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Slide

17-1

Reporting and Analyzing


Cash Flows
Slide
17-2

Importance of Cash Flows


Does
Doesthe
thebusiness
business
How
How did
didthe
the have
havesufficient
sufficient cash
cash
business
businessfund
fundits
its to
topay
payits
itsdebts
debtsasas
operations?
operations? they
theymature?
mature?

Did
Didthe
thebusiness
business Did
Didthe
thebusiness
business
make
makeany
anydividend
dividend borrow
borrow any
anyfunds
fundsor
or
payments?
payments? repay
repayany
anyloans?
loans?
Slide
17-3

Measuring Cash Flows

Cash Cash
Cash
Equivalents 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
Slide
17-5

Operating Activities

Inflows
Inflows
 Receipts
Receipts from
from customers.
customers.
 Cash
Cashdividends
dividends received.
received.
 Interest
Interestfrom
from borrowers.
borrowers.
 Other.
Other.
Outflows
Outflows
 Salaries
Salaries and
andwages.
wages.
 Payments
Paymentsto tosuppliers.
suppliers.
 Taxes
Taxes and
and fines.
fines.
 Interest
Interestpaid
paidto tolenders.
lenders.
 Other.
Other.
Slide
17-6

Investing Activities

Inflows
Inflows
 Selling
Sellinglong-term
long-termproductive
productive
assets.
assets.
 Selling
Sellingequity
equity investments.
investments. + Cash
Collecting Cash
 Collectingof
of principal
principal on
onloans.
loans.
 Other.
Other.
Flows
Flows
from
from
Outflows
Outflows
Purchase
Investing
Investing
 Purchaselong-term
long-term productive
productive
assets.
assets. _ Activities
Activities
 Purchase
Purchaseequity
equity investments.
investments.
 Purchase
Purchasedebt
debt investments.
investments.
 Make
Makeloans.
loans.
Slide
17-7

Financing Activities

Inflows
Inflows
 Issuing
Issuingits
its own
ownequity
equity
securities.
securities.
Issuing + Cash
 Issuingbonds
bonds and andnotes.
notes. Cash
 Issuing
Issuingshort-term
short-termand andlong-
long- Flows
term
termliabilities.
liabilities.
Flows
from
from
Outflows
Outflows Financing
Financing
 Pay
Pay dividends
dividends totostockholders.
stockholders. _ Activities
Activities
 Purchase
Purchasetreasury
treasury stock.
stock.
 Repay
Repay cash
cashloans.
loans.
 Cover
Cover withdrawals
withdrawals bybyowners
owners..
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.
securities.
 Conversion
 Conversion of of preferred
preferred stock
stock to
to
common
common stock.
stock.
 Leasing
 Leasing ofof assets
assets inin aa capital
capital lease
lease
transaction.
transaction.
Slide Exh.
17-9 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:
[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 $ #####
Slide Exh.
17-10 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 Direct Method
activities:
[List of individual inflows and outflows]
Net cash provided (used)Indirect Method
by financing activites #####
Net increase (decrease) in cash $ #####
Cash (and equivalents) balance at beginning of period #####
Cash (and equivalents) balance at end of period $ #####
Slide
17-11

Analyzing Noncash Accounts

The
The changes
changes inin 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.
sheet.

Cash
Cash == Liabilities
Liabilities ++ Stockholders
Stockholders
Equity
Equity Noncash
Noncash Assets
Assets

Derives from . . .
Assets
Assets == Liabilities
Liabilities ++ Stockholders
Stockholders Equity
Equity
Slide
17-12

Lets look at the


Direct Method
for preparing
the Cash Flows
from Operating
Activities
section.
Slide Exh.
17-13 17.12

Direct Method
Cash Received from Customers
Can be computed two ways:
 Obtained from cash receipts journal.
 Obtained from accrual sales information.

Cash received - Increase in A/R


from customers
= Sales
{ + Decrease in A/R
Slide Exh.
17-14 17.13

Direct Method
Cash Paid for Merchandise
 Step 1

+ Increase in inventory
Purchases = COGS
{ - Decrease in inventory

 Step 2

Cash paid for + Decrease in A/P


merchandise
= Purchases
{ - Increase in A/P
Slide Exh.
17-15 17.14

Direct Method
Wages and Operating Expenses
The
The cash
cash paid
paid for
for wages
wages and
and other
other operating
operating
expenses
expenses isis affected
affected by
by
(1)
(1) whether
whether the
the expense
expense was
was prepaid,
prepaid, and
and
(2)
(2) whether
whether the
the expense
expense was
was accrued.
accrued.

