase in accrued liabilities .

Slide 17-16 Direct Method Cash Paid for Interest and Taxes  Interest Cash paid for interest Interest = Expense + Decrease in interest payable . 17.15 .Increase in interest payable {  Taxes Cash paid for taxes + Decrease in taxes payable .Increase in taxes payable { Tax = Expense Exh.

 They are not disclosed in the Statement of Cash Flows using the direct method.  .Slide 17-17 Direct Method Depreciation Expense  Depreciation. and Depletion Expenses Operating cash flows are not involved. Amortization.

.Slide 17-18 Direct Method Gains and Losses Gains and losses do not appear on the Statement of Cash Flows using the Direct Method.

Slide 17-19 Let’s look at the Indirect Method for preparing the Cash Flows from Operating Activities section. .

5% 97. liabilities. 97. amortization.5% of of all all companies companies use use the the indirect indirect method.Slide 17-20 Indirect Method of Reporting Operating Cash Flows Changes Changesin incurrent currentassets assets and andcurrent currentliabilities. Cash CashFlows Flows from fromOperating Operating Activities Activities Net Net Income Income ++Losses Lossesand and --Gains Gains ++Noncash Noncash expenses expensessuch suchas as depreciation depreciationand and amortization. . method.

income.Slide 17-21 Indirect Method of Reporting Operating Cash Flows Current Assets Current Liabilities Change in Account Balance During Year Increase Decrease Subtract from net Add to net income. Subtract from net income. . Use this table when adjusting Net Income to Operating Cash Flows. Add to net income.

Slide 17-22 Indirect Method Example East. Accounts Accounts Receivable Receivable increased increased by by $7. 2002.’s Operating Cash Flow for 2002? .500 of of Depreciation Depreciation Expense. 2002.500 $7.000.500 $12. Inc. reports reports $125. What is East. East East reported reported $12. 31. During During 2002.000 $125.000 net net income income for for the the year year ended ended December December 31. $10. 2002. Inc. East. Inc. Expense.500 during during the the year year and and Accounts Accounts Payable Payable increased increased by by $10.000.

start with method.Slide 17-23 Indirect Method Example Net Netincome income Deduct: Deduct:Increase Increasein inaccounts accounts receivable receivable For For the the indirect indirect Cash provided by operating Cash provided by operating method. income.000 125. start with activities activities net net income. $$ 125.000 .

activities activities depletion.500 12. expense. amortization. or or bad bad debt debt expense.000 12. amortization. depletion. depreciation. $$ 125.Slide 17-24 Indirect Method Example Net Netincome income Add: Add:Depreciation Depreciationexpense expense Deduct: Deduct:Increase Increasein inaccounts accounts receivable Add receivable Add noncash noncash expenses expenses such such as as Cash by operating Cashprovided provided by operating depreciation.000 125.500 .

Subtract from net income.500 Change inby Account Balance During Year Cash Cashprovided provided byoperating operating Increase Decrease activities activities Current Assets Current Liabilities Subtract from net income. (7.000 12.000 125.500) (7. Add to net income.500) . Add to net income.Slide 17-25 Indirect Method Example Net Netincome income Add: Add:Depreciation Depreciationexpense expense Deduct: Deduct:Increase Increasein inaccounts accounts receivable receivable $$ 125.500 12.

500) 10. Subtract from net income.Slide 17-26 Indirect Method Example Net $$ 125.500) receivable (7.000 Add: 12.000 Add: Add:Increase Increasein inaccounts accountspayable payable 10. Add to net income.500 Deduct: Deduct:Increase Increasein inaccounts accounts receivable (7.000 Cash Cashprovided providedby byoperating operating Change in Account Balance During Year activities activities Current Assets Current Liabilities Increase Subtract from net income.000 Netincome income 125. .500 Add:Depreciation Depreciationexpense expense 12. Decrease Add to net income.

000 125.500 (7.500) (7.500 12. .Slide 17-27 Indirect Method Example Net Netincome income Add: Add:Depreciation Depreciationexpense expense Deduct: Deduct:Increase Increasein inaccounts accounts receivable receivable Add: Add:Increase Increasein inaccounts accountspayable payable Cash Cashprovided providedby byoperating operating activities activities $$ 125.000 12.000 $$ 140.000 10.500) 10.000 for Cash Provided by Operating Activities.000 140. we would get the same $140.000 If we used the Direct Method.

.Slide 17-28 Let’s do a complete Statement of Cash Flows using the Indirect Method.

..Slide 17-29 Statement of Cash Flows Indirect Method Prepare Prepare aa Statement Statement of of Cash Cash Flows Flows for for the the period period ending ending December December 31. 2001 2001 using using the the Indirect Indirect Method. Refer Refer to to the the following following information information . Method. 31. ... .

