Cash Flow Statement

Chapter 13

Objectives


  

Provide information re operating capabilities Liquidity Financial flexibility Or: Where did the money come from? Where did it go?

Operating Capability:


The ability to conduct business at the desired level

Liquidity:
The ability to meet immediate obligations. Measure of liquidity: current ratio. Disadvantage: current ratio uses year-end balances of current assets and current liabilities (may not be representative of a company's position during most of the year.)

Liquidity



Current Cash Debt Coverage Ratio

Somewhat better than current ratio: Cash provided by operations Average current liabilities Cash from operations involves entire year (not balance at one point in time) it is a better representation of liquidity on the average day.

Financial Flexibility


Ability to take advantage of new opportunities I.e., credit availability

Elements of Cash Flow Statement:

   

Operating Activities Investing Activities Financing Activities Non-Cash Activities

Operating Activities
  

 

Cash collected from operations Less cash paid for operating activities In effect transforms income statement to a cash basis Excludes non-cash items Excludes non-operating items (I.e., sale of assets) Includes interest and dividend income

Investing Activities


Cash received from investing activities



I.e., sale of equipment I.e., purchase of stock in another company

Less cash paid for purchase of assets



Equals net cash from investing activities

Financing Activities


Cash received financing sources



I.e., issuance of stock, borrowings

   

Less cash paid for retirement of debt Less cash paid for repurchase of stock Less cash paid for dividends Equals net cash from financing activities

Cash Flow Statement:

     

Net CF from operating activities Plus Net CF from investing activities Plus Net CF from financing activities Equals net cash flow for the period Plus beginning cash (balance sheet) Equals ending cash (balance sheet)

Non-Cash Activities:


I.e., acquisition of land in exchange for stock

 

No cash exchanged Should, however, be disclosed

Shown separately after Cash Flow Statement

Format:
 

Direct Method versus Indirect Method Only cash flow from operations section


However, net cash flow from operations is the same (the money doesn t change!)

Investing and financing section stay the same

Format:


Direct Method
  

Clearer Conceptually preferred User friendly Not clear Most commonly seen

Indirect Method
 

Direct Method Operating Activities:

 

Cash collected from customers Less cash paid for:

   

Purchases Salaries Other expenses Taxes

Equals cash flow from operations

Indirect Method Operating Activities:

   

Net income as reported + non cash items (depreciation exp.) - non cash items (gain on sale) +/- decreases in current assets (liabilities) +/- increases in current liabilities (assets) Equals net cash flow from operations

Alternative Scenarios:
A Cash flow from Operations Investing Financing Net Cash flow beginning cash ending cash -$30,000 -$40,000 $100,000 $30,000 $10,000 $40,000 $50,000 $30,000 -$100,000 -$20,000 $25,000 $5,000 $50,000 -$20,000 -$40,000 -$10,000 $20,000 $10,000 B C