Cash paid for Wages + Increase in + Decrease in


wages and
other operating
expenses
=
{
and other
operating
expenses
prepaid expenses
- Decrease in
prepaid expenses { accrued liabilities
- Increase in
accrued liabilities
Slide Exh.
17-16 17.15

Direct Method
Cash Paid for Interest and Taxes
 Interest
+ Decrease in
Cash paid
for interest
=
Interest
Expense
{
interest payable
- Increase in
interest payable

 Taxes
+ Decrease in
Cash paid
for taxes
=
Tax
Expense { taxes payable
- Increase in
taxes payable
Slide
17-17

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

Lets look at the


Indirect Method
for preparing
the Cash Flows
from Operating
Activities
section.
Slide
17-20

Indirect Method of Reporting


Operating Cash Flows
Changes
Changesinincurrent
currentassets
assets
and
andcurrent
currentliabilities.
liabilities.

Cash
CashFlows
Flows
Net
Net from
fromOperating
Operating
Income
Income Activities
Activities

++Losses
Lossesandand ++Noncash
Noncash
--Gains
Gains expenses
expensessuch
suchas as
depreciation
depreciationand
and
amortization.
amortization.

97.5%
97.5% of
of all
all companies
companies use
use the
the indirect
indirect method.
method.
Slide
17-21

Indirect Method of Reporting


Operating Cash Flows

Change in Account Balance During Year


Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.

Use this table when adjusting Net Income


to Operating Cash Flows.
Slide
17-22

Indirect Method
Example
East,
East, Inc.
Inc. reports
reports $125,000
$125,000 net
net income
income for
for the
the
year
year ended
ended December
December 31,31, 2002.
2002.
Accounts
Accounts Receivable
Receivable increased
increased byby $7,500
$7,500
during
during thethe year
year and
and Accounts
Accounts Payable
Payable
increased
increased by
by $10,000.
$10,000.
During
During 2002,
2002, East
East reported
reported $12,500
$12,500 of
of
Depreciation
Depreciation Expense.
Expense.

What is East, Inc.s Operating


Cash Flow for 2002?
Slide
17-23

Indirect Method
Example
Net
Netincome
income $$ 125,000
125,000

Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
receivable
For
For thethe indirect
indirect
Cash
Cash provided
method,
provided by operating
start
by with
operating
method,
activities
start with
activities
net
net income.
income.
Slide
17-24

Indirect Method
Example
Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
Add
Add noncash
receivable noncash
expenses
expenses suchsuch asas
Cash
Cashprovided
providedby
byoperating
operating
depreciation,
depreciation,
activities
activities
depletion,
depletion,
amortization,
amortization, or or bad
bad
debt
debt expense.
expense.
Slide
17-25

Indirect Method
Example
Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
receivable (7,500)
(7,500)

Cash
Cashprovided
Change inby
provided byoperating
Account Balance During Year
operating
activities Increase Decrease
activities
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Slide
17-26

Indirect Method
Example
Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increasein inaccounts
accounts
receivable
receivable (7,500)
(7,500)
Add:
Add:Increase
Increasein inaccounts
accountspayable
payable 10,000
10,000
Cash
Cashprovided
providedby byoperating
operating
Change in Account Balance During Year
activities
activities Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Slide
17-27

Indirect Method
Example
Net
Netincome
income $$ 125,000
125,000
Add:
Add:Depreciation
Depreciationexpense
expense 12,500
12,500
Deduct:
Deduct:Increase
Increaseininaccounts
accounts
receivable
receivable (7,500)
(7,500)
Add:
Add:Increase
Increaseininaccounts
accountspayable
payable 10,000
10,000
Cash
Cashprovided
providedbybyoperating
operating
activities
activities $$ 140,000
140,000

If we used the Direct Method, we would get the same


$140,000 for Cash Provided by Operating Activities.
Slide
17-28

Lets 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 ofof Cash
Cash
Flows
Flows for
for the
the period
period ending
ending
December
December 31,
31, 2001
2001 using
using the
the
Indirect
Indirect Method.
Method.

