Session - Cash Flows

Statement of Cash Flows
12-1
Selected Indian Companies: Operating Cash Flows and Net Income
(all figures in INR Million)

Net Cash Flow from
Company Name Net Profit % Difference
Operating Activities
Bank of India Limited 20,129 146,382 627%
Blue Dart Express Limited 1,293 1,535 19%
Colgate Palmolive (India)
Limited 5,590 6,381 14%
SKS Microfinance Limited 1,876 (11,463) -711%

T.V. Today Network Limited 810 779 -4%
Tata Consultancy Services
198,522 193,688 -2%
Limited
12-2
• Statement of Cash Flows
• Third required financial statement.

• How does a company obtain its cash ?
• Where does a company spend it its cash ?
• What explains the changes in cash balance ?
12-3
Helps the user answer questions such as
• How much cash was provided by the normal,
ongoing operations of the company?
• In what other ways were significant amounts
of cash raised?
• Is the company investing enough in new plant
and equipment to maintain or increase
capacity and to replace old facilities with
more efficient ones?
• Is the company reinvesting excess cash in
productive assets, or is it using the cash to
retire stock?
12-4
• Income Statement vs. Statement of Cash Flows
·Income statement.
· Accrual basis results of entity’s operating
activities during a period.
· Revenue recognition, matching of expenses.
·Statement of Cash Flows.
· Cash flows associated with an entity’s
operating, investing, and financing activities
during a period.
· Reconciles changes in cash account on
balance sheet (i.e., beginning balance to
ending balance).
12-5
Benefits of the Statement of Cash Flows
·Numbers on cash flow statement are objective

(i.e., cash is cash).
·Eliminates judgments and estimates involved
with accrual accounting as on income statement
and balance sheet.
·Useful information for users dependent upon a
healthy cash flow from entity (e.g., employees,
suppliers, lenders).
·But in some instances, balance sheet and
income statement may provide better
information about financial status and operating
performance.
12-6
Understanding the Business
Some analysts consider it important to understand the

various sources and uses of cash that are associated with
business activity.
12-7
What is cash?
The definition of cash includes cash and cash

equivalents.
Cash equivalents are short-term, highly liquid

investments that are both
• Readily convertible into known amounts of
cash and
• So near to maturity there is little risk that their
value will change if interest rates change.
Generally, only investments with original
maturities of three months or less qualify as cash
equivalents
12-8
Classifications of the Statement of Cash Flows
Cash inflows and outflows

Operating Activities directly related to earnings
from normal operations.

related to the acquisition or
Investing Activities sale of productive facilities
and investments in the
securities of other companies.

related to external sources of
Financing Activities
financing (owners and
creditors) for the enterprise.
12-9
Exercise
12-10
Exhibit NATIONAL BEVERAGE CORP.
Consolidated Statement of Cash Flows*
Year Ended April 29, 2017 (dollars in thousands)
Cash flows from operating activities:
Net income $107,045
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Consolidated Depreciation and amortization

Changes in assets and liabilities:
10,152
Statement of Accounts receivable

Inventories
(10,273)
(5,433)
Cash Flows Prepaid expenses

Accounts payable
(2,603)
8,709
Accrued expenses 2,883
Net cash provided by operating activities 110,480
Cash flows from investing activities:
Purchase of property, plant, and equipment (14,015)
Proceeds from disposal of property, plant, and equipment 28
Purchase of short-term investments (1,463)
Proceeds from sale of short-term investments 2,011
Net cash used by investing activities (13,439)
Cash flows from financing activities:
Repayment of principal on long-term debt —
Proceeds from issuance of long-term debt 1,333
The ending cash Repurchase of stock
Proceeds from issuance of stock
—
1,068
balance should Payment of cash dividends
Net cash used by financing activities
(68,647)
(66,246)
agree with the Net Increase (Decrease) in Cash and Equivalents
Cash and Equivalents—Beginning of Year
30,795
105,577
balance sheet. Cash and Equivalents—End of Year
*Certain amounts have been adjusted for pedagogical purposes.
$136,372
12-11
Direct Method vs. Indirect Method
The cash flows from operating activities are always

the same, regardless of whether the direct or
indirect method is used.
Access the text alternative for these images
12-12
Cash Flows from Operating Activities