000 209.000 134.000 (19.000) 200.000 .000 199.000 (25.000 174.000 555.000) 597.000 $ 41.000 76.000 $ 47. $1 par Retained earnings Total Liabilities and Stockholders' Equity $ $ $ $ 2000 Increase or (Decrease) 63.000) 35.000 75.Slide 17-30 B&G Company Comparative Balance Sheets December 31 2001 Assets Cash Accounts receivable Inventories Land Equipment Accumulated depreciation-equipment Total Assets Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock.000 65.000 (8.000 9.000 39.000 $ 150.000 200.000) 34.000 $ 22.000) (50.000 $ 85.000 (32.000 597.000 (66.000 189.000 270.000 555.000 170.000 70.000) 100.

Slide 17-31  Additional Additional Information Information for for 2001: 2001:  Net Net income income was was $105.000 cash. $40.000 were were redeemed redeemed for for $50.000. .  Common Common stock stock was was issued issued for for $35.000 $50.000.000.000 cash. $105.000. cash.000 $35. cash.000 $50.  Cash Cash dividends dividends declared declared and and paid paid were were $40.  Bonds Bonds payable payable of of $50.

analyze analyze the the changes changes in in current current assets assets and and current current liabilities. gains. Then. Then. liabilities.000 Start Start with with accrual-basis accrual-basis net net income. 2001 Cash flows from operating activities Net income Adjustments to accrual-basis net income: Add Add noncash noncash expenses expenses and and losses. Subtract Subtract noncash noncash revenues revenues and and gains.Slide 17-32 B&G Company Statement of Cash Flows For the Year Ended December 31. . losses. income. $ 105.

000 36.000 Decrease in accounts payable (8. 2001 Cash flows from operating activities Net income $ Adjustments to accrual-basis net income: Depreciation expense $ 34. . .000 141. ubtract ct from from ne nett incom incomee.000) Total adjustments Net cash provided by operating activities Cash flows from investing activities Curre Current nt Asse Assets ts Curre Current nt LLia iabilitie bilitiess 105. . . in incom comee.Slide 17-33 B&G Company Statement of Cash Flows For the Year Ended December 31.000 Cha Chang ngee in in Account Account Ba Bala lance nce During During Ye Yeaarr In De Incre creaase se Decre creaase se SSubtra Add ubtract ct from from nneett Add to to ne nett incom incomee.000 Increase in accounts receivable (9. Add SSubtra Add to to ne nett incom incomee.000) Decrease in inventory 19. .

section.000 Increase in accounts receivable (9. 2001 Cash flows from operating activities Net income $ Adjustments to accrual-basis net income: Depreciation expense $ 34.000) Decrease in inventory 19.000) Total adjustments Net cash provided by operating activities Cash flows from investing activities Now.000 .000 141.Slide 17-34 B&G Company Statement of Cash Flows For the Year Ended December 31.000 Decrease in accounts payable (8. Now. 105.000 36. let’s let’s complete complete the the investing investing section.

Now.000) Decrease in inventory 19. 105.000 (45.000 141. 2001 Cash flows from operating activities Net income $ Adjustments to accrual-basis net income: Depreciation expense $ 34.000) Net cash used by investing activities Cash flows from financing activities Now. let’s let’s complete complete the the financing financing section.000) Total adjustments Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of land 25.000 Purchase of equipment (70.000 Increase in accounts receivable (9. section.000 Decrease in accounts payable (8.000 36.Slide 17-35 B&G Company Statement of Cash Flows For the Year Ended December 31.000) .

000 141. 2001 $ 105.000) 41.000 22.000 63.000) Net cash used by financing activities Net increase in cash Cash.000) Total adjustments Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of land 25.000) Net cash used by investing activities Cash flows from financing activities Proceeds from issuance of common stock 35.000 Redemption of bonds (50. 2001 Cash flows from operating activities Net income $ Adjustments to accrual-basis net income: Depreciation expense $ 34.000 Increase in accounts receivable (9. January 1.000) Decrease in inventory 19.000 Purchase of equipment (70. 2001 Cash.000) (55. December 31.000 .000 36.Slide 17-36 B&G Company Statement of Cash Flows For the Year Ended December 31.000 Decrease in accounts payable (8.000 (45.000) Payment of dividends (40.

Slide 17-37 Analyzing Cash Sources and Uses Cash Flows of Competitors all numbers in thousands Fisher Sprint Tektron Cash provided (used) by operating activities $ 90.000 $ 15. 17.000 Net increase (decrease) in cash Exh.000 (27.000 $ (24.000 $ 15.000) Repayment of debt $ 15.000 Purchase of operating assets (48.000 $ 40.000) Cash provided (used) by investing activities: Proceeds from sale of operating assets 26.19 .000) (25.000) Cash provided (used) by financing activities: Proceeds from issuance of debt 13.

17.Slide 17-38 Cash Flow on Total Assets Used. to to assess assess company company performance. Used. ratios. Cash Flow on Total Assets = Operating cash flows Average total assets Exh. performance. along along with with income-based income-based ratios.20 .

Slide 17-39 End .