Refer
Refer to
to the
the following
following
information
information .. .. ..
Slide
17-30
B&G Company
Comparative Balance Sheets
December 31
Increase
or
2001 2000 (Decrease)
Assets
Cash $ 63,000 $ 22,000 $ 41,000
Accounts receivable 85,000 76,000 9,000
Inventories 170,000 189,000 (19,000)
Land 75,000 100,000 (25,000)
Equipment 270,000 200,000 70,000
Accumulated depreciation-equipment (66,000) (32,000) 34,000
Total Assets $ 597,000 $ 555,000

Liabilities and Stockholders' Equity


Accounts payable $ 39,000 $ 47,000 (8,000)
Bonds payable 150,000 200,000 (50,000)
Common stock, $1 par 209,000 174,000 35,000
Retained earnings 199,000 134,000 65,000
Total Liabilities and Stockholders' Equity $ 597,000 $ 555,000
Slide
17-31

 Additional
Additional Information
Information for
for 2001:
2001:
Net
 Net income
income was
was $105,000.
$105,000.
Cash
 Cash dividends
dividends declared
declared and
and paid
paid were
were
$40,000.
$40,000.
Bonds
 Bonds payable
payable of
of $50,000
$50,000 were
were redeemed
redeemed
for
for $50,000
$50,000 cash.
cash.
Common
 Common stock
stock was
was issued
issued for
for $35,000
$35,000
cash.
cash.
Slide B&G Company
17-32 Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:

Add
Add noncash
noncash expenses
expenses Start
Start with
with
and
and losses.
losses. accrual-basis
accrual-basis
Subtract
Subtract noncash
noncash net
net income.
income.
revenues
revenues and
and gains.
gains.
Then,
Then, analyze
analyze the
the
changes
changes inin current
current
assets
assets and
and current
current
liabilities.
liabilities.
Slide B&G Company
17-33 Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities

Cha
Chang
ngee in in Account
Account BaBala
lance
nce During
During Ye Yeaarr
In
Incre
creaase se De
Decre
creaasese
Curre
Current nt SSubtra
ubtract ct from
from nneett Add
Add to
to ne
nett incom
incomee. .
Asse
Assetsts in
incom
comee. .
Curre
Current nt Add
Add toto ne
nett incom
incomee. . SSubtra
ubtract
ct from
from ne
nett
LLia
iabilitie
bilitiess incom
incomee. .
Slide B&G Company
17-34 Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities

Now,
Now, lets
lets complete
complete
the
the investing
investing
section.
section.
Slide B&G Company
17-35 Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
Cash flows from financing activities

Now,
Now, lets
lets complete
complete
the
the financing
financing section.
section.
Slide B&G Company
17-36 Statement of Cash Flows
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income $ 105,000
Adjustments to accrual-basis net income:
Depreciation expense $ 34,000
Increase in accounts receivable (9,000)
Decrease in inventory 19,000
Decrease in accounts payable (8,000)
Total adjustments 36,000
Net cash provided by operating activities 141,000
Cash flows from investing activities
Proceeds from sale of land 25,000
Purchase of equipment (70,000)
Net cash used by investing activities (45,000)
Cash flows from financing activities
Proceeds from issuance of common stock 35,000
Redemption of bonds (50,000)
Payment of dividends (40,000)
Net cash used by financing activities (55,000)
Net increase in cash 41,000
Cash, January 1, 2001 22,000
Cash, December 31, 2001 $ 63,000
Slide Exh.
17-37 17.19

Analyzing Cash Sources and Uses


Cash Flows of Competitors
all numbers in thousands Fisher Sprint Tektron
Cash provided (used) by operating
activities $ 90,000 $ 40,000 $ (24,000)
Cash provided (used) by investing
activities:
Proceeds from sale of operating
assets 26,000
Purchase of operating assets (48,000) (25,000)
Cash provided (used) by financing
activities:
Proceeds from issuance of debt 13,000
Repayment of debt (27,000)
Net increase (decrease) in cash $ 15,000 $ 15,000 $ 15,000
Slide Exh.
17-38 17.20

Cash Flow on Total Assets

Used,
Used, along
along with
with income-based
income-based ratios,
ratios, to
to
assess
assess company
company performance.
performance.

Cash Flow on Operating cash flows


Total Assets = Average total assets
Slide
17-39

End