12-13
Cash Flows from Investing Activities

12-14
Cash Flows from Financing Activities

12-15
Net Increase (Decrease) in Cash
The combination of the net cash flows from

operating, investing, and financing activities must
equal the net increase or decrease in cash.
Net cash provided by operating activities $110,480
Net cash used in investing activities (13,439)
Net cash used in financing activities (66,246)
Net increase in cash and cash equivalents 30,795
Beginning
Cash and cash equivalents at beginning of period 105,577
and ending
Cash and cash equivalents at end of period $136,372 balances
from the
balance sheet
12-16
Relationships to the Balance Sheet and Income
Statement
Information needed to prepare a statement of

cash flows:
• Comparative balance sheets
• A complete income statement
• Additional details concerning selected accounts
12-17
Excercise
• Dr Pepper Snapple Group is the third largest nonalcoholic

beverage company in the world. A listing
of some of its cash flows follows. Indicate whether each item
is disclosed in the Operating Activities
(O), Investing Activities (I), or Financing Activities (F) section
of the statement of cash flows.
_____ 1. Proceeds from issuance of long-term debt.
_____ 2. Collections from customers.
_____ 3. Payment of interest on debt.
_____ 4. Purchase of property, plant, and equipment.
_____ 5. Proceeds from disposal of investment securities.
12-18
Exhibit
Comparative Balance Sheet
Access the text alternative for these images 12-19

Relationships to the Balance Sheet and Income
Statement 2
Preparation and understanding of the cash flow
statement focuses on the changes in the balance
sheet accounts.
Δ Cash = Δ Liabilities + Δ Stockholders’ − Δ Noncash
Equity Assets
Derives from . . .
Assets = Liabilities + Stockholders’ Equity
12-20
Exhibit
Current Income Statement
NATIONAL BEVERAGE CORP.
Consolidated Statement of Income*
For the Fiscal Year Ended April 29, 2017
(dollars in thousands)
Net sales $826,918
Cost of sales 500,841
Gross profit 326,077
Operating expenses:
Selling, general, and administrative expense 152,911
Depreciation and amortization expense 10,152
Total operating expenses 163,063
Operating income 163,014
Interest expense 189
Income before provision for income taxes 162,825
Provision for income taxes 55,780
Net income $107,045
Under the indirect method, the statement of cash flows begins with net income
from the income statement.
12-21
Reporting and Interpreting Cash Flows from
Operating Activities
The indirect method adjusts net income by
eliminating noncash items.
12-22
Adjustment for Gains and Losses
Cash received from the sale or disposal of long-term assets

is classified as investing cash inflow. Gains/losses on the
income statement, if any, are subtracted from/added to
net income in order to compute cash flow from operating
activities.
Gains must be subtracted

Gains from net income to avoid
double counting the gain.
Losses must be added to net

Losses income to avoid double
counting the loss.
12-23
Exhibit
Schedule for Net Cash Flow from Operating Activities, Indirect Method

Year Ended April 29, 2017
Net income $107,045
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,152
Accounts receivable (10,273)
Inventories (5,433)
Prepaid expenses (2,603)
Accounts payable 8,709
Step 1
Adjust net income for depreciation and amortization expense and gains and losses
on sale of investing assets.
12-24
Exhibit )
Schedule for Net Cash Flow from Operating Activities, Indirect Method

Year Ended April 29, 2017
Net income $107,045
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Inventories (5,433)
Step 2
Adjust net income for changes in
current assets and current liabilities.
12-25
Indicate which of the following items taken from Dr Pepper Snapple
Group’s cash flow statement
would be added (+), subtracted (−), or not included (NA) in the
reconciliation of net income to cash flow from operations.
4. Decrease in accounts
1. Increase in inventories. receivable.
2. Proceeds from issuance of 5. Increase in accounts
notes payable. payable.
3. Amortization expense. 6. Increase in prepaid
expenses.
12-26
Summary
We can summarize the typical additions and subtractions

that are required to reconcile net income with cash flow
from operating activities as follows:
ADDITIONS AND SUBTRACTIONS TO
RECONCILE NET INCOME TO CASH FLOW
FROM OPERATING ACTIVITIES
Item When Item Increases When Item Decreases
Depreciation and amortization + NA
Gain on sale of long-term assets − NA
Loss on sale of long-term assets + NA
Accounts receivable − +
Inventory − +
Prepaid expenses − +
Accounts payable + −
Accrued expense liabilities + −
12-27
Classification of Interest on the Cash Flow
Statement
International
U.S. GAAP and IFRS differ in the cash Perspective—IFRS
flow statement treatment of interest
received and interest paid.
Interest Received Interest Paid

U.S. GAAP Operating Operating
IFRS Operating or Investing Operating or Financing
12-28
Interpreting Cash Flows from Operating
Activities
A common rule of thumb followed by financial and
credit analysts is to avoid firms with rising net
income but falling cash flow from operations.
Investors will not invest in a company if they do

not believe that cash generated from operations
will be available to pay them dividends or expand
the company.
Creditors will not lend money if they do not

believe that cash generated from operations will
be available to pay back the loan.
12-29
Fraud and Cash Flows from Operations 1
QUESTION OF ETHICS
The cash flow statement often gives

outsiders the first hint that financial $$$
statements may contain errors and
irregularities.
Unethical managers sometimes attempt to reach earnings

