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STATEMENT OF STATEMENT OF CASH FLOWSCASH FLOWS

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The Primary Purpose of the Statement of Cash Flows Is...

To provide information about: cash receipts, cash payments, and the net change in cash resulting

from:operating,investing, andfinancing activities of a company during a period.

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Usefulness of the Statement of Cash Flow

The entity’s ability to generate future cash flows.

The entity’s ability to pay dividends and meet obligations.

The reason for the difference between net income and net cash provided (used) by operating activities.

The cash investing and financing transactions during the period.

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Operating Activities...

Operating Activities are the day to day activities of the organization. It is the principal source of funds – the engine of the company.

Include: The cash effects of transactions that

create revenues and expenses and Enter into determination of net

income.Involve Income Statement Items

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Investing Activities...

Include: Purchasing and disposing of

investments and productive long-lived assets using cash and

Lending money and collecting the loans.

Involve Investments and Noncurrrent Asset Items

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Financing Activities...Financing Activities are the owner’s

equity structure of the organization. Include:

Obtaining cash from issuing debt and repaying the amounts borrowed and

Obtaining cash from stockholders, repurchasing shares, and paying dividends.

Involve Noncurrent Liability and Stockholders’ Equity Items

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Types of Cash Flows -Operating Activities

Cash inflows: From sale of goods or services From return on loans (interest

received) and on equity securities (dividends received)

Cash outflows: To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses

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Types of Cash Flows -Investing Activities

Cash inflows: From sale of property, plant, and equipment From sale of debt or equity securities of

other entities From collection of principal on loans to

other entities Cash outflows:

To purchase property, plant, and equipment To purchase debt or equity securities

of other entities To make loans to other entities

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Types of Cash Flows -Financing Activities

Cash inflows: From sale of equity securities

(company's own stock) From issuance of debt (bonds and

notes) Cash outflows:

To stockholders as dividends To redeem long-term debt or

reacquire capital stock

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Operating Activities - ALERT

Some cash flows relating to investing or financing activities are classified as operating activities. For example... Receipts of investment revenue (interest

and dividends) and Payments of interest to lenders are

classified as operating activities because these items are reported in the income statement.

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Significant Noncash Activities...

That do NOT affect cash are NOT reported in the body of the statement of cash flows.

Are reported: In a separate schedule at the bottom of the

statement of cash flows or In a separate note or supplementary

schedule to the financial statements.

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Significant Noncash Activities...

1. Issuance of common stock to purchase assets.

2. Conversion of bonds into common stock.3. Issuance of debt to purchase assets.4. Exchanges of plant assets.

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Format of the Statement of Cash Flows

Statement of Cash Flows explains the difference between beginning cash and ending cash on the balance sheet.

Three parts: operating investing financing

Plus significant noncash investing and financing activities in separate schedule or at bottom of the statement of cash flows.

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Format of Statement of Cash Flows

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Statement of Cash Flows Helps Users Evaluate

1. The entity's ability to generate future cash flows

2. The entity's ability to pay dividends and meet obligations

3. The reasons for the difference between net income and net cash provided (used) by operating activities

4. The investing and financing transactions during the period

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Statement of Cash Flows Helps Answer the Following Questions

How did cash increase when there was a net loss for the period?

How were the proceeds of the bond issue used? How was the expansion in the plant and

equipment financed? Why were dividends not increased? How was the retirement of debt accomplished? How much money was borrowed during the year? Is cash flow greater or less than net income?

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Sources of Information for the Statement of Cash Flows

Comparative balance sheet Current income statement Additional information

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Major Steps in Preparing Statement of Cash Flows

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Major Steps in Preparing Statement of Cash Flows

In order to perform step 1 a company MUST convert net income from a cash to accrural basis.

Over Ninety-eight (98.8)% of companies use the indirect method, so will we.

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Comparative Balance Sheet

Indicates the amount of changes in assets, liabilities, and stockholders' equities from the beginning to the end of the period.

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Current Income Statement

Information in this statement helps the reader determine the amount of cash provided or used by operations during the period.

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Income Statement and Additional Information

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Indirect and Direct Methods

Convert net income from an accrual basis to a cash basis.

This conversion may be done by two methods: indirect direct

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Indirect and Direct Methods

Both methods arrive at the same total amount for “Net cash” provided by operating activities.

The methods differ in disclosing the items that make up the total amount.

The choice of methods affects only the operating activities section; the investing and financing activities sections are the same.

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Indirect Method

Most companies favor the indirect method for the following reasons: it is easier to prepare it focuses on the differences between net

income and net cash flow from operating activities

it tends to reveal less company information to competitors.

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3 Steps to Convert Net Income to Net Cash from Operations

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Adjustment of Depreciation

Adjustment of Loss on Equipment

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Analysis of Accounts Receivable

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Adjustment For Changes in Current Assets

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Adjustment For Changes in Current Liabilities

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Adjustments Needed to Convert Net Income to Net Cash Provided

by Operating Activities

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Statement of Cash Flows, 2007 Indirect Method