targets by manipulating accruals and deferrals of revenues
and expenses to inflate income. Because these adjusting
entries do not affect the cash account, they have no effect
on the cash flow statement.
A growing difference between net income and cash flow

from operations can be a sign of such manipulations.
12-30
Reporting and Interpreting Cash Flows from
Investing Activities
Related Balance
Sheet Account(s) Investing Activity Cash Flow Effect
Property, plant, and Purchase of property, Outflow
equipment and intangible plant, and equipment or
assets (patents, etc.) intangible assets for cash
Sale of property, plant, and Inflow
equipment or intangible
assets for cash
Short- or long-term Purchase of investment Outflow
investments (stocks and securities for cash
bonds of other companies)
Sale (maturity) of investment Inflow
securities for cash
Remember that:
Only purchases paid for with cash or cash equivalents are included.
The amount of cash that is received from the sale of assets is included,
regardless of whether the assets are sold at a gain or loss.
12-31
Exhibit 12.1 (2)
Net income $107,045
We must report Depreciation and amortization
10,152
individually the cash Accounts receivable (10,273)

Inventories (5,433)
used to purchase Prepaid expenses (2,603)
equipment and the Accounts payable
Accrued expenses
8,709
2,883
cash proceeds Net cash provided by operating activities 110,480
received from the Purchase of property, plant, and equipment (14,015)
sale of equipment. Proceeds from disposal of property, plant, and equipment
Purchase of short-term investments
28
(1,463)
Repurchase of stock —
Proceeds from issuance of stock 1,068
Payment of cash dividends (68,647)
Net cash used by financing activities (66,246)
Net Increase (Decrease) in Cash and Equivalents 30,795
Cash and Equivalents—Beginning of Year 105,577
Cash and Equivalents—End of Year $136,372
12-32
Exhibit 12.1 (3)
Net income $107,045
Although short-term operating activities:
investments is a Changes in assets and liabilities:
current asset, it is Inventories (5,433)
reported in the Prepaid expenses
Accounts payable
(2,603)
8,709
investing section on Accrued expenses 2,883
the statement of Cash flows from investing activities:
cash flows. The Purchase of property, plant, and equipment
Proceeds from disposal of property, plant, and equipment
(14,015)
28
company purchased Purchase of short-term investments (1,463)
short-term Net cash used by investing activities (13,439)
investments for Cash flows from financing activities:
$1,463. They Proceeds from issuance of long-term debt 1,333
company also sold Proceeds from issuance of stock 1,068
short-term Payment of cash dividends
Net cash used by financing activities
(68,647)
(66,246)
investments for Net Increase (Decrease) in Cash and Equivalents 30,795
$2,011, an amount Cash and Equivalents—End of Year $136,372
equal to their net *Certain amounts have been adjusted for pedagogical purposes.
book value.
12-33
Free Cash Flow
FINANCIAL ANALYSIS
Managers and analysts calculate free

cash flow as a measure of a firm’s ability $$$
to pursue long-term investment
opportunities
Free Cash Flow = Cash Flow from Operating Activities

– Dividends – Capital Expenditures
Any positive free cash flow is available for additional

capital expenditures, investments in other companies, and
mergers and acquisitions without the need for external
financing or reductions in dividends to shareholders.
12-34
Reporting Cash Flows from Financing Activities
Related Balance Cash Flow
Sheet Account(s) Financing Activity Effect
Short-term debt (notes Borrowing cash from banks Inflow
payable) or other financial institutions
Repayment of loan principal Outflow
Long-term debt Issuance of bonds for cash Inflow

Repayment of bond principal Outflow
Common stock and Issuance of stock for cash Inflow
additional paid-in capital
Repurchase (retirement) of stock with cash Outflow
Retained earnings Payment of cash dividends Outflow
Remember that:
Cash repayments of principal are cash flows from financing activities.
Interest payments are cash flows from financing (as per Ind AS) activities.
Dividend payments are cash flows from financing activities.
If debt or stock is issued for other than cash, it is not included in this section.
12-35
Exhibit 12.1 (4)
Net income $107,045
Inventories (5,433)
Cash received from Proceeds from issuance of stock
Payment of cash dividends
1,068
(68,647)
issuance of long- Net cash used by financing activities (66,246)
Net Increase (Decrease) in Cash and Equivalents 30,795
term debt. Cash and Equivalents—Beginning of Year 105,577
Cash and Equivalents—End of Year $136,372
12-36
Exhibit 12.1 (5)
Net income $107,045
Inventories (5,433)
Proceeds from issuance of stock 1,068
Cash received from Net cash used by financing activities (66,246)
issuing common Net Increase (Decrease) in Cash and Equivalents
Cash and Equivalents—Beginning of Year
30,795
105,577
stock. Cash and Equivalents—End of Year $136,372
12-37
Exhibit 12.1 (6)
Net income $107,045
Retained earnings operating activities:
increased by $38,398 Changes in assets and liabilities:
due to the combined Accounts receivable (10,273)
Inventories (5,433)
effect of $107,045 of Prepaid expenses (2,603)
income and $68,647 in Accounts payable 8,709
dividends declared Net cash provided by operating activities 110,480
and paid. Cash flows from investing activities:
Retained Earnings Analysis Proceeds from issuance of stock 1,068
April 30, 2016 $188,926 Net cash used by financing activities (66,246)
Add net income 107,045 Net Increase (Decrease) in Cash and Equivalents 30,795
Less dividends (68,647) Cash and Equivalents—End of Year $136,372
April 29, 2017 $227,324
12-38
Interpreting Cash Flows from Financing Activities
The long-term growth of a company is normally financed

from three sources:
1. Internally generated funds (cash from operating
activities)
2. The issuance of stock
3. Money borrowed on a long-term basis
The statement of cash flows shows how management

has elected to fund its growth. This information is
used by analysts who wish to evaluate the capital
structure and growth potential of a business.
12-39
Completing the Statement and Additional
Disclosures Statement of Cash Flows (Indirect Method)
Operating activities:
Net income
+ Depreciation and amortization expense
− Gain on sale of long-term assets
+ Loss on sale of long-term assets
+ Decreases in operating assets
+ Increases in operating liabilities
− Increases in operating assets
− Decreases in operating liabilities
Net Cash Flow from Operating Activities
Investing Activities:
− Purchase of property, plant, and equipment or intangible assets
+ Sale of property, plant, and equipment or intangible assets
− Purchase of investment securities
+ Sale (maturity) of investment securities
Net Cash Flow from Investing Activities
Financing Activities:
+ Borrowing from bank or other financial institution
− Repayment of loan principal
+ Issuance of bonds for cash
− Repayment of bond principal
+ Issuance of stock
− Repurchase (retirement) of stock
− Payment of (cash) dividends
Net Cash Flow from Financing Activities
Net increase or decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
12-40
Supplemental Cash Flow Information
Two additional required cash flow disclosures

are normally listed at the bottom of the
statement or in the notes.
1. Noncash investing and financing activities,
such as the purchase of a building with a
mortgage given by the former owner.
2. Cash paid for interest and cash paid for
income taxes (for companies that use the
indirect method)
12-41
Chapter Supplement A: Reporting Cash Flows
from Operating Activities—Direct Method
Sales revenue
+ Decrease in accounts receivable
Other expenses
− Increase in accounts receivable
+ Increase in prepaid expenses
= Cash collections from customers
− Decrease in prepaid expenses
− Increase in accrued expenses
Interest/Dividend revenue
+ Decrease in accrued expenses
+ Decrease in interest/dividends
receivable = Cash paid for expenses
− Increase in interest/dividends
receivable
= Collections of interest/dividends Income tax expense
on investments + Increase in prepaid income taxes
− Decrease in prepaid income taxes
Cost of goods sold − Increase in income taxes payable
+ Increase in inventory + Decrease in income taxes payable
− Decrease in inventory = Payments of income taxes
− Increase in accounts payable
+ Decrease in accounts payable
= Cash payments to suppliers
12-42

Session - Cash Flows

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Session - Cash Flows

Uploaded by

Copyright:

Available Formats

Statement of Cash Flows

(all figures in INR Million)

SKS Microfinance Limited 1,876 (11,463) -711%

• Third required financial statement.

·Numbers on cash flow statement are objective

Some analysts consider it important to understand the

The definition of cash includes cash and cash

Cash equivalents are short-term, highly liquid

Cash inflows and outflows

Cash inflows and outflows

Cash inflows and outflows

Consolidated Depreciation and amortization

Statement of Accounts receivable

Cash Flows Prepaid expenses

The cash flows from operating activities are always

Access the text alternative for these images

Access the text alternative for these images

Access the text alternative for these images

The combination of the net cash flows from

Information needed to prepare a statement of

• Dr Pepper Snapple Group is the third largest nonalcoholic

Access the text alternative for these images 12-19

Cash received from the sale or disposal of long-term assets

Gains must be subtracted

Losses must be added to net

NATIONAL BEVERAGE CORP.

NATIONAL BEVERAGE CORP.

We can summarize the typical additions and subtractions

Interest Received Interest Paid

Investors will not invest in a company if they do

Creditors will not lend money if they do not

The cash flow statement often gives

Unethical managers sometimes attempt to reach earnings

A growing difference between net income and cash flow

individually the cash Accounts receivable (10,273)

Managers and analysts calculate free

Free Cash Flow = Cash Flow from Operating Activities

Any positive free cash flow is available for additional

Long-term debt Issuance of bonds for cash Inflow

The long-term growth of a company is normally financed

The statement of cash flows shows how management

Two additional required cash flow disclosures

